Compass, Inc. 10-K

Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of December 31, 2021 due to the material weaknesses in our internal control over financial reporting described below. In light of this fact, our management has performed additional analyses, reconciliations, and other post-closing procedures and has concluded that, notwithstanding the material weaknesses in our internal control over financial reporting, the consolidated financial statements for the periods covered by and included in this Annual Report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with GAAP. Previously Reported Material Weaknesses As disclosed in the section entitled “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K, we previously identified material weaknesses in our internal control over financial reporting. These material weaknesses primarily relate to our failure to design, maintain, and document sufficient oversight of activities related to our internal control over financial reporting due to a lack of an appropriate level of experience and training in internal control over financial reporting commensurate with public company requirements; formal accounting policies procedures, and controls related to substantially all of our business processes to achieve complete, accurate and timely financial accounting, reporting and disclosures, including controls over account reconciliations, segregation of duties and the preparation and review of journal entries; IT general controls for information systems and applications that are relevant to the preparation of the consolidated financial statements. We have concluded that these material weaknesses arose because, as a private company, we did not have the necessary business processes, systems, personnel, and related internal controls necessary to satisfy the accounting and financial reporting requirements of a public company. Accordingly, we have determined that these control deficiencies constituted material weaknesses in our internal control over financial reporting. A material weakness is a deficiency or combination of deficiencies in our internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our consolidated financial statements would not be prevented or detected on a timely basis. These deficiencies could result in additional misstatements to our consolidated financial statements that would be material and would not be prevented or detected on a timely basis. Remediation Plans We have commenced measures to remediate the identified material weaknesses. These measures include adding personnel as well as improving the control environment around financial systems and processes. We intend to continue to take steps to remediate the material weaknesses described above and further evolve our accounting processes. We will not be able to remediate these material weaknesses until these steps have been completed and have been operating effectively for a sufficient period of time. The following remedial actions were taken through the year ended December 31, 2021: • hired a Vice President of Internal Audit to oversee our internal controls program and work with management in its design and implementation of internal control over financial reporting; • developed detailed action plans to address control deficiencies identified across business processes and financial systems impacting our financial reporting; and • engaged a global accounting advisory firm to assist with the documentation, evaluation, remediation and testing of our internal control over financial reporting. 106 Table of Contents The following are remedial actions that management is undertaking during 2022: • evaluate our internal control over financial reporting with respect to design, implementation, and operating effectiveness; • formalize our accounting policies, including training relevant personnel, related to, but not limited to, account reconciliations and manual journal entries; and • formalize IT procedures for key financial systems, including training relevant personnel, related to segregation of duties, user access, batch jobs, data backups, change management, and program development. While we believe that these efforts will improve our internal control over financial reporting, the implementation of our remediation is ongoing and will require testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. We believe we are making progress toward achieving the effectiveness of our internal controls and disclosure controls. The actions that we are taking are subject to ongoing senior management review, as well as audit committee oversight. We will not be able to conclude whether the steps we are taking will remediate the material weaknesses in our internal control over financial reporting until we have completed our remediation efforts and subsequent evaluation of their effectiveness. We may also conclude that additional measures may be required to remediate the material weaknesses in our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting The Annual Report on Form 10-K does not include a report of management’s assessment regarding internal control over financial reporting due to a transition period established by the rules of the SEC for newly public companies. Inherent Limitation on the Effectiveness of Internal Controls and Procedures Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not Applicable. 107 Table of Contents PART III Item 10. Directors, Executive Officers and Corporate Governance. Information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commission on Schedule 14A in connection with our 2022 Annual Meeting of Stockholders, or the Proxy Statement, which will be filed no later than 120 days after the end of our fiscal year ended December 31, 2021, and is incorporated herein by reference. We have adopted a Code of Business Conduct and Ethics that applies to our officers, directors and employees which is available on our website at investors.compass.com. The Code of Business Conduct and Ethics is intended to qualify as a “code of ethics” within the meaning of Section 406 of the Sarbanes-Oxley Act of 2002 and Item 406 of Regulation S-K. In addition, we intend to promptly disclose on our website at www.compass.com (1) the nature of any amendment to our Code of Business Conduct and Ethics that applies to our directors or our principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions and (2) the nature of any waiver, including an implicit waiver, from a provision of our code of ethics that is granted to a director one of these specified officers, the name of such person who is granted the waiver and the date of the waiver on our website in the future. Item 11. Executive Compensation. The information required by this item regarding executive compensation will be incorporated by reference to the information set forth in our Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this item regarding security ownership of certain beneficial owners and management and our equity compensation plans will be incorporated by reference to the information set forth in our Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this item regarding security ownership of certain beneficial owners and management and our equity compensation plans will be incorporated by reference to the information set forth in our Proxy Statement. Item 14. Principal Accountant Fees and Services. The information required by this item regarding principal accountant fees and services will be incorporated by reference to the information set forth in our Proxy Statement. 108 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules. (a) The following documents are filed as part of this report: 1. Financial Statements Information in response to this Item is included in Part II, Item 8 of this Annual Report on Form 10-K. 2. Financial Statement Schedules Schedule II. Valuation and Qualifying Accounts. Years Ended December 31, 2021, 2020 and 2019 Balance at Beginning of Year Charged to Costs and Expenses Write- offs Other Balance at End of Year (in millions) December 31, 2021 Accounts receivable allowance for credit loss $ 8.1 $ 1.7 $ (2.7 ) $ — $ 7.1 Compass Concierge receivable allowance for credit loss 17.2 7.2 (7.1 ) — 17.3 Valuation allowance for deferred tax assets 287.5 — — 160.9 (b) 448.4 December 31, 2020 Accounts receivable allowance for credit loss 2.7 6.9 (1.5 ) — 8.1 Compass Concierge receivable allowance for credit loss 4.7 9.1 (2.2 ) 5.6 (a) 17.2 Valuation allowance for deferred tax assets 223.1 — — 64.4 (b) 287.5 December 31, 2019 Accounts receivable allowance for credit loss 2.2 2.1 (1.6 ) — 2.7 Compass Concierge receivable allowance for credit loss — 4.7 — — 4.7 Valuation allowance for deferred tax assets 108.9 — — 114.2 (b) 223.1 (a) The Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326) as of January 1, 2020 on a modified retrospective basis which resulted in a $5.6 million increase in the Company’s overall allowance for credit losses related to the Company’s Compass Concierge receivables, with a corresponding increase to the Company’s accumulated deficit. (b) For the years ended December 31, 2021, 2020 and 2019, the increase in valuation allowance relates to U.S. deferred tax assets for which the Company continues to maintain that the realization of these assets has not achieved a more-likely-than-not threshold. This is primarily due to the evidence that the Company continued to maintain three-year cumulative pre-tax book losses. 109 Table of Contents 3. Exhibits Exhibit Index Incorporated by Reference Exhibit Number Exhibit Description Form File No. Exhibit Filing Date Filed Herewith 3.1 Restated Certificate of Incorporation of the Registrant 10Q 001-40291 3.1 5/13/2021 3.2 Amended and Restated Bylaws of the Registrant 10Q 001-40291 3.2 5/13/2021 4.1 Description of Common Stock X 4.2 Form of Registrant’s Class A common stock certificate S-1/A 333-253744 4.1 3/23/2021 10.1 Form of Indemnification Agreement by and between the Registrant and each of its directors and executive officers S-1 333-253744 10.1 3/1/2021 10.2 2012 Stock Incentive Plan and forms of award agreements thereunder S-1 333-253744 10.2 3/1/2021 10.3 2021 Equity Incentive Plan and forms of award agreements thereunder S-1/A 333-253744 10.3 3/23/2021 10.4 2021 Employee Stock Purchase Plan and forms of award agreements thereunder S-1/A 333-253744 10.4 3/23/2021 10.5 Non-Employee Director Compensation Policy S-1 333-253744 10.5 3/1/2021 10.6 Letter Agreement between the Registrant and Robert Reffkin, dated as of March 12, 2020, as amended S-1/A 333-253744 10.6 3/23/2021 10.7 Offer Letter between the Registrant and Kristen Ankerbrandt, dated as of March 13, 2021 S-1/A 333-253744 10.7 3/23/2021 10.8 Offer Letter between the Registrant and Greg Hart, dated as of March 12, 2021 S-1/A 333-253744 10.8 3/23/2021 10.9 Offer Letter between the Registrant and Joseph Sirosh, dated as of March 12, 2021 S-1/A 333-253744 10.9 3/23/2021 10.10 Offer Letter between the Registrant and Brad Serwin, dated as of March 12, 2021 S-1/A 333-253744 10.10 3/23/2021 10.11 Form of Change in Control and Severance Agreement between the Registrant and its named executive officers S-1/A 333-253744 10.11 3/23/2021 10.12 Lease Agreement between Urban Compass, Inc. and 90 Fifth Avenue Owner LLC, dated July 23, 2014, and amendments thereto S-1 333-253744 10.12 3/1/2021 10.13 Amended and Restated Revolving Credit and Security Agreement among Compass Concierge SPV I, LLC, Barclays Bank PLC and the lenders party thereto, dated as of July 29, 2021 10Q 001-40291 10.1 8/10/2021 10.14 Revolving Credit and Guaranty Agreement among the Registrant, Barclays Bank PLC, the Lenders, and Issuing Banks party thereto, dated as of March 4, 2021 S-1/A 333-253744 10.14 3/23/2021 10.15 Form of Exchange Agreement between the Registrant and Robert Reffkin S-1 333-253744 10.14 3/1/2021 10.16 Form of Equity Exchange Right Agreement between the Registrant and Robert Reffkin S-1 333-253744 10.15 3/1/2021 10.17 Forms of Global Notice of Restricted Stock Unit Award and Global Restricted Stock Unit Award Agreement 10Q 001-40291 10.2 8/10/2021 10.18 Forms of Global Notice of Stock Option Grant and Global Stock Option Agreement 10Q 001-40291 10.3 8/10/2021 21.1 Subsidiaries of the Registrant S-1/A 333-253744 21.1 3/23/2021 23.1 Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm X 24.1 Power of Attorney (contained in “Signatures”) X 31.1 Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) X 31.2 Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) X 32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 X 32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 X 101 Interactive Data Files X 104 Cover page interactive data file, submitted using inline XBRL (contained in Exhibit 101) X Item 16. Form 10-K Summary None. 110 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Compass, Inc (Registrant) February 28, 2022 By /s/ Robert Reffkin (Date) Robert Reffkin Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, each person whose individual signature appears below hereby authorizes and appoints Robert Reffkin, Kristen Ankerbrandt, and Scott Wahlers and each of them, with full power of substitution and re-substitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Annual Report on Form 10-K and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to be done by virtue thereof. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name Title Date /s/ Robert Reffkin Chairman of the Board of Directors and Chief Executive Officer February 28, 2022 Robert Reffkin (Principal Executive Officer) /s/ Kristen Ankerbrandt Chief Financial Officer February 28, 2022 Kristen Ankerbrandt (Principal Financial Officer) /s/ Scott Wahlers Chief Accounting Officer February 28, 2022 Scott Wahlers (Principal Accounting Officer) /s/ Jeffrey Housenbold Director February 28, 2022 Jeffrey Housenbold /s/ Frank Martell Director February 28, 2022 Frank Martell /s/ Eileen Murray Director February 28, 2022 Eileen Murray /s/ Charles Phillips Director February 28, 2022 Charles Phillips /s/ Steven Sordello Director February 28, 2022 Steven Sordello /s/ Pamela Thomas-Graham Director February 28, 2022 Pamela Thomas-Graham 111