Compass, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report. 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 this Annual Report 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 consolidated financial statements and notes thereto included elsewhere in this Annual 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 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 for the year ended December 31, 2021 compared to the year ended December 31, 2020. An analysis of 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 for the year ended December 31, 2020 compared to the year ended December 31, 2019 is included in the IPO Registration Statement, for our IPO, dated as of March 31, 2021 and filed with the SEC on April 1, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended. • 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 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 December 31, 2021. • 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 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 grow their respective businesses faster than the industry, save time and reduce their business expenses, enhancing their profits over time. Our platform includes an integrated suite of cloud-based software for customer relationship management, marketing, client service 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. 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 26,296,438 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. Recent Developments In July 2021, we and Guaranteed Rate, Inc., or Guaranteed Rate, formed OriginPoint, LLC, or OriginPoint, a new mortgage origination company. OriginPoint originates mortgages for Compass real estate brokerage clients, as well as the clients of any other brokerage in the context of a new purchase or other customers not working with a brokerage in the context of a refinancing, in order to make loans available to a broad consumer audience. OriginPoint is a joint venture and is owned 49.9% by us and 50.1% by Guaranteed Rate. OriginPoint began originating mortgages in December 2021. OriginPoint has established and maintains its own warehouse lines of credit, and it funds its own mortgage loan transactions from these independent sources. The warehouse lines maintained by OriginPoint are collaterized by the underlying mortgages available for sale and are non-recourse to Compass. 51 Table of Contents Operational Highlights for the year ended December 31, 2021 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. We also 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 26,000 agents on our platform as of December 31, 2021. 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 years ended December 31, 2021, 2020 and 2019, the Average Number of Principal Agents (1) was 11,058, 8,686 and 6,787, respectively. The principal agent additions came in both new and existing markets. During the years ended December 31, 2021, 2020 and 2019, our agents closed 225,272, 144,784 and 87,158 Total Transactions (1) , respectively. Our growth in Total Transactions was due to a combination of new agents joining the platform, enhanced productivity for existing agents already on the platform and a robust housing market. Our Gross Transaction Value (1) for the years ended December 31, 2021, 2020 and 2019, was $254.2 billion, $151.7 billion and $97.5 billion, respectively. This growth reflects strong transaction volume, higher productivity per principal agent and higher Average Transaction Values. Average Transaction Value is calculated by dividing Gross Transaction Value by Total Transactions. We believe there remains a meaningful opportunity to grow our business by continuing to expand our geographic coverage. During the year ended December 31, 2021, we launched 25 new markets, bringing total markets served to 69 at the end of the year. We now operate real estate brokerage services in 28 states. For the year ended December 31, 2021, our Gross Transaction Value represented 5.6% of residential real estate transacted in the United States, compared to 4.0% for the year ended December 31, 2020. We calculate our 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. 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. As we move forward, the priority with which we enter new markets will be based on the addressable size of each market, agent feedback and local market dynamics. 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. (1) For 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 Annual Report. 52 Table of Contents 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. Impact of the COVID-19 Pandemic on Our Business In March 2020, the World Health Organization declared the outbreak of the COVID-19 a global pandemic, which remains ongoing as new variants of the virus continue to emerge. The ongoing COVID-19 pandemic has had, and continues to have, a significant impact around the world, including in the U.S. and had an adverse impact on the residential real estate during its early days. In 2020, in response to the COVID-19 pandemic, we took a number of measures, including, but not limited to, adoption of remote working for our employees and a virtual model for our agents, various platform enhancements and certain cost-saving measures such as a reduction of our workforce by 15%, temporary salary reductions, termination of certain lease obligations and reduction of certain discretionary expenses to mitigate potential impacts of the COVID-19 pandemic on our business and financial results. Some of these measures, such as remote work, remain in effect currently. While we did not see adverse impacts of the COVID-19 pandemic on our business and financial results in the year ended December 31, 2021, the extent of the future impact of the ongoing COVID-19 pandemic on our business and financial results will depend largely on future developments, including the emergence of new variants of the COVID-19 virus, the severity and transmission rates of the new variants, the duration and extent of the spread of the virus (including new variants), the timing, availability and effectiveness of vaccines (including booster shots) and vaccination rates, and the prevalence of local, regional and national restrictions and regulatory orders in response to the ongoing COVID-19 pandemic, all of which are highly uncertain and difficult to predicted. 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.” Components of Our Results of Operations Revenue We generate substantially all our revenue by assisting home sellers and buyers in listing, marketing, selling and finding homes. We hold the real estate brokerage license that is necessary under relevant state laws and regulations to provide brokerage services and therefore we control those services that are necessary to legally transfer real estate between home sellers and buyers. We are the principal in the transaction and recognize as revenue the gross amount of the commission we expect to receive in exchange for those services. Revenue is recognized upon the transfer of control of promised services to the home sellers or home buyers. Accordingly, real estate commissions are recorded as revenue at the point in time real estate transactions are closed (i.e., sale or purchase of a home). Commissions paid to agents are recognized concurrently with associated revenue and are presented within the Commissions and other related expense line on our consolidated statement of operations. We also recognize revenue from other adjacent services related to the home transaction such as title and escrow services. While revenue from these services was immaterial through 2021, we expect revenue from these services to grow over time as we expand existing and add new adjacent services to our platform. 53 Table of Contents Operating Expenses Commissions and other related expense Commissions and other related expense primarily consists of commissions paid to our agents, who are independent contractors, upon the closing of a real estate transaction as well as stock-based compensation expense related to our Agent Equity Program and fees paid to external brokerages for client referrals, which are recognized and paid upon the closing of a real estate transaction. We also charge our agents resource fees. These fees are either transaction based, where amounts are collected at the closing of a real estate transaction, or in the form of periodic fixed fees. These fees are recognized as a reduction to commissions and other related expense. We expect our commissions and other related expense to increase in absolute dollars over the long term as our revenue continues to grow. Our commissions and other related expense as a percentage of revenue is expected to fluctuate from period-to-period based on the mix of the commission arrangements we have with our agents, the resource fees we collect and the increase in adjacent services revenue. Beginning at the time of our IPO, we began to incur additional commissions and other related expense for stock-based compensation expense associated with our RSUs granted in connection with the agent equity program as described in the section titled “—Critical Accounting Estimates and Policies—Stock-Based Compensation.” Sales and marketing Sales and marketing expense consists primarily of marketing and advertising expenses, compensation and other personnel-related costs for employees supporting sales, marketing, expansion and related functions, occupancy-related costs for our regional offices, agent acquisition incentives and costs related to administering the Compass Concierge Program, including associated bad debt expenses. Advertising expense primarily includes the cost of marketing activities such as print advertising, online advertising and promotional items, which are expensed as incurred. Compensation and other personnel-related costs include salaries, benefits, bonuses and stock-based compensation expense. We plan to continue to invest in sales and marketing to attract and retain agents and increase brand awareness with home sellers and buyers. We expect that sales and marketing expense will increase on an absolute dollar basis to the extent that we continue to experience increased adoption of our platform. We expect sales and marketing expense to vary from period-to-period as a percentage of revenue for the foreseeable future and decrease as a percentage of revenue over the long term. Beginning at the time of our IPO, we began to incur additional sales and marketing expense for stock-based compensation expense associated with our RSUs as described in the section titled “—Critical Accounting Estimates and Policies—Stock-Based Compensation.” Operations and support Operations and support expense consists primarily of compensation and other personnel-related costs for employees supporting agents, third-party consulting and professional services costs, fair value adjustments to contingent consideration for our acquisitions and other related expenses. We plan to continue to invest in operations and support to ensure success for our agents. We expect that operations and support expense will increase on an absolute dollar basis to the extent we continue to see growth on our platform. We expect operations and support expense to vary from period-to-period as a percentage of revenue for the foreseeable future and decrease as a percentage of revenue over the long term as a result of continued investments to improve the operational efficiency of our operations and support organization. Beginning at the time of our IPO, we began to incur additional operations and support expense for stock-based compensation expense associated with our RSUs as described in the section titled “—Critical Accounting Estimates and Policies—Stock-Based Compensation.” Research and development Research and development expense consists primarily of compensation and other personnel-related costs for employees in the product, engineering and technology functions, website hosting expenses, software licenses and equipment, third-party consulting costs, data licenses and other related expenses. We plan to continue to invest in research and development to maintain our platform and to support our technology infrastructure. We expect that our research and development expense will increase on an absolute dollar basis, vary from period-to-period as a percentage of revenue for the foreseeable future and decrease as a percentage of revenue over the long-term as we continue to invest in the research and development activities relating to ongoing improvements to and maintenance of our platform for agents, including the hiring of engineering, product development and design employees to support these efforts. Beginning at the time of our IPO, we began to incur additional research and development expense for stock-based compensation expense associated with our RSUs as described in the section titled “—Critical Accounting Estimates and Policies—Stock-Based Compensation.” 54 Table of Contents General and administrative General and administrative expense consists primarily of compensation and other personnel-related costs for our executive management and administrative employees, including finance and accounting, legal, human resources and communications, the occupancy costs for our New York headquarters and other offices supporting our administrative functions, professional services fees for legal and finance, insurance expenses and talent acquisition expenses. We expect that general and administrative expense will increase on an absolute dollar basis and vary from period-to-period as a percentage of revenue for the foreseeable future as we focus on processes, systems and controls to enable our internal support functions to scale with the growth of our business. We expect to incur additional expenses as a result of operating as a public company, including expenses to comply with the rules and regulations applicable to companies listed on a national securities exchange, expenses related to compliance and reporting obligations pursuant to the rules and regulations of the SEC and higher expenses for directors’ and officers’ insurance, investor relations and professional services. We expect that general and administrative expense as a percentage of revenue will decrease over the long term. Beginning at the time of our IPO, we began to incur additional general and administrative expense for stock-based compensation expense associated with our RSUs as described in the section titled “—Critical Accounting Estimates and Policies—Stock-Based Compensation.” Depreciation and amortization Depreciation and amortization expense consists primarily of depreciation and amortization of our property and equipment, capitalized software and acquired intangible assets. We expect depreciation and amortization expense will increase on an absolute dollar basis and vary from period-to-period as a percentage of revenue for the foreseeable future as we continue to invest in our platform to develop new functionalities, purchase technology through acquisitions and develop our technology infrastructure. We will also continue to invest in property and equipment, including leases, to support our overall growth. Investment Income, net Investment income, net consists primarily of interest, dividends and realized gains and losses earned on our cash and cash equivalents. Interest Expense Interest expense consists primarily of expense related to the interest expenses, including committment fees for available borrowing capacities, and amortization of debt issuance costs associated with our Concierge Facility and Revolving Credit Facility. Benefit from Income Taxes Benefit from income taxes consists of a partial reduction in the valuation allowance related to the carryover tax basis in deferred tax liabilities from acquisitions. We maintain a full valuation allowance against our deferred tax assets for U.S. income tax purposes because we have concluded that it is more likely than not that the deferred tax assets will not be realized. Equity in Loss of Unconsolidated Entity Equity in loss of unconsolidated entity includes the results of our share of loss from our OriginPoint joint venture. 55 Table of Contents RESULTS OF OPERATIONS The following table sets forth our consolidated statements of operations data for the period indicated: Year Ended December 31, 2021 2020 2019 (in millions, except percentages) Revenue $ 6,421.0 100.0 % $ 3,720.8 100.0 % $ 2,386.0 100.0 % Operating expenses: Commissions and other related expense (1) 5,310.5 82.7 3,056.9 82.2 1,935.6 81.1 Sales and marketing (1) 510.4 7.9 407.9 11.0 382.8 16.0 Operations and support (1) 374.9 5.8 225.1 6.0 204.8 8.6 Research and development (1) 365.3 5.7 146.3 3.9 131.3 5.5 General and administrative (1) 288.5 4.5 106.7 2.9 92.4 3.9 Depreciation and amortization 64.4 1.0 51.2 1.4 40.9 1.7 Total operating expenses 6,914.0 107.7 3,994.1 107.3 2,787.8 116.8 Loss from operations (493.0 ) (7.7 ) (273.3 ) (7.3 ) (401.8 ) (16.8 ) Investment income, net 0.1 0.0 2.0 0.1 12.9 0.5 Interest expense (2.4 ) (0.0 ) (0.6 ) (0.0 ) — — Loss before income taxes and equity in loss (495.3 ) (7.7 ) (271.9 ) (7.3 ) (388.9 ) (16.3 ) Benefit from income taxes 2.5 0.0 1.7 0.0 0.9 0.0 Equity in loss of unconsolidated entity (1.3 ) (0.0 ) — — — — Net loss $ (494.1 ) (7.7 )% $ (270.2 ) (7.3 )% $ (388.0 ) (16.3 )% (1) Includes stock-based compensation expense as follows: Year Ended December 31, 2021 2020 2019 Commissions and other related expense $ 128.7 $ 5.7 $ 16.1 Sales and marketing 38.4 16.0 11.1 Operations and support 16.9 3.5 2.4 Research and development 92.7 1.4 2.8 General and administrative 109.6 16.6 5.0 Total stock-based compensation expense $ 386.3 $ 43.2 $ 37.4 Stock-based compensation for the year ended December 31, 2021 includes the following amounts related to 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 Years Ended December 31, 2021 and 2020 Revenue Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Revenue $ 6,421.0 $ 3,720.8 $ 2,700.2 72.6 % Revenue increased by $2,700.2 million, or 72.6%, for 2021 compared to 2020. The increase was primarily driven by an increase in the number of agents that joined our platform during 2020 and 2021, a higher volume of transactions from both new and existing agents, continued geographic expansion both within our existing and new markets, as well as from a modest increase in Average Transaction Value. The Average Number of Principal Agents for 2021 was 11,058 compared to 8,686 for 2020. Total Transactions for 2021 grew to 225,272, an increase of 55.6% from 2020. 56 Table of Contents Operating Expenses Commissions and other related expense Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Commissions and other related expense $ 5,310.5 $ 3,056.9 $ 2,253.6 73.7 % Percentage of revenue 82.7 % 82.2 % Commissions and other related expense increased by $2,253.6 million, or 73.7%, for 2021 compared to 2020. Included in Commissions and other related expense were non-cash expenses related to stock-based compensation of $128.7 million for the year ended December 31, 2021 and $5.7 million for the year ended December 31, 2020. The increase in stock-based compensation expense in 2021 as compared to 2020 was almost entirely the result of the required accounting treatment for our RSUs which differed before and after the March 31, 2021 effective date of our IPO. The RSUs outstanding prior to the IPO contained a liquidity-event based vesting condition, in addition to a time-based vesting condition. The liquidity-event based vesting condition did not allow for the recognition of stock based-compensation expense until this condition was satisfied at the time of the IPO. We recognized a one-time acceleration of stock-based compensation expense of $41.7 million in connection with our IPO when this liquidity-event based vesting condition was satisfied and recognized additional stock-based compensation expense subsequent to the IPO over the periods that the time-based vesting conditions are satisfied. Accordingly, stock-based compensation expense for the periods before and after the IPO are not comparable. Commissions and other related expense excluding such non-cash stock-based compensation expense was $5,181.8 million, or 80.7% of revenue for 2021 and $3,051.2 million, or 82.0% for 2020. The increase in absolute dollars of commissions and other related expense, excluding the non-cash stock-based compensation, was primarily driven by our higher revenue. The favorable 130 basis points decrease in commissions and other related expense, excluding the non-cash stock-based compensation expense, expressed as a percentage of revenue in the year ended December 31, 2021, respectively, as compared to the year ended December 31, 2020 was primarily due to the change in mix of the commission arrangements we have with our agents and changes in geographic mix. Sales and marketing Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Sales and marketing $ 510.4 $ 407.9 $ 102.5 25.1 % Percentage of revenue 7.9 % 11.0 % Sales and marketing expense increased by $102.5 million, or 25.1%, for 2021 compared to 2020. Included in Sales and marketing expense were non-cash expenses related to stock-based compensation of $38.4 million for the year ended December 31, 2021 and $16.0 million for the year ended December 31, 2020, respectively. The increase in stock-based compensation expense for 2021 as compared to 2020 was almost entirely the result of the required accounting treatment for our RSUs which differed before and after the March 31, 2021 effective date of our IPO. The RSUs outstanding prior to the IPO contained a liquidity-event based vesting condition, in addition to a time-based vesting condition. The liquidity-event based vesting condition did not allow for the recognition of stock based-compensation expense until this condition was satisfied at the time of the IPO. We recognized a one-time acceleration of stock-based compensation expense of $1.8 million in connection with our IPO when this liquidity-event based vesting condition was satisfied and recognized additional stock-based compensation expense subsequent to the IPO over the periods that the time-based vesting conditions are satisfied. Accordingly, stock-based compensation expense for the periods before and after the IPO are not comparable. Sales and marketing expense excluding such non-cash stock-based compensation expense was $472.0 million, or 7.4% of revenue for 2021 and $391.9 million, or 10.5% for 2020, respectively. The increase in sales and marketing expense, excluding the non-cash stock-based compensation expense was partially due to an increase in employee and agent headcount and increased agent marketing and advertising. The decrease in sales and marketing expense excluding the non-cash stock-based compensation expense, expressed as a percentage of revenue during the year ended December 31, 2021 as compared to the year ended December 31, 2020, respectively, was primarily due to the economies of scale as we were able to grow revenue more quickly than the costs of our sales and marketing efforts. 57 Table of Contents Operations and support Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Operations and support $ 374.9 $ 225.1 $ 149.8 66.5 % Percentage of revenue 5.8 % 6.0 % Operations and support expense increased by $149.8 million, or 66.5%, for 2021 compared to 2020. Included in Operations and support expense were non-cash expenses related to stock-based compensation of $16.9 million for the year ended December 31, 2021 and $3.5 million for the year ended December 31, 2020, respectively. The increase in stock-based compensation expense for 2021 as compared to 2020 was almost entirely the result of the required accounting treatment for our RSUs which differed before and after the March 31, 2021 effective date of our IPO. The RSUs outstanding prior to the IPO contained a liquidity-event based vesting condition, in addition to a time-based vesting condition. The liquidity-event based vesting condition did not allow for the recognition of stock based-compensation expense until this condition was satisfied at the time of the IPO. We recognized a one-time acceleration of stock-based compensation expense of $3.1 million in connection with our IPO when this liquidity-event based vesting condition was satisfied and recognized additional stock-based compensation expense subsequent to the IPO over the periods that the time-based vesting conditions are satisfied. Accordingly, stock-based compensation expense for the periods before and after the IPO are not comparable. Operations and support expense excluding such non-cash stock-based compensation expense was $358.0 million, or 5.6% of revenue for 2021 and $221.6 million, or 6.0% for 2020, respectively. The increase in absolute dollars, excluding such non-cash stock-based compensation expense, was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount and costs associated with the various acquisitions completed during 2020 and 2021. The decrease in operations and support expense excluding the non-cash stock-based compensation expense, expressed as a percentage of revenue during the year ended December 31, 2021, as compared to the year ended December 31, 2020, respectively, was primarily due to the economies of scale as we were able to grow revenue more quickly than the costs to support our agents on our platform. Research and development Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Research and development $ 365.3 $ 146.3 $ 219.0 149.7 % Percentage of revenue 5.7 % 3.9 % Research and development expense increased by $219.0 million, or 149.7%, for 2021 compared 2020. Included in Research and development expense were non-cash expenses related to stock-based compensation of $92.7 million for the year ended December 31, 2021 and $1.4 million for the year ended December 31, 2020, respectively. The increase in stock-based compensation expense for 2021 as compared to 2020 was almost entirely the result of the required accounting treatment for our RSUs which differed before and after the March 31, 2021 effective date of our IPO. The RSUs outstanding prior to the IPO contained a liquidity-event based vesting condition, in addition to a time-based vesting condition. The liquidity-event based vesting condition did not allow for the recognition of stock based-compensation expense until this condition was satisfied at the time of the IPO. We recognized a one-time acceleration of stock-based compensation expense of $46.9 million in connection with our IPO when this liquidity-event based vesting condition was satisfied and recognized additional stock-based compensation expense subsequent to the IPO over the periods that the time-based vesting conditions are satisfied. Accordingly, stock-based compensation expense for the periods before and after the IPO are not comparable. Research and development expense excluding such non-cash stock-based compensation expense was $272.6 million, or 4.2% of revenue for 2021 and $144.9 million, or 3.9% for 2020, respectively. The increase in absolute dollars and on a percentage of revenue basis, excluding such non-cash stock-based compensation expense was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount and additional software costs for our technology infrastructure and platform. 58 Table of Contents General and administrative Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) General and administrative $ 288.5 $ 106.7 $ 181.8 170.4 % Percentage of revenue 4.5 % 2.9 % General and administrative expense increased by $181.8 million, or 170.4%, for 2021 compared 2020. During the year ended December 31, 2021, General and administrative expense includes a charge of $21.3 million in connection with the settlement of the Avi Dorfman and RentJolt, Inc. matter (the “Litigation Matter”). Also included in General and administrative expense were non-cash expenses related to stock-based compensation of $109.6 million for 2021 and $16.6 million for 2020. The increase in stock-based compensation expense for 2021 as compared to 2020 was almost entirely the result of the required accounting treatment for our RSUs which differed before and after the March 31, 2021 effective date of our IPO. The RSUs outstanding prior to the IPO contained a liquidity-event based vesting condition, in addition to a time-based vesting condition. The liquidity-event based vesting condition did not allow for the recognition of stock based-compensation expense until this condition was satisfied at the time of the IPO. We recognized a one-time acceleration of stock-based compensation expense of $55.0 million in connection with our IPO when this liquidity-event based vesting condition was satisfied and recognized additional stock-based compensation expense subsequent to the IPO over the periods that the time-based vesting conditions are satisfied. Accordingly, stock-based compensation expense for the periods before and after the IPO are not comparable. General and administrative expense excluding such non-cash stock-based compensation expense and the Litigation Matter was $157.6 million, or 2.5% of revenue for 2021 and $90.1 million, or 2.4% of revenue for 2020. The increase in absolute dollars and on a percentage of revenue basis, excluding such non-cash stock-based compensation expense was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount and increased administrative expenses resulting from our public company requirements following our IPO. Depreciation and amortization Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Depreciation and amortization $ 64.4 $ 51.2 $ 13.2 25.8 % Percentage of revenue 1.0 % 1.4 % Depreciation and amortization expense increased by $13.2 million, or 25.8%, for 2021 compared 2020. The increase was primarily driven by an increase in the amortization of intangible assets related to the impact of acquisitions completed during the years ended December 31, 2021 and 2020. Depreciation and amortization expense as a percentage of revenue decreased in 2021 as compared to 2020, primarily due to capital expenditures growing at a slower rate relative to our revenue growth. Investment income, net Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Investment income, net $ 0.1 $ 2.0 $ (1.9) (95.0 )% During the year ended December 31, 2021, interest income was $0.1 million and during year ended December 31, 2020, interest income was $2.0 million. Investment income, net was not meaningful during the year ended December 31, 2021 as a result of lower average interest rates on our short-term interest-bearing investments. Interest expense Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Interest expense $ (2.4) $ (0.6) $ (1.8) 300.0 % Interest expense increased by $1.8 million, or 300%, for 2021 compared 2020. The increase 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 and the amortization of the issuance costs of such facilities. The Concierge Facility did not exist until July 2020 and the Revolving Credit Facility did not exist in the year ago period. 59 Table of Contents Benefit from income taxes Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Benefit from income taxes $ 2.5 $ 1.7 $ 0.8 47.1 % Benefit from income taxes increased by $0.8 million, or 47.1%, for 2021 compared to 2020. The increase resulted from a partial reduction in the valuation allowance related to the carryover tax basis in deferred tax liabilities from acquisitions. Equity in loss of unconsolidated entity Year Ended December 31, 2021 2020 $ Change % Change (in millions, except percentages) Equity in loss of unconsolidated entity $ (1.3 ) $ — $ (1.3) 100.0 % During the year ended December 31, 2021, equity in losses of unconsolidated entity was $1.3 million from our 49.9% ownership in OriginPoint, a joint venture we formed with Guaranteed Rate, Inc. in July 2021. K EY BUSINESS METRICS AND NON-GAAP FINANCIAL MEASURES In addition to the measures presented in our 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. Year Ended December 31, 2021 2020 2019 Total Transactions 225,272 144,784 87,158 Gross Transaction Value (in billions) $ 254.2 $ 151.7 $ 97.5 Average Number of Principal Agents 11,058 8,686 6,787 Net loss (in millions) $ (494.1 ) $ (270.2 ) $ (388.0 ) Net loss margin (7.7 )% (7.3 )% (16.3 )% Adjusted EBITDA (1) (in millions) $ 1.6 $ (155.5 ) $ (324.6 ) Adjusted EBITDA margin (1) 0.0 % (4.2 )% (13.6 )% (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 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. We exclude transactions related to rentals in this metric. Total Transactions have increased over time as we recruited new agents in existing markets, expanded into new markets, retained top-performing agents and as existing agents increased their productivity on our platform. Our Total Transactions for the year ended December 31, 2021 were 225,272, an increase of 55.6% from the year ended December 31, 2020. These increases were due to a combination of agent additions, enhanced productivity from the platform and a robust housing market. Robust housing demand was driven by a number of factors including: (i) favorable economic conditions supported by historically low mortgage rates, (ii) higher mobility rates as consumers reassess the requirements of their homes, have more flexibility on location, and accelerate the purchase of second homes and (iii) positive demographic trends as millennials are entering the housing market in larger numbers and household formations increase. 60 Table of Contents 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 year ended December 31, 2021 was $254.2 billion, an increase of 67.6% from the year ended December 31, 2020. We have experienced consistent and significant growth in the number of agents on our platform and the markets we serve, resulting in strong period-over-period growth rates in both Total Transactions and associated Gross Transaction Value. 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 year ended December 31, 2021 was 11,058, representing an increase of 27.3% from the year ago period. For the year ended December 31, 2021, our Average Number of Principal Agents was 48.0% of our average number of total agents. Our principal agents generate revenue across a diverse set of real estate markets in the United States. Non-GAAP Financial Measures Adjusted EBITDA and Adjusted EBITDA margin Adjusted EBITDA is a non-GAAP financial measure that represents our Net loss adjusted for depreciation and amortization, investment income, net, interest expense, stock-based compensation expense, benefit from income taxes 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) a litigation charge in connection with the settlement of the Litigation 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 they 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, therefore 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 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 reflected 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. 61 Table of Contents The following table provides a reconciliation of Net loss to Adjusted EBITDA (in millions): Year Ended December 31, 2021 2020 2019 Net loss $ (494.1 ) $ (270.2 ) $ (388.0 ) Adjusted to exclude the following: Depreciation and amortization 64.4 51.2 40.9 Investment income, net (0.1 ) (2.0 ) (12.9 ) Interest expense 2.4 0.6 — Stock-based compensation 386.3 43.2 37.4 Benefit from income taxes (2.5 ) (1.7 ) (0.9 ) Restructuring charges (1) — 10.3 1.7 Acquisition-related expenses (2) 23.9 13.1 (2.8 ) Litigation charge (3) 21.3 — — Adjusted EBITDA $ 1.6 $ (155.5 ) $ (324.6 ) Net loss margin (7.7 )% (7.3 )% (16.3 )% Adjusted EBITDA margin 0.0 % (4.2 )% (13.6 )% (1) Includes lease termination and severance costs. See Note 17 to our consolidated financial statements included elsewhere in this Annual Report for more information. (2) 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 to our consolidated financial statements included elsewhere in this Annual Report for more information. (3) Represents a charge of $21.3 million in connection with the settlement of the Litigation Matter. See Note 11 to our consolidated financial statements included elsewhere in this Annual Report for more information. Adjusted EBITDA was income of $1.6 million compared to a loss of $(155.5) million during the years ended December 31, 2021 and 2020, respectively. The favorable increase in Adjusted EBITDA during the year ended December 31, 2021 as compared to the year ended December 31, 2020 was primarily due to a significant increase in our revenue which was driven by our growth initiatives resulting in an increase in the number of agents that joined our platform during 2020 and 2021, including continued geographic expansion into new markets and a higher volume of transactions from both new and existing agents. Additionally, while expenses increased as compared to the year ended December 31, 2020, the rate of increase was less than the increase in our revenue which contributed to the favorable increases in Adjusted EBITDA. The following tables provide supplemental information to the Reconciliation of Net loss to Adjusted EBITDA presented above. These tables identify how each of the Operating expenses related financial statement line items contained within the accompanying consolidated statements of operations elsewhere in this Annual Report are impacted by the items excluded from Adjusted EBITDA (in millions): Year Ended December 31, 2021 Commissions and other related expense Sales and marketing Operations and support Research and development General and administrative GAAP Basis $ 5,310.5 $ 510.4 $ 374.9 $ 365.3 $ 288.5 Adjusted to exclude the following: Stock-based compensation (128.7 ) (38.4 ) (16.9 ) (92.7 ) (109.6 ) Acquisition-related expenses — — (23.9 ) — — Litigation charge — — — — (21.3 ) Non-GAAP Basis $ 5,181.8 $ 472.0 $ 334.1 $ 272.6 $ 157.6 62 Table of Contents Year Ended December 31, 2020 Commissions and other related expense Sales and marketing Operations and support Research and development General and administrative GAAP Basis $ 3,056.9 $ 407.9 $ 225.1 $ 146.3 $ 106.7 Adjusted to exclude the following: Stock-based compensation (5.7 ) (16.0 ) (3.5 ) (1.4 ) (16.6 ) Restructuring charges — (5.8 ) (2.9 ) (0.7 ) (0.9 ) Acquisition-related expenses — — (13.1 ) — — Non-GAAP Basis $ 3,051.2 $ 386.1 $ 205.6 $ 144.2 $ 89.2 Year Ended December 31, 2019 Commissions and other related expense Sales and marketing Operations and support Research and development General and administrative GAAP Basis $ 1,935.6 $ 382.8 $ 204.8 $ 131.3 $ 92.4 Adjusted to exclude the following: Stock-based compensation (16.1 ) (11.1 ) (2.4 ) (2.8 ) (5.0 ) Restructuring charges — (1.7 ) — — — Acquisition-related expenses — — 2.8 — — Non-GAAP Basis $ 1,919.5 $ 370.0 $ 205.2 $ 128.5 $ 87.4 LIQUIDITY AND CAPITAL RESOURCES Since inception, we have 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 December 31, 2021, we had cash and cash equivalents of $618.3 million and an accumulated deficit of $1.6 billion. During April 2021, we received aggregate proceeds of $438.7 million from our IPO, net of offering costs of approximately $11.0 million. We expect that operating losses and negative cash flows from operations may continue in certain periods in the foreseeable future as we continue to invest in the expansion of our business, including adjacent services and other new revenue streams, research and development and sales and marketing activities. We believe our existing cash and cash equivalents, the Concierge Facility (which, as defined below, 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. 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 expansion into new geographic markets, continued investment in adjacent services and other new revenue streams, future acquisitions, and the timing of investments in technology and personnel to support the overall growth in our business. 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. In addition to the foregoing, based on our current assessment, we do not currently anticipate any material impact on our long-term liquidity due to the ongoing COVID-19 pandemic. However, we will continue to assess the effect of the pandemic on our business. The extent and duration of the ongoing COVID-19 pandemic over the longer term and the extent to which it will impact the global economy, U.S. residential market and our financial condition, results of operations, or cash flows remain uncertain and dependent on future developments that are highly uncertain and difficult to predict. Such developments include, but are not limited to, the emergence of new variants, severity and transmission rate of the virus, the duration and extent of the spread of the virus (including new variants), the timing, availability, and effectiveness of vaccines (including booster shots) and the vaccination rates, the prevalence of local, regional and national restrictions and regulatory orders in response to the ongoing COVID-19 pandemic and the extent and effectiveness of containment actions taken, as well as the impact of these and other factors on residential real estate values, real estate transaction behavior in general, and on our business in particular. While the potential economic impact brought by the ongoing COVID-19 pandemic may be difficult to assess or predict, the ultimate impact of the pandemic could result in significant disruption of global financial markets, reducing our ability to access capital in the future. In addition, a recession or long-term market correction resulting from the ongoing COVID-19 pandemic could materially affect our business, financial condition and results of operations. 63 Table of Contents Concierge Facility In July 2020, our subsidiary, Compass Concierge SPV I, LLC, or Concierge SPV, entered into a Revolving Credit and Security Agreement, or the Concierge Facility, with Barclays Bank PLC, as administrative agent, and the several lenders party thereto. The Concierge Facility provides for a $75.0 million revolving credit facility and is solely used to finance, in part, our Compass Concierge Program. The Concierge Facility is secured by the assets of the Concierge SPV, which primarily consists of the purchased receivables and cash of the Compass Concierge Program. The Concierge Facility is also guaranteed by us. Prior to July 29, 2021, borrowings under the Concierge Facility accrued interest at rates equal to the adjusted London interbank offered rate, or LIBOR, plus the applicable margin of 3.00%, as adjusted, or an alternate rate of interest upon the occurrence of certain changes in LIBOR. Additionally, prior to July 29, 2021, we were required to pay an annual commitment fee of 0.50% on a quarterly basis based on the unused portion of the Concierge Facility irrespective of our utilization rate. On July 29, 2021, we amended and restated the Concierge Facility (the “A&R Concierge Facility”), extending the revolving period for another twelve months, lowering the interest rate to LIBOR plus a margin of 1.85%, which may be adjusted, and lowering the annual commitment fee to 0.35% if the Concierge Facility is utilized greater than 50% (the annual commitment fee remained the same, at 0.50%, if the Concierge Facility is utilized less than 50%). Pursuant to the A&R Concierge Facility, the principal amount, if any, is payable in full in January 2023, unless earlier terminated or extended. As of December 31, 2021 and 2020, there were $16.2 million and $8.4 million, respectively, in borrowings outstanding under the Concierge Facility. The interest rate on the Concierge Facility was 3.23% as of December 31, 2021. We have the option to repay our borrowings under the Concierge Facility without premium or penalty prior to maturity. The Concierge Facility contains customary affirmative covenants, such as financial statement reporting requirements, as well as customary covenants related to the Concierge SPV, including affirmative covenants that restrict its ability to, among other things, incur additional indebtedness, sell certain receivables, declare dividends or make certain distributions and undergo a merger or consolidation or certain other transactions. Additionally, in the event that we and our consolidated subsidiaries fail to comply with certain financial covenants that require us to meet certain liquidity-based measures, the commitments under the Concierge Facility will automatically be reduced to zero and we will be required to repay any outstanding loans under the Concierge Facility. As of December 31, 2021, we were in compliance with the covenants under the Concierge Facility. Revolving Credit and Guaranty Agreement In March 2021, we entered into a Revolving Credit and Guaranty Agreement, or the Revolving Credit Facility, with several lenders and issuing banks and Barclays Bank PLC, as administrative agent and as collateral agent. The Revolving Credit Facility provides for a $350.0 million revolving credit facility, which may be increased by the greater of $250.0 million and 18.5% of our consolidated total assets, plus such additional amount so long as our total net leverage ratio does not exceed 4.50:1.00 on a pro forma basis as of the most recent test period, subject to the terms of the Revolving Credit Facility. The Revolving Credit Facility also includes a letter of credit sublimit which is the lesser of (i) $125.0 million and (ii) the aggregate unused amount of the revolving commitments then in effect under the Revolving Credit Facility. Our obligations under the Revolving Credit Facility are guaranteed by certain of our subsidiaries and are secured by a first priority security interest in substantially all of our assets and subsidiary guarantors. Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) a floating rate per annum equal to the base rate plus a margin of 0.50% or (ii) a floating rate per annum equal to the rate at which dollar deposits are offered in the London interbank market plus a margin of 1.50%. In the Revolving Credit Facility, the base rate is defined as the highest of (a) the prime rate as quoted by The Wall Street Journal, (b) the federal funds effective rate plus 0.50%, (c) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.00%, and (d) 1.00%. During an event of default under the Revolving Credit Facility the applicable interest rates are increased by 2.0% per annum. We are also obligated to pay other customary fees for a credit facility of this size and type, including a commitment fee on a quarterly basis based on amounts committed but unused under the Revolving Credit Facility of 0.175% per annum and fees associated with letters of credit. The principal amount, if any, is payable in full in March 2026, unless earlier terminated or extended. We have the option to repay our borrowings, and to permanently reduce the loan commitments whole or in part, under the Revolving Credit Facility without premium or penalty prior to maturity. As of December 31, 2021, we had no outstanding borrowings under the Revolving Credit Facility and outstanding letters of credit totaled approximately $30.3 million. The Revolving Credit Facility contains customary representations, warranties, financial covenants applicable to us and our restricted subsidiaries, affirmative covenants, such as financial statement reporting requirements, and negative covenant which restrict its ability, among other things, to incur liens and indebtedness, make certain investments, declare dividends, dispose of, transfer or sell assets, make stock repurchases and consummate certain other matters, all subject to certain exceptions. The financial covenants require that we maintain certain liquidity-based measures and total revenue requirements. As of December 31, 2021, we were in compliance with the covenants under the Revolving Credit Facility. 64 Table of Contents The Revolving Credit Facility includes customary events of default that include, among other things, nonpayment of principal, interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments, change of control and certain material ERISA events. The occurrence of an event of default could result in the acceleration of the obligations under the Revolving Credit Facility. Cash Flows The following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2021 2020 2019 (in millions) Net cash used in operating activities $ (28.6 ) $ (58.1 ) $ (377.0 ) Net cash (used in) provided by investing activities (192.5 ) (13.4 ) 389.9 Net cash provided by financing activities 399.3 19.9 350.2 Net increase (decrease) in cash and cash equivalents $ 178.2 $ (51.6 ) $ 363.1 Operating Activities For 2021, net cash used in operating activities was $28.6 million. The outflow was primarily due to a $494.1 million net loss adjusted for $457.3 million of non-cash charges and cash inflow due to changes in assets and liabilities of $8.2 million. The non-cash charges are primarily related to $386.3 million of stock-based compensation expense, $64.4 million of depreciation and amortization expense and $8.9 million of bad debt expense. The changes in assets and liabilities resulted in a cash inflow primarily due to a $43.3 million increase in accrued expenses and other liabilities, a $9.4 million decrease in Compass Concierge receivables and a decrease of $8.5 million in accounts receivable due to timing of receipts. The cash inflow provided by operations was partially offset by an increase of $40.0 million in other currents assets and an increase of $11.8 million in other non-current assets. For 2020, net cash used in operating activities was $58.1 million. The outflow was primarily due to a $270.2 million loss from operations adjusted for $119.6 million of non-cash charges and cash inflow due to changes in assets and liabilities of $92.5 million. The non-cash charges are primarily related to $51.2 million of depreciation and amortization expense, $43.2 million of stock-based compensation expense and $16.0 million of bad debt expense. The changes in assets and liabilities resulted in a cash inflow primarily due to a net increase of $34.6 million operating lease liabilities as compared to operating lease assets, a $29.1 million increase in commissions payable as a result of increased revenue and the timing of commissions payments, a $20.5 million increase in accrued expenses and other liabilities, a $19.4 million decrease in Other current assets, and a $16.6 million decrease in Compass Concierge Receivables. The cash inflow provided by operations was partially offset by an increase of $16.3 million in accounts receivable due to growth in revenue and timing of receipts. For 2019, net cash used in operating activities was $377.0 million. The outflow was primarily due to a $388.0 million loss from operations adjusted for $75.2 million of non-cash charges and cash outflow due to changes in assets and liabilities of $64.2 million. The non-cash charges are primarily related to $40.9 million of depreciation and amortization expense, $37.4 million of stock-based compensation expense, $9.9 million due to changes related to contingent consideration and $6.8 million of bad debt expense. The changes in assets and liabilities increased cash outflow primarily due to a $84.8 million increase in Compass Concierge Receivables due to the growth of the program which was launched in October 2018, an increase of $45.0 million in other current assets primarily related to increases in prepaid incentives for agents and an increase of $18.2 million in accounts receivable due to growth in revenue and timing of receipts. These increases in cash used in operations were partially offset by a $24.9 million increase in accrued expenses and other liabilities, primarily attributable to an increase of $21.5 million in accrued expense due to the timing of invoices and payments and accrued personnel and compensation costs due to increased employee headcount, a $21.8 million net increase due to increases in operating lease liabilities as compared to operating lease right-of-use assets and a $21.6 million increase in commissions payable as a result of increased revenue and the timing of commissions payments. Investing Activities During 2021, net cash used by investing activities was $192.5 million consisting of $137.4 million in payments for acquisitions, net of cash acquired, $50.1 million in capital expenditures and $5.0 million for investment in an unconsolidated entity. The investment in an unconsolidated entity represents our investment in OriginPoint, the joint venture we formed with Guaranteed Rate in 2021. During 2020, net cash used by investing activities was $13.4 million consisting of $43.3 million in capital expenditures and $25.6 million in payments for acquisitions, net of cash acquired, partially offset by $55.5 million in proceeds from sales and maturities of marketable securities. During 2019, net cash provided by investing activities was $389.9 million consisting of $572.9 million in proceeds from sales and maturities of marketable securities, partially offset by $70.7 million for purchases of marketable securities, $74.1 million in capital expenditures and $38.2 million in payments for acquisitions, net of cash acquired. 65 Table of Contents Financing Activities During 2021, net cash provided by financing activities was $399.3 million, primarily consisting of $439.6 million in net proceeds from the issuance of common stock upon initial public offering, $26.9 million in proceeds from the exercise and early exercise of stock options and $7.8 million in proceeds from drawdowns on the Concierge Facility, partially offset by $62.4 million in taxes paid related to net share settlement of equity awards, $10.7 million in payments of contingent consideration related to acquisitions and $1.9 million in paid deferred debt issuance costs for credit facilities. During 2020, net cash provided by financing activities was $19.9 million, primarily consisting of $15.9 million in proceeds from the exercise and early exercise of stock options and $11.4 million in proceeds from drawdowns on the Concierge Facility, partially offset by $3.2 million in payments of contingent consideration related to acquisitions, $3.0 million in repayments of drawdowns on the Concierge Facility and $1.3 million in paid deferred debt issuance costs for the Concierge Facility. During 2019, net cash provided by financing activities was $350.2 million, primarily consisting of $343.3 million in net proceeds from the issuance of Series G convertible preferred stock and $7.6 million in proceeds from the exercise of stock options. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as of December 31, 2021: Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More than 5 Years (in millions) Operating lease obligations (1) $ 655.3 $ 103.8 $ 206.5 $ 157.2 $ 187.8 Other acquisition related compensation 60.5 34.4 24.0 2.1 — Estimated undiscounted contingent consideration payments 24.4 15.0 9.3 0.1 — Purchase obligations 76.9 35.4 35.7 5.8 — Total $ 817.1 $ 188.6 $ 275.5 $ 165.2 $ 187.8 (1) As of December, 2021, the Company has additional operating leases for real estate that have not yet commenced of $82.0 million payable through 2032, which have been excluded from above. Our Concierge Facility, which matures in January 2023, unless earlier terminated or extended and can be repaid at any time. As of December 31, 2021, there were $16.2 million in borrowings outstanding under the Concierge Facility. We are required to pay an annual commitment fee of 0.50% on a quarterly basis based on the unused portion of the Concierge Facility. In addition, interest on the used portion of the Concierge Facility is 3.0% plus an interest rate based on LIBOR multiplied by the Statutory Reserve Rate. The effective interest rate was 3.23% as of December 31, 2021. For additional information, see the section titled “Liquidity and Capital Resources— Concierge Facility.” As of December 31, 2021, we had no outstanding borrowings under our Revolving Credit Facility and outstanding letters of credit totaled approximately $30.3 million. Borrowings under the Revolving Credit Facility bear interest, at our option, at either (i) a floating rate per annum equal to the base rate plus a margin of 0.50% or (ii) a floating rate per annum equal to the rate at which dollar deposits are offered in the London interbank market plus a margin of 1.50%. During an event of default under the Revolving Credit Facility the applicable interest rates are increased by 2.0% per annum. We are also obligated to pay other customary fees for a credit facility of this size and type, including a commitment fee on a quarterly basis based on amounts committed but unused under the Revolving Credit Facility of 0.175% per annum and fees associated with letters of credit. The principal amount, if any, is payable in full in March 2026, unless earlier terminated or extended. For additional information, see the section titled “—Liquidity and Capital Resources— Revolving Credit and Guaranty Agreement.” We have irrevocable letters of credit with various financial institutions, primarily related to security deposits for leased facilities. As of December 31, 2021, we were contingently liable for $54.5 million, under these letters of credit. As of December 31, 2021, $30.3 million and $24.2 million of these letters of credit are collateralized by our Revolving Credit Facility and cash and cash equivalents, respectively. 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 totaled $172.1 million and $46.1 million as of December 31, 2021 and 2020, respectively. We did not have any other off-balance sheet arrangements as of or during the periods presented. 66 Table of Contents CRITICAL ACCOUNTING ESTIMATES AND POLICIES Our consolidated financial statements and accompanying notes have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make judgements, estimates and assumptions that affect the amounts 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 are many uncertainties regarding the ongoing COVID-19 pandemic, and we are closely monitoring the impact of the pandemic on all aspects of our business, including how it has impacted and may continue to impact our operations and our customers for an indefinite period of time. The extent and duration of the ongoing COVID-19 pandemic over the longer term and the extent to which it will impact the global economy, U.S. residential market and our financial condition, results of operations, or cash flows remain uncertain and depend on future developments that are highly uncertain and difficult to predict. Such developments include, but are not limited to, the emergence of new variants, severity and transmission rate of the virus, the duration and extent of the spread of the virus (including new variants), the timing, availability, and effectiveness of vaccines (including booster shots) and the vaccination rates, the prevalence of local, regional and national restrictions and regulatory orders in response to the ongoing COVID-19 pandemic and the extent and effectiveness of containment actions taken, as well as the impact of these and other factors on residential real estate values, real estate transaction behavior in general, and on our business in particular. We will continue to assess impacts of the ongoing COVID-19 pandemic and will adjust our operations as necessary. A thorough understanding of our critical accounting policies is essential when reviewing our consolidated financial statements. We believe that the critical accounting policies listed below are the most difficult management decisions as they involve the use of significant estimates and assumptions as described above. See Note 2 to our consolidated financial statements included elsewhere in this Annual Report for more information. Revenue Recognition We generate revenue by assisting home sellers and buyers in listing, marketing, selling and finding homes. We hold the real estate brokerage license that is necessary under relevant state laws and regulations to provide brokerage services and therefore controls those services that are necessary to legally transfer real estate between home sellers and buyers. Although our agents are independent contractors, they cannot execute a real estate transaction without a brokerage license, which the Company possesses. We have the only contractual relationship for the sale or exchange of real estate with its clients. Accordingly, we are the principal in our transactions with home buyers and sellers. As principal, we recognize revenue in the gross amount of consideration to which we expect to receive in exchange for those services. We concluded that our brokerage revenue contains a single performance obligation that is satisfied upon the closing of a real estate services transaction, at which point the entire transaction price is earned. Revenue is recognized upon the closing of a real estate transaction (i.e. purchase or sale of a home) since we are not entitled to any commission until the performance obligation is satisfied and are not owed any commission for unsuccessful transactions, even if services have been provided. We operate exclusively in the United States and generate substantially all of our revenue from commissions from home sellers and buyers. In addition to commission revenue, we generate revenue through adjacent services related to the home transaction such as title and escrow services which comprised an immaterial amount of the consolidated revenue for the years ended December 31, 2021, 2020 and 2019. Our management evaluated and determined that no disaggregation of revenue is necessary or appropriate. As we generally bill for our services at the time of revenue recognition, we do not have material deferred revenue or contract asset balances. In addition, we do not capitalize commissions paid to agents as incremental contract costs as there are no future benefits associated with the expenses. Stock-Based Compensation We measure compensation expense for all stock-based awards based on the estimated fair value of the awards on the date of grant. Compensation expense is generally recognized as expense on a straight-line basis over the service period based on the vesting requirements. We recognize forfeitures as they occur. For stock options, which we issue to employees and affiliated agents, we generally estimate the fair value using the Black- Scholes option pricing model, which requires the input of subjective assumptions, including (1) the fair value of common stock, (2) the expected stock price volatility, (3) the expected term of the award, (4) the risk-free interest rate and (5) expected dividends. 67 Table of Contents We also issue RSUs to employees and affiliated agents. In addition to the issuance of RSUs to agents as equity compensation for the provision of services, we offer RSUs to affiliated agents through our Agent Equity Program. The Agent Equity Program offers affiliated agents the ability to elect to have a portion of their commissions earned during a calendar year to be paid in the form of RSUs. RSUs issued in connection with the Agent Equity Program are granted at the beginning of the year following the calendar year in which the commissions were earned and are subject to the terms and conditions of the 2012 Stock Incentive Plan and the 2021 Equity Incentive Plan, as applicable. Our RSUs granted prior to December 2020 generally vest based upon the satisfaction of both a service-based condition and a liquidity event-based condition. The service-based vesting condition for these awards is generally satisfied over four years, except for the RSUs associated with the 2020 Agent Equity Program which vested immediately on the date of issuance. The liquidity event-based vesting condition is satisfied on the occurrence of a qualifying event, generally defined as a change in control or the effective date of the registration statement for our IPO. The fair value of these RSUs is measured based on the fair value of our common stock on the grant date and will begin to be recognized as expense when both the required service-based vesting condition and the liquidity event-based vesting condition has been achieved using the accelerated attribution method. The liquidity event-based vesting requirement was met on March 31, 2021, the effective date of our registration statement. Beginning in December 2020, we began issuing RSUs that vest upon the satisfaction of only a service-based vesting condition that is generally ranging from four to five years. The fair value of these RSUs is measured based on the fair value of our common stock on the grant date and will be recognized as expense on a straight-line basis as the required service-based vesting condition is satisfied. Any vested RSUs that require only a service-based vesting condition will convert to common stock following vesting and their prescribed delayed settlement periods. For RSUs to be granted in connection with the 2021 Agent Equity Program, we determine the value of the stock-based compensation expense at the time the underlying commission is earned and begin to recognize the associated expense on a straight-line basis over the requisite service periods beginning on the closing date of the underlying real estate commission transactions. The stock-based compensation expense is recorded as a liability and will be reclassified to additional paid-in capital at the end of the vesting period when the underlying RSUs are issued. For the year ended December 31, 2021, we recognized stock-based compensation expense and an associated liability of $84.8 million in connection with RSUs earned as a part of the 2021 Agent Equity Program. The associated liability is recorded within Accrued expenses and other current liabilities in the consolidated balance sheet. On a limited basis, we have issued stock options and RSUs that contain 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. Such awards are valued using a Monte Carlo simulation and the underlying expense will be recognized as the associated vesting conditions are met. Common Stock Valuations Prior to our IPO, given the absence of a public trading market for our common stock, and in accordance with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation, our board of directors, and from June 2020 onward, the compensation committee of our board of directors, exercised its reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of fair value of our common stock, including: • independent third-party valuations of our common stock; • the prices of the recent convertible preferred stock sales by us to investors in arm’s-length transactions; • the price of sales of our common stock and preferred stock in recent secondary sales by existing stockholders to investors; • our capital resources and financial condition; • the preferences held by our convertible preferred stock classes relative to those of our common stock; • the likelihood and timing of achieving a liquidity event, such as an initial public offering or sale of the Company, given prevailing market conditions; • our historical operating and financial performance as well as our estimates of future financial performance; • valuations of comparable companies; • the hiring of key personnel; • the status of our agent recruitment, development, and sales efforts; • the relative lack of marketability of our common stock; • industry information such as market growth and volume and macro-economic events; and • additional objective and subjective factors relating to our business. 68 Table of Contents Prior to our IPO, in valuing our common stock, our board of directors, and from June 2020 onward, the compensation committee of our board of directors, determined the fair value of our common stock using an options- based allocation method that values the claim each security class has on the overall value of the enterprise, taking into account certain preferences and rights, in addition to giving consideration to recent secondary sales of our common stock. The aggregate equity value was determined based on the recent convertible preferred stock sales by us to investors. Additionally, beginning in late 2020 as the likelihood of an initial public offering became more imminent, the determination of the fair value of our common stock included estimates related to the valuation of our common stock in the scenario of an initial public offering, including assumptions related to the likelihood and timing of such an event. Following our IPO, it is not necessary to determine the fair value of our Class A common stock, as our shares are traded in the public market. 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 consolidated financial statements included in this Annual Report.