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 “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, operational highlights and discussions of how seasonal factors and macroeconomic conditions may impact our results. • Results of Operations. This section provides our analysis and outlook for the significant line items on our statements of operations, as well as other information that we deem meaningful to understand our results of operations on a consolidated basis for the year ended December 31, 2022 compared to the year ended December 31, 2021. 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, 2021 compared to the year ended December 31, 2020 is included in our Form 10-K for the year ended December 31, 2021. • 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, 2022. • Critical Accounting Estimates and Policies. This section discusses those accounting policies that are considered important to the evaluation and reporting of our financial condition and results of operations, and whose application requires us to exercise subjective and often complex judgments in making estimates and assumptions. • Recent Accounting Pronouncements. This section provides a summary of the most recent authoritative accounting standards and guidance that have either been recently adopted by our company or may be adopted in the future. INTRODUCTION We are a technology-enabled brokerage that provides an end-to-end platform of software, services and support to empower our residential real estate agents to deliver exceptional service to seller and buyer clients. Real estate agents are themselves business owners, and Compass agents utilize the platform to grow their respective businesses, save time and manage their business more effectively. Our platform includes an integrated suite of cloud-based software for customer relationship management, marketing, client service and other critical functionality, all custom-built for the real estate industry and enabling our core brokerage services. The platform also uses proprietary data, analytics, artificial intelligence and machine learning to deliver high value recommendations and outcomes for Compass agents and their clients. Our business model is directly aligned with the success of our agents. We attract agents to our brokerage and partner with them as independent contractors who affiliate their real estate licenses with us, operating their businesses on our platform 37 Table of Contents and under our brand. We currently generate substantially all of our revenue from commissions paid by clients at the time that a home is transacted, which agents use to assist home sellers and buyers in listing, marketing, selling and finding homes as well as through the provision of services adjacent to the transaction, such as title, escrow and mortgage origination services. While adjacent services comprise a small portion of our revenue to date, we are well-positioned to capture meaningful revenue from adjacent services as we continue to expand and diversify our offerings within the real estate ecosystem. On April 6, 2021, we completed our IPO and our Class A common stock began trading on the New York Stock Exchange on April 1, 2021 under the symbol “COMP”. In connection with the IPO, we issued and sold 26.3 million shares of our Class A common stock at a public offering price of $18.00 per share. We received aggregate proceeds of $438.7 million from the IPO, net of the underwriting discount and offering costs of approximately $11.0 million. Recent Developments Throughout 2022, a number of macroeconomic conditions contributed to the slowdown in the U.S. residential real estate market, impacting our business and financial results during the year ended December 31, 2022, as described in more detail in the section entitled “—Results of Operations”. These conditions include, but are not limited to, the conflict in Ukraine, volatility in the U.S. equity markets, rising inflation, rapidly rising mortgage interest rates and the Federal Reserve Board increasing the federal funds rate by an aggregate of 4.50% through January 2023 with possible further increases. These conditions have contributed towards slowed consumer demand and declining home affordability and began to have an impact on price appreciation. Any further slowdown or additional challenging conditions in the U.S. residential real estate market could have a significant impact on our business and financial results in the first quarter of 2023 and beyond. While we continue to assess the effects of the current slowdown on our business and financial results, the ultimate impact will depend on future developments, which are highly uncertain and difficult to predict, as well as the actions that we have taken, or will take, to minimize any current and future impact. Update Related to Restructuring Activities During the year ended December 31, 2022, we enacted certain workforce reductions, wound down Modus Technologies, Inc. (“Modus”) and terminated certain of our operating leases. The workforce reductions are part of a broader plan to take meaningful actions to improve the alignment between our organizational structure and our long-term business strategy, drive cost efficiencies enabled by our technology and other competitive advantages and continue to drive toward profitability and positive free cash flow. In addition to the aforementioned workforce reductions, restructuring actions have included and are expected to include, but not be limited to, a reduction in U.S. hiring and backfills resulting from attrition; a reduction in spend through third party vendors; eliminating the use of incentives when recruiting new agents and reducing incentives for existing agents; a planned pause in M&A activity and new market expansion; and a review of occupancy costs with a view to consolidating offices and reducing related costs. As a result of restructuring actions taken during the year ended December 31, 2022, we incurred restructuring costs of $49.1 million, resulting from severance and other termination benefits for employees whose roles are being eliminated, lease terminations costs as a result of the accelerated amortization of various right-of-use assets and other restructuring costs, including those costs related to the wind-down of Modus. These costs have been presented within the Restructuring costs line in the consolidated statements of operations. We incurred additional non-cash charges of approximately $7.1 million during the year ended December 31, 2022 associated with the discontinued use of certain intangible assets associated with Modus and charges pertaining to the write-down of fixed assets for certain real estate leases that have been exited, or partially exited. These costs have been included within the Depreciation and amortization line in the consolidated statements of operations. During January 2023, we implemented a further workforce reduction as part of our ongoing cost reduction initiatives to manage the business during the current macroeconomic environment. As a result of this reduction, we expect to incur pre-tax cash charges of approximately $10 million to $12 million for severance and other termination benefits for employees whose roles were or are being eliminated during the three months ending March 31, 2023. Operational Highlights for the year ended December 31, 2022 We continue to attract and retain the most talented agents to our platform, which is critical to our long-term success. We grow our revenue by attracting high-performing agents looking to grow their business and increasing the productivity of our agents. We also continue to invest in our proprietary, integrated platform, designed for real estate agents, to enable 38 Table of Contents 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 28,000 agents on our platform as of December 31, 2022. A subset of our agents are considered principal agents, which we define as either agents who are leaders of their respective agent teams or individual agents operating independently on our platform. For the years ended December 31, 2022, 2021 and 2020, the Average Number of Principal Agents 3 was 13,073, 11,058 and 8,686, respectively. The principal agent additions came in both new and existing markets. During the years ended December 31, 2022, 2021 and 2020, our agents closed 211,538, 225,272 and 144,784 Total Transactions 3 , respectively. The decline was primarily driven by the macroeconomic conditions that contributed to the slowdown in the U.S. residential real estate market. See the section entitled “—Recent Developments” for more details surrounding these macroeconomic conditions. Our Gross Transaction Value 3 for the years ended December 31, 2022, 2021 and 2020, was $230.3 billion, $254.2 billion and $151.7 billion, respectively. Gross Transaction Value is primarily driven by home values in the markets we serve and by changes in the number of our agents in those markets, as well as seasonality and the aforementioned macroeconomic conditions. For the year ended December 31, 2022, our Gross Transaction Value represented 4.6% of residential real estate transacted in the United States, compared to 4.5% for the year ended December 31, 2021. 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. Should we elect to resume expansion into new markets in the future, faster data integration and ingestion, more efficient agent onboarding, and the ability to customize our solutions to local market requirements will allow us to enter new markets more quickly and effectively over time. We have a dedicated expansion team responsible for launching new markets that partners closely with our enterprise sales team to rapidly identify talented agents in each new market. The priority with which we enter new markets will be based on the addressable size of each market, agent feedback, local market dynamics and the improvement of macroeconomic conditions. Expansion within existing markets is particularly cost efficient as we are able to leverage existing infrastructure, personnel and our agent network. Seasonality and Cyclicality The residential real estate market is seasonal, which directly impacts our agents’ businesses. While individual markets may vary, transaction volume is typically highest in spring and summer, and then declines gradually in late fall and winter. We experience the most significant financial effect from this seasonality in the first and fourth quarters of each year, when our revenue is typically lower relative to the second and third quarters. The effect of this seasonality on our revenue has a larger effect on our results of operations as many of our operating expenses (excluding commissions) are somewhat fixed in nature and do not vary directly in line with our revenue. We believe that this seasonality has affected and will continue to affect our quarterly results; however, to date its effect may have been masked by our rapid growth during the year ended December 31, 2021 and the impact of changes in macroeconomic conditions experienced during the year ended December 31, 2022. 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. 3 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. 39 Table of Contents 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). We also recognize revenue from other adjacent services related to the home transaction such as title and escrow services. While revenue from these services has been immaterial through 2022, we expect revenue from these services to grow over time as we expand existing and add new adjacent services to our platform. 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 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. 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 fees we collect and any changes 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 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 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. Beginning at the time of our IPO, we began to incur additional sales and marketing expense for stock-based compensation expense associated with 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 acquisition related expenses. 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. 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.” 40 Table of Contents 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 expect that our research and development expense will vary from period-to-period as a percentage of revenue for the foreseeable future and decrease as a percentage of revenue. Beginning at the time of our IPO, we began to incur additional research and development expense for stock-based compensation expense associated with RSUs as described in the section titled “—Critical Accounting Estimates and Policies—Stock-Based Compensation.” 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 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 for our business. Beginning at the time of our IPO, we began to incur additional general and administrative expense for stock-based compensation expense associated with RSUs as described in the section titled “—Critical Accounting Estimates and Policies—Stock-Based Compensation.” Restructuring Costs Restructuring costs consists primarily of severance and other termination benefits for employees whose roles are being eliminated, lease terminations costs as a result of the accelerated amortization of various right-of-use assets and other restructuring costs, including those costs related to the wind-down of Modus. For the year ended December 31, 2020, we have reclassified certain expenses previously classified in other operating expense amounts to the Restructuring costs line item in order to conform to the current period financial statement presentation. 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 vary from period-to-period as a percentage of revenue for the foreseeable future. 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 commitment 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. The benefit from income taxes is reduced by current taxes in India that are not offset with future alternative minimum tax credits. We maintain a full valuation allowance against our deferred tax assets 41 Table of Contents 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 losses from our OriginPoint joint venture. RESULTS OF OPERATIONS The following table sets forth our consolidated statements of operations data for the period indicated: Year Ended December 31, 2022 2021 2020 (in millions, except percentages) Revenue $ 6,018.0 100.0 % $ 6,421.0 100.0 % $ 3,720.8 100.0 % Operating expenses: Commissions and other related expense (1) 4,936.1 82.0 5,310.5 82.7 3,056.9 82.2 Sales and marketing (1) 575.1 9.6 510.4 7.9 402.1 10.8 Operations and support (1) 392.4 6.5 374.9 5.8 222.2 6.0 Research and development (1) 360.3 6.0 365.3 5.7 145.6 3.9 General and administrative (1) 208.1 3.5 288.5 4.5 105.8 2.8 Restructuring costs 49.1 0.8 — — 10.3 0.3 Depreciation and amortization 86.3 1.4 64.4 1.0 51.2 1.4 Total operating expenses 6,607.4 109.8 6,914.0 107.7 3,994.1 107.3 Loss from operations (589.4) (9.8) (493.0) (7.7) (273.3) (7.3) Investment income, net 2.8 — 0.1 — 2.0 0.1 Interest expense (3.6) (0.1) (2.4) — (0.6) — Loss before income taxes and equity in loss of unconsolidated entity (590.2) (9.8) (495.3) (7.7) (271.9) (7.3) Benefit from income taxes 0.9 — 2.5 — 1.7 — Equity in loss of unconsolidated entity (12.2) (0.2) (1.3) — — — Net loss (601.5) (10.0) (494.1) (7.7) (270.2) (7.3) Net (income) loss attributable to non-controlling interests — — — — — — Net loss attributable to Compass, Inc. $ (601.5) (10.0 %) $ (494.1) (7.7 %) $ (270.2) (7.3 %) (1) Includes stock-based compensation expense as follows: Year Ended December 31, 2022 2021 2020 Commissions and other related expense $ 59.0 $ 128.7 $ 5.7 Sales and marketing 42.0 38.4 16.0 Operations and support 15.6 16.9 3.5 Research and development 57.5 92.7 1.4 General and administrative 60.4 109.6 16.6 Total stock-based compensation expense $ 234.5 $ 386.3 $ 43.2 42 Table of Contents Stock-based compensation for the year ended December 31, 2021 includes the following amounts related to the 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, 2022 and 2021 Revenue Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Revenue $ 6,018.0 $ 6,421.0 $ (403.0) (6.3 %) Revenue decreased by $403.0 million, or 6.3%, for 2022 compared to 2021. The decrease was primarily driven by the macroeconomic conditions that contributed to the current slowdown in the U.S. residential real estate market, a lower volume of transactions and a decline in Average Transaction Value, partially offset by an increase in the number of agents that joined our platform during 2021 and 2022. The Average Number of Principal Agents for 2022 was 13,073 compared to 11,058 for 2021. Total Transactions for 2022 declined to 211,538, a decrease of 6.1% from 2021. Operating Expenses Commissions and other related expense Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Commissions and other related expense $ 4,936.1 $ 5,310.5 $ (374.4) (7.1 %) Percentage of revenue 82.0 % 82.7 % Commissions and other related expense decreased by $374.4 million, or 7.1%, for 2022 compared to 2021. Included in Commissions and other related expense were non-cash expenses related to stock-based compensation of $59.0 million for the year ended December 31, 2022 and $128.7 million for the year ended December 31, 2021. The decline in stock-based compensation expense in 2022 as compared to 2021 was primarily related to a one-time acceleration of stock-based compensation expense of $41.7 million incurred on March 31, 2021 in connection with our IPO and a decline in year over year agent participation in the Agent Equity Program. 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. Commissions and other related expense excluding such non-cash stock-based compensation expense was $4,877.1 million, or 81.0% of revenue for 2022 and $5,181.8 million, or 80.7% for 2021. The decrease in absolute dollars of commissions and other related expense, excluding the non-cash stock-based compensation, was primarily driven by our lower revenue. The unfavorable 30 basis points increase 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, 2022 as compared to the year ended December 31, 2021 was primarily due to the change in mix of the commission arrangements we have with our agents and changes in geographic mix. 43 Table of Contents Sales and marketing Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Sales and marketing $ 575.1 $ 510.4 $ 64.7 12.7 % Percentage of revenue 9.6 % 7.9 % Sales and marketing expense increased by $64.7 million, or 12.7%, for 2022 compared to 2021. Included in Sales and marketing expense were non-cash expenses related to stock-based compensation of $42.0 million for the year ended December 31, 2022 and $38.4 million for the year ended December 31, 2021. The increase in stock-based compensation expense for 2022 as compared to 2021 was due to expense for awards related to increased headcount partially offset by a one-time acceleration of stock-based compensation expense of $1.8 million incurred on March 31, 2021 in connection with our IPO. 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 and we continue to recognize additional stock-based compensation expense subsequent to the IPO. Sales and marketing expense excluding such non-cash stock-based compensation expense was $533.1 million, or 8.9% of revenue for 2022 and $472.0 million, or 7.4% for 2021, respectively. The increase in sales and marketing expense in absolute dollars and on a percentage of revenue, excluding the non-cash stock-based compensation expense, was primarily due to an increase in agent marketing and advertising, an increase in agent recruiting costs and increased occupancy costs. Operations and support Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Operations and support $ 392.4 $ 374.9 $ 17.5 4.7 % Percentage of revenue 6.5 % 5.8 % Operations and support expense increased by $17.5 million, or 4.7%, for 2022 compared to 2021. Included in Operations and support expense were non-cash expenses related to stock-based compensation of $15.6 million for the year ended December 31, 2022 and $16.9 million for the year ended December 31, 2021. The decrease in stock-based compensation expense for 2022 as compared to 2021 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. Operations and support expense excluding such non-cash stock-based compensation expense was $376.8 million, or 6.3% of revenue for 2022 and $358.0 million, or 5.6% for 2021. 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 higher headcount prior to the aforementioned workforce reductions. 44 Table of Contents Research and development Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Research and development $ 360.3 $ 365.3 $ (5.0) (1.4 %) Percentage of revenue 6.0 % 5.7 % Research and development expense decreased by $5.0 million, or 1.4%, for 2022 compared to 2021. Included in Research and development expense were non-cash expenses related to stock-based compensation of $57.5 million for the year ended December 31, 2022 and $92.7 million for the year ended December 31, 2021. The decrease in stock-based compensation expense for 2022 as compared to 2021 was 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. Research and development expense excluding such non-cash stock-based compensation expense was $302.8 million, or 5.0% of revenue for 2022 and $272.6 million, or 4.2% for 2021. 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 higher headcount prior to the aforementioned workforce reductions and additional software costs for our technology infrastructure and platform. General and administrative Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) General and administrative $ 208.1 $ 288.5 $ (80.4) (27.9 %) Percentage of revenue 3.5 % 4.5 % General and administrative expense decreased by $80.4 million, or 27.9%, for 2022 compared to 2021. During the years ended December 31, 2022 and 2021, General and administrative expense includes charges of $10.5 million in connection with the Realogy Holdings Corp. matter and $21.3 million in connection with the Avi Dorfman and RentJolt, Inc. matter, respectively (collectively, the "Litigation Matters"). Also included in General and administrative expense were non-cash expenses related to stock-based compensation of $60.4 million for 2022 and $109.6 million for 2021. The decrease in stock-based compensation expense for 2022 as compared to 2021 was 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. General and administrative expense excluding such non-cash stock-based compensation expense and the Litigation Matters was $137.2 million, or 2.3% of revenue for 2022 and $157.6 million, or 2.5% of revenue for 2021. The decrease in absolute dollars and on a percentage of revenue basis, excluding such non-cash stock-based compensation expense and the Litigation Matters, was primarily due to our cost reduction initiatives taken during the year ended December 31, 2022. 45 Table of Contents Restructuring costs Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Restructuring costs $ 49.1 $ — $ 49.1 100.0 % Percentage of revenue 0.8 % — % Restructuring costs primarily consisted of costs associated with workforce reduction actions and the wind-down of Modus. See Note 17 - "Restructuring Activities" in our consolidated financial statements included elsewhere in this Annual Report, for information. Depreciation and amortization Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Depreciation and amortization $ 86.3 $ 64.4 $ 21.9 34.0 % Percentage of revenue 1.4 % 1.0 % Depreciation and amortization expense increased by $21.9 million, or 34.0%, for 2022 compared to 2021.The increase in absolute dollars and on a percentage of revenue basis was primarily driven by an increase in the amortization of intangible assets related to the impact of acquisitions completed during the year ended December 31, 2021 as well as the acceleration of $7.1 million of amortization in connection the discontinued use of certain intangible assets associated with Modus and charges pertaining to the write-down of fixed assets for certain real estate leases that have been exited, or partially exited. Investment income, net Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Investment income, net $ 2.8 $ 0.1 $ 2.7 2700.0 % During the year ended December 31, 2022, interest income was $2.8 million and during year ended December 31, 2021, interest income was $0.1 million. Investment income, net increased during the year ended December 31, 2022 as a result of increased average interest rates on our short-term interest-bearing investments. Interest expense Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Interest expense $ 3.6 $ 2.4 $ 1.2 50.0 % Interest expense increased by $1.2 million, or 50.0%, for 2022 compared to 2021. 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. 46 Table of Contents Benefit from income taxes Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Benefit from income taxes $ 0.9 $ 2.5 $ (1.6) (64.0 %) Benefit from income taxes decreased by $1.6 million, or 64.0%, for 2022 compared to 2021. The decrease resulted from a reduction in current year acquisition related activities and an increase in current taxes in India that are not offset with future alternative minimum tax credits. Equity in loss of unconsolidated entity Year Ended December 31, 2022 2021 $ Change % Change (in millions, except percentages) Equity in loss of unconsolidated entity $ 12.2 $ 1.3 $ 10.9 838.5 % During the year ended December 31, 2022, equity in loss of unconsolidated entity was $12.2 million and during the year ended December 31, 2021, equity in loss of unconsolidated entity was $1.3 million from our mortgage joint venture with Guaranteed Rate, Inc., which was formed 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, 2022 2021 2020 Total Transactions 211,538 225,272 144,784 Gross Transaction Value (in billions) $ 230.3 $ 254.2 $ 151.7 Average Number of Principal Agents 13,073 11,058 8,686 Net loss attributable to Compass, Inc. (in millions) $ (601.5) $ (494.1) $ (270.2) Net loss attributable to Compass, Inc. margin (10.0) % (7.7) % (7.3) % Adjusted EBITDA (1) (in millions) $ (210.0) $ 1.6 $ (155.5) Adjusted EBITDA margin (1) (3.5) % 0.0 % (4.2) % (1) Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. For more information regarding our use of these measures and a reconciliation of Net loss attributable to Compass, Inc. to Adjusted EBITDA, see the section titled “—Non-GAAP Financial Measures” below. Key Business Metrics Total Transactions Total Transactions is a key measure of the scale of our platform, which drives our financial performance. We define Total Transactions as the sum of all transactions closed on our platform in which our agent represented the buyer or seller in the purchase or sale of a home. We include a single transaction twice when one or more of our agents represent both the buyer and seller in any given transaction. We exclude transactions related to rentals in this metric. Our Total Transactions for the year ended December 31, 2022 were 211,538, a decrease of 6.1% from the year ended December 31, 2021. The decline was primarily driven by the macroeconomic conditions that contributed to the slowdown in the U.S. residential real estate market partially offset by agent additions. 47 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. We exclude transactions related to rentals in this metric. 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, 2022 was $230.3 billion, a decrease of 9.4% from the year ended December 31, 2021. The macroeconomic conditions that contributed to the slowdown in the U.S. residential real estate market resulted in period-over-period declines in both Total Transactions and 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, 2022 was 13,073, representing an increase of 18.2% from the year ago period. For the year ended December 31, 2022, our Average Number of Principal Agents was 46.3% 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 attributable to Compass, Inc. 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) litigation charges in connection with the Litigation Matters. 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 attributable to Compass, Inc. and our other GAAP results. In evaluating Adjusted EBITDA and Adjusted EBITDA margin, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments 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. 48 Table of Contents The following table provides a reconciliation of Net loss attributable to Compass, Inc. to Adjusted EBITDA (in millions, except percentages): Year Ended December 31, 2022 2021 2020 Net loss attributable to Compass, Inc. $ (601.5) $ (494.1) $ (270.2) Adjusted to exclude the following: Depreciation and amortization 86.3 64.4 51.2 Investment income, net (2.8) (0.1) (2.0) Interest expense 3.6 2.4 0.6 Stock-based compensation 234.5 386.3 43.2 Benefit from income taxes (0.9) (2.5) (1.7) Restructuring costs 49.1 — 10.3 Acquisition-related expenses (1) 11.2 23.9 13.1 Litigation charges (2) 10.5 21.3 — Adjusted EBITDA $ (210.0) $ 1.6 $ (155.5) Net loss attributable to Compass, Inc. margin (10.0) % (7.7) % (7.3) % Adjusted EBITDA margin (3.5) % 0.0 % (4.2) % (1) Includes adjustments related to the change in fair value of contingent consideration and adjustments related to acquisition consideration treated as compensation expense over the underlying retention periods. See Note 3 to our consolidated financial statements included elsewhere in this Annual Report for more information. (2) Represents a charge of $10.5 million incurred during the year ended December 31, 2022 in connection with the Realogy Holdings Corp. matter and a $21.3 million expense incurred during the year ended December 31, 2021 in connection with the settlement of the Avi Dorfman and RentJolt, Inc. matter. See Note 11 to our consolidated financial statements included elsewhere in this Annual Report for more information. Adjusted EBITDA was a loss of $210.0 million compared to income of $1.6 million during the years ended December 31, 2022 and 2021, respectively. The decrease in Adjusted EBITDA during the year ended December 31, 2022 as compared to the year ended December 31, 2021 was primarily due to the growth in operating expenses as a percentage of revenue resulting from investments in sales and marketing, operations and support and research and development and a slow down in revenue resulting from the current macroeconomic conditions impacting the U.S. residential real estate market as described in more detail under the section entitled “—Recent Developments”. The following tables provide supplemental information to the Reconciliation of Net loss attributable to Compass, Inc. to Adjusted EBITDA presented above. These tables identify how 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, 2022 Commissions and other related expense Sales and marketing Operations and support Research and development General and administrative GAAP Basis $ 4,936.1 $ 575.1 $ 392.4 $ 360.3 $ 208.1 Adjusted to exclude the following: Stock-based compensation (59.0) (42.0) (15.6) (57.5) (60.4) Acquisition-related expenses — — (11.2) — — Litigation charge — — — — (10.5) Non-GAAP Basis $ 4,877.1 $ 533.1 $ 365.6 $ 302.8 $ 137.2 49 Table of Contents 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 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 $ 402.1 $ 222.2 $ 145.6 $ 105.8 Adjusted to exclude the following: Stock-based compensation (5.7) (16.0) (3.5) (1.4) (16.6) Acquisition-related expenses — — (13.1) — — Non-GAAP Basis $ 3,051.2 $ 386.1 $ 205.6 $ 144.2 $ 89.2 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, 2022, we had cash and cash equivalents of $361.9 million and an accumulated deficit of $2.2 billion. We expect that operating losses and negative cash flows from operations may continue in certain periods in the foreseeable future as a result of the current slowdown in the U.S. residential real estate market as described in more detail under the section entitled “—Recent Developments”. 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 and beyond. Our future capital requirements will depend on many factors, including, but not limited to, growth in the number of our agents and the associated costs to attract, support and retain them, our decision to resume expansion into new geographic markets, continued investment in adjacent services and other new revenue streams, future acquisitions, the timing of investments in technology and personnel to support the overall growth in our business and the extent and duration of the current and any future slowdown in the U.S. residential real estate market. To the extent that current and anticipated future sources of liquidity are insufficient to fund our future business activities and requirements, we may be required to seek additional equity or debt financing. The sale of additional equity would result in additional dilution to our stockholders. The incurrence of debt financing would result in debt service obligations and the instruments governing such debt could provide for operating and financing covenants that would restrict our operations. There can be no assurances that we will be able to raise additional capital. In the event that additional financing is required from outside sources, we may not be able to negotiate terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, financial condition and results of operations could be adversely affected. See the sections entitled “Risk Factors—Risks Related to Ownership of Our Class A Common Stock—We may need to raise additional capital to continue to grow our business and we may not be able to raise additional capital on terms acceptable to us, or at all” and “Risk Factors—Risks Related to Our Business and Operations—Covenants in our debt agreements may restrict our borrowing capacity or operating activities and adversely affect our financial condition”. 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 50 Table of Contents part, our Compass Concierge Program. The Concierge Facility is secured primarily by the Concierge Receivables and cash of the Compass Concierge Program. On August 5, 2022, we further amended and restated the Concierge Facility (the “Second A&R Concierge Facility”) to among other things extend the revolving period to August 4, 2023. The interest rate on the Concierge Facility was 7.59% as of December 31, 2022. Pursuant to the Second A&R Concierge Facility, the principal amount, if any, is payable in full in February 2024, unless earlier terminated or extended. As of December 31, 2022 and 2021, there were $31.9 million and $16.2 million, respectively, in borrowings outstanding under the Concierge Facility. We have the option to repay our borrowings under the Second A&R Concierge Facility without premium or penalty prior to maturity. The Second A&R Concierge Facility contains customary affirmative covenants, such as financial statement reporting requirements, as well as 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 Second A&R Concierge Facility will automatically be reduced to zero and we will be required to repay any outstanding loans under the Second A&R Concierge Facility. As of December 31, 2022, we were in compliance with the covenants under the Second A&R 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 Barclays Bank PLC, as administrative agent and as collateral agent, and certain other lenders. The Revolving Credit Facility provides for a $350.0 million revolving credit facility, subject to the terms and conditions 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%. The base rate is equal to 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 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, fees associated with letters of credit and administrative and arrangement fees. The principal amount, if any, is payable in full on March 4, 2026, unless earlier terminated or extended. We have the option to repay our borrowings, and to permanently reduce the loan commitments in whole or in part, under the Revolving Credit Facility without premium or penalty prior to maturity. As of December 31, 2022, we had $150.0 million in outstanding borrowings under the Revolving Credit Facility and outstanding letters of credit under the Revolving Credit Facility totaled approximately $33.0 million. The interest rate on the borrowings under the Revolving Credit Facility was 5.86% as of December 31, 2022. 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 covenants 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 of at least $150.0 million as of the last day of each fiscal quarter and each date of a credit extension and (ii) consolidated total revenue as of the last day of each fiscal quarter be equal to or greater than the specified amount corresponding to such period. The minimum required consolidated revenue threshold for the trailing four fiscal quarters is $2,418.0 million during 2022, $3,799.0 million during 2023 and $4,668.0 million thereafter. As of December 31, 2022, we were in compliance with the financial covenants under the Revolving Credit Facility. 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 51 Table of Contents 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, 2022 2021 2020 (in millions) Net cash used in operating activities $ (291.7) $ (28.6) $ (58.1) Net cash used in investing activities (100.1) (192.5) (13.4) Net cash provided by financing activities 135.4 399.3 19.9 Net (decrease) increase in cash and cash equivalents $ (256.4) $ 178.2 $ (51.6) Operating Activities For 2022, net cash used in operating activities was $291.7 million. The outflow was primarily due to a $601.5 million net loss adjusted for $339.0 million of non-cash charges and cash outflow due to changes in assets and liabilities of $29.2 million. The non-cash charges are primarily related to $234.5 million of stock-based compensation expense, $86.3 million of depreciation and amortization expense, $12.2 million of equity in loss of unconsolidated entity and $7.3 million of bad debt expense. The changes in assets and liabilities resulted in a cash outflow primarily due to a $36.5 million decrease in accrued expenses and other liabilities, a $15.9 million decrease in Commissions payable, a $11.7 million increase in Compass Concierge receivables and a decrease of $4.8 million in accounts payable due to timing of payments. The cash outflow from operations was partially offset by a decrease of $17.6 million in other currents assets, a decrease of $9.8 million in other non-current assets, a decrease of $6.5 million in accounts receivable due to timing of receipts and a $5.8 million inflow from net operating lease right-of-use assets and operating lease liabilities. 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. Investing Activities During 2022, net cash used by investing activities was $100.1 million consisting of $70.1 million in capital expenditures, $15.0 million in payments for acquisitions, net of cash acquired, and $15.0 million for investment in an unconsolidated entity. The investment in an unconsolidated entity represents our investment in our mortgage joint venture with Guaranteed Rate, Inc. that we formed in 2021. 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 52 Table of Contents unconsolidated entity. The investment in an unconsolidated entity represents our investment in our joint venture that we formed 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. Financing Activities During 2022, net cash provided by financing activities was $135.4 million, primarily consisting of $150.0 million in proceeds from drawdowns on the Revolving Credit Facility, $15.7 million in net proceeds from drawdowns and repayments on the Concierge Facility and $9.0 million in proceeds from the exercise of stock options, partially offset by $23.5 million in taxes paid related to net share settlement of equity awards and $17.5 million in payments for acquisitions, including payments of contingent consideration. 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. Contractual Obligations and Commitments The following table summarizes our contractual obligations and commitments as of December 31, 2022: 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) $ 677.7 $ 118.9 $ 217.0 $ 163.1 $ 178.7 Other acquisition related compensation 21.9 14.3 7.6 — — Estimated undiscounted contingent consideration payments 14.0 10.0 3.1 0.9 — Acquisition related payables 13.5 13.3 0.2 — — Purchase obligations 74.6 30.4 31.0 13.2 — Total $ 801.7 $ 186.9 $ 258.9 $ 177.2 $ 178.7 __________ (1) As of December 31, 2022, the Company has additional operating leases for real estate that have not yet commenced of $11.2 million payable through 2033, which have been excluded from above. Our Concierge Facility matures August 4, 2023 unless earlier terminated or extended and can be repaid at any time. As of December 31, 2022, there were $31.9 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 2.35% plus an interest rate based on Term SOFR plus a credit adjustment spread of 0.11448%. The effective interest rate was 7.59% as of December 31, 2022. For additional information, see the section titled “—Liquidity and Capital Resources—Concierge Facility.” As of December 31, 2022, we had $150.0 million outstanding borrowings under our Revolving Credit Facility and outstanding letters of credit totaled approximately $33.0 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 53 Table of Contents 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. The interest rate on the borrowings under the Revolving Credit Facility was 5.86% as of December 31, 2022. 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, 2022, we were contingently liable for $48.0 million, under these letters of credit. As of December 31, 2022, $33.0 million and $15.0 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 $136.7 million and $172.1 million as of December 31, 2022 and 2021, respectively. We did not have any other off-balance sheet arrangements as of or during the periods presented. CRITICAL ACCOUNTING ESTIMATES AND POLICIES Our consolidated financial statements and accompanying notes have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Actual results may differ from these estimates and therefore, if material, our future financial statements will be affected. 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, 2022, 2021 and 2020. Our management evaluated and determined that no disaggregation of revenue is necessary or appropriate. 54 Table of Contents 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, affiliated agents and in certain cases in connection with business combinations, 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. We also issue RSUs to employees, affiliated agents and in certain cases in connection with business combinations. 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. We discontinued the Agent Equity Program following the issuance of RSUs in January 2023 related to the 2022 program year. 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 was measured based on the fair value of our common stock on the grant date and was recognized as expense when both the required service-based vesting condition and the liquidity event-based vesting condition were 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. In December 2020, we began issuing RSUs that vest upon the satisfaction of only a service-based vesting condition that generally ranges from one 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 granted in connection with the 2021 and 2022 Agent Equity Programs, we determined the value of the stock-based compensation expense at the time the underlying commission is earned and began 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 was 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. 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. 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. 55 Table of Contents