Compass(COMP) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents Compass, Inc.'s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2023 and 2022, including balance sheets, statements of operations, stockholders' equity, and cash flows. It also provides detailed notes on business operations, accounting policies, acquisitions, debt, commitments, stock-based compensation, and restructuring activities Condensed Consolidated Balance Sheets This section details Compass, Inc.'s financial position, presenting assets, liabilities, and stockholders' equity as of September 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheets (in millions) | Metric | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------- | :----------- | :----------- | | Assets | | | | Cash and cash equivalents | $220.0 | $361.9 | | Total current assets | $357.8 | $517.9 | | Total assets | $1,263.6 | $1,533.1 | | Liabilities & Stockholders' Equity | | | | Total current liabilities | $337.6 | $517.5 | | Total liabilities | $786.2 | $1,012.4 | | Total stockholders' equity | $477.4 | $520.7 | | Total liabilities and stockholders' equity | $1,263.6 | $1,533.1 | - Cash and cash equivalents decreased by $141.9 million from $361.9 million at December 31, 2022, to $220.0 million at September 30, 2023, reflecting a reduction in liquidity[20] - Total assets decreased by $269.5 million, from $1,533.1 million at December 31, 2022, to $1,263.6 million at September 30, 2023[20] - Total liabilities decreased by $226.2 million, from $1,012.4 million at December 31, 2022, to $786.2 million at September 30, 2023[20] Condensed Consolidated Statements of Operations This section outlines Compass, Inc.'s financial performance, including revenue, operating expenses, and net loss for the three and nine months ended September 30, 2023 and 2022 Condensed Consolidated Statements of Operations (in millions) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $1,337.4 | $1,493.7 | $3,788.6 | $4,910.8 | | Total operating expenses | $1,376.3 | $1,645.5 | $4,020.5 | $5,347.4 | | Loss from operations | $(38.9) | $(151.8) | $(231.9) | $(436.6) | | Net loss | $(39.2) | $(154.1) | $(236.3) | $(443.5) | | Net loss attributable to Compass, Inc. | $(39.4) | $(154.2) | $(237.6) | $(443.4) | | Net loss per share (basic and diluted) | $(0.08) | $(0.36) | $(0.52) | $(1.04) | - Revenue decreased by 10.5% for the three months ended September 30, 2023, and by 22.9% for the nine months ended September 30, 2023, compared to the prior year periods, primarily due to a slowdown in the U.S. residential real estate market[22][141] - Net loss attributable to Compass, Inc. significantly improved, decreasing from $(154.2) million to $(39.4) million for the three months ended September 30, 2023, and from $(443.4) million to $(237.6) million for the nine months ended September 30, 2023, driven by cost reduction initiatives[22] - Net loss per share (basic and diluted) improved from $(0.36) to $(0.08) for the three months and from $(1.04) to $(0.52) for the nine months ended September 30, 2023[22] Condensed Consolidated Statements of Stockholders' Equity This section presents the changes in Compass, Inc.'s stockholders' equity, reflecting net loss, stock issuances, and stock-based compensation for the nine months ended September 30, 2023 Changes in Stockholders' Equity (in millions) | Metric | Balances at Dec 31, 2022 | Net Loss | Issuance of Common Stock (Acquisitions) | Issuance of Common Stock (Agent Equity Program) | Stock-Based Compensation | Balances at Sep 30, 2023 | | :------------------------------------- | :----------------------- | :------- | :-------------------------------------- | :--------------------------------------------- | :----------------------- | :----------------------- | | Total Compass, Inc. Stockholders' Equity | $517.1 | $(237.6) | $10.6 | $53.3 | $111.4 | $474.0 | - Total Compass, Inc. stockholders' equity decreased from $517.1 million at December 31, 2022, to $474.0 million at September 30, 2023, primarily due to net loss, partially offset by stock-based compensation and common stock issuances[28] - Additional paid-in capital increased by $194.5 million for the nine months ended September 30, 2023, largely due to stock-based compensation ($111.4 million) and common stock issuances related to the 2022 Agent Equity Program ($53.3 million) and Strategic Transaction ($30.0 million)[28] Condensed Consolidated Statements of Cash Flows This section summarizes Compass, Inc.'s cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2023 and 2022 Condensed Consolidated Statements of Cash Flows (in millions) | Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $12.8 | $(173.9) | | Net cash used in investing activities | $(8.2) | $(86.9) | | Net cash used in financing activities | $(146.5) | $(2.6) | | Net decrease in cash and cash equivalents | $(141.9) | $(263.4) | | Cash and cash equivalents at end of period | $220.0 | $354.9 | - Operating activities generated $12.8 million in cash for the nine months ended September 30, 2023, a significant improvement from the $173.9 million cash used in the prior year, primarily due to reduced net loss and non-cash adjustments[30][179] - Net cash used in financing activities increased substantially to $146.5 million for the nine months ended September 30, 2023, mainly due to $150.0 million in net repayments on the Revolving Credit Facility[30][183] Notes to Condensed Consolidated Financial Statements This section provides detailed explanatory notes supporting the condensed consolidated financial statements, covering business operations, accounting policies, and specific financial items 1. Business and Basis of Presentation This note describes Compass, Inc.'s business model, the impact of macroeconomic conditions, and its liquidity position - Compass, Inc. provides an end-to-end platform for residential real estate agents, integrating cloud-based software, proprietary data, analytics, AI, and machine learning to support brokerage services[32] - The company generates substantially all revenue from commissions paid by clients through its independent contractor agents, with adjacent services like title and escrow comprising a smaller portion[33] - Macroeconomic conditions, including rising inflation and mortgage interest rates, have slowed the U.S. residential real estate market, adversely impacting the company's business[37][38] - The company enacted restructuring actions in 2022 and 2023 to improve organizational alignment, drive cost efficiencies, and move towards profitability and positive free cash flow[39] - As of September 30, 2023, the company had $220.0 million in cash and cash equivalents and $303.4 million available under its Revolving Credit Facility, believing it has sufficient liquidity for at least the next twelve months[40] 2. Summary of Significant Accounting Policies This note outlines the key accounting principles, judgments, and estimates used in preparing the financial statements, including business combinations and stock-based compensation - The financial statements are prepared in accordance with U.S. GAAP, requiring management judgments and estimates for areas such as common stock valuation, acquired intangible assets, contingent consideration, and income taxes[41] - Business combinations are accounted for using the acquisition method, allocating purchase consideration to acquired assets and liabilities at fair value, with any excess recorded as goodwill[42] - Stock-based compensation expense for awards (stock options, RSUs) is measured at fair value on the grant date and recognized over the service period, with forfeitures recognized as they occur[43] - The company discontinued the Agent Equity Program following the issuance of RSUs related to the 2022 program in Q1 2023[45][102] - The company adopted ASU 2021-08 (Business Combinations) and ASU 2022-02 (Financial Instruments - Credit Losses) as of January 1, 2023, with no material impact on its consolidated financial statements[52][53] 3. Acquisitions This note details the company's acquisition activities, including consideration paid, assets acquired, and liabilities assumed during the nine months ended September 30, 2023 - During the nine months ended September 30, 2023, Compass acquired two residential real estate brokerages and the assets of a smaller brokerage to expand its business in key domestic markets[54] - Consideration for 2023 acquisitions included cash, Class A common stock, and contingent payments up to $4.0 million based on earnings targets through 2027[55] Acquisition-Related Financials (9 Months Ended Sep 30, 2023, in millions) | Metric | Amount | | :------------------------------------- | :----- | | Customer relationships recognized | $10.8 | | Other current and non-current assets | $5.1 | | Other current and non-current liabilities | $6.1 | | Goodwill recognized | $10.2 | - Contingent consideration liabilities, measured at fair value, totaled $18.8 million as of September 30, 2023, with an undiscounted estimated payment of $34.2 million[60][65] - The company expects to pay up to an additional $4.5 million in future compensation to selling shareholders for retention-based arrangements[62] 4. Fair Value of Financial Assets and Liabilities This note describes the valuation methodologies and classifications for the company's financial assets and liabilities, including cash and contingent consideration - Cash and cash equivalents ($220.0 million as of Sep 30, 2023) are classified as Level 1 financial instruments, valued using quoted prices in active markets[64] - Contingent consideration liabilities ($18.8 million as of Sep 30, 2023) are classified as Level 3 financial instruments, with fair value estimated using unobservable inputs like forecasted future business results[64][66] Contingent Consideration Balances (in millions) | Category | Sep 30, 2023 | Dec 31, 2022 | | :------------------------------------- | :----------- | :----------- | | Accrued expenses and other current liabilities | $5.1 | $10.0 | | Other non-current liabilities | $13.7 | $4.0 | | Total contingent consideration | $18.8 | $14.0 | 5. Debt This note provides information on the company's credit facilities, outstanding debt balances, interest rates, and compliance with debt covenants - The Concierge Facility, a $75.0 million revolving credit facility, was extended to August 3, 2025, and bears interest at term SOFR plus 2.75% (8.90% as of Sep 30, 2023)[68][69] - As of September 30, 2023, the company had $27.9 million outstanding under the Concierge Facility and was in compliance with its covenants[20][70] - The Revolving Credit Facility provides for a $350.0 million revolving credit facility, maturing in March 2026, with no outstanding borrowings as of September 30, 2023[72][76] - The Revolving Credit Facility requires maintaining liquidity of at least $150.0 million and consolidated total revenue of at least $3,799.0 million for the trailing four fiscal quarters in 2023, with compliance as of September 30, 2023[77] 6. Commitments and Contingencies This note details the company's legal disputes, regulatory inquiries, and other contingent liabilities, including antitrust lawsuits and escrow deposits - The company is involved in legal disputes and regulatory inquiries in the ordinary course of business, recording liabilities when losses are probable and estimable[79] - Two putative class action lawsuits (Gibson Lawsuit and Batton Lawsuit) were filed in October/November 2023, alleging antitrust violations related to buyer broker compensation[81][82] - The company is unable to predict the outcome or reasonably estimate potential losses from these antitrust lawsuits but plans to vigorously defend itself[81][83] - As of September 30, 2023, the company was contingently liable for $54.4 million under irrevocable letters of credit, primarily for leased facilities[84] - Escrow and trust deposits, not company assets, totaled $153.5 million as of September 30, 2023, for which the company remains contingently liable[85] 7. Preferred Stock and Common Stock This note outlines the company's authorized and outstanding capital stock, including Class A, B, and C common stock, and recent equity transactions - The company's authorized capital stock includes 12.5 billion shares of Class A common stock (one vote per share), 1.25 billion shares of Class B common stock (no voting rights), and 100 million shares of Class C common stock (twenty votes per share)[88][89] Common Stock Shares (as of Sep 30, 2023) | Class | Authorized Shares | Issued & Outstanding Shares | | :----------------- | :---------------- | :-------------------------- | | Class A common stock | 12,500,000,000 | 458,904,462 | | Class C common stock | 100,000,000 | 18,939,356 | | Total | 13,850,000,000 | 477,843,818 | - In August 2023, the company completed a Strategic Transaction, receiving $32.3 million cash for 9.0 million Class A common shares and committing to a contingent payment up to $5.5 million by May 2025[91] 8. Stock-Based Compensation This note details the company's equity incentive plans, stock option and RSU activity, and the total stock-based compensation expense recognized - The 2021 Equity Incentive Plan had 33.7 million shares available for future grants as of September 30, 2023, after an automatic increase of 21.9 million shares on January 1, 2023[93] - The 2021 Employee Stock Purchase Plan (ESPP) had 14.1 million Class A common shares available for grant as of September 30, 2023, with 0.8 million shares issued during the nine months ended September 30, 2023[95] Stock Option Activity (in millions, except share and per share amounts) | Metric | Number of Options | Weighted Average Exercise Price | | :------------------------------------- | :---------------- | :------------------------------ | | Balance as of Dec 31, 2022 | 46,694,237 | $5.44 | | Granted | 220,680 | $3.86 | | Exercised | (2,745,170) | $1.51 | | Forfeited | (2,729,899) | $6.76 | | Balance as of Sep 30, 2023 | 41,439,848 | $5.60 | Restricted Stock Unit (RSU) Activity | Metric | Number of Awards | Weighted Average Grant Date Fair Value | | :------------------------------------- | :--------------- | :------------------------------------- | | Balance as of Dec 31, 2022 | 47,189,837 | $7.10 | | Granted | 36,924,173 | $3.41 | | Vested and converted to common stock | (29,399,902) | $4.90 | | Forfeited | (6,232,581) | $7.49 | | Balance as of Sep 30, 2023 | 48,481,527 | $5.57 | - The Agent Equity Program was discontinued after granting 14.1 million RSUs in January 2023 related to the 2022 program, which immediately vested[102] Total Stock-Based Compensation Expense (in millions) | Period | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total stock-based compensation expense | $38.0 | $50.1 | $121.9 | $173.1 | - Unrecognized stock-based compensation expense totaled $202.4 million as of September 30, 2023, to be recognized over a weighted-average period of 2.1 years[103] 9. Income Taxes This note explains the company's income tax benefit and the maintenance of a full valuation allowance on domestic net deferred tax assets - The company recognized an income tax benefit of $0.5 million for both the three and nine months ended September 30, 2023, primarily from a partial reduction in valuation allowance related to deferred tax liabilities from an acquisition[105] - A full valuation allowance is maintained on all domestic net deferred tax assets due to factors including estimated future taxable income and historic profitability[106] 10. Net Loss Per Share Attributable to Compass, Inc. This note details the calculation of net loss per share, including the weighted-average shares outstanding and anti-dilutive securities Net Loss Per Share Attributable to Compass, Inc. | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net loss attributable to Compass, Inc. (in millions) | $(39.4) | $(154.2) | $(237.6) | $(443.4) | | Weighted-average shares outstanding (basic and diluted) | 470,945,736 | 432,459,739 | 460,730,792 | 425,338,530 | | Net loss per share (basic and diluted) | $(0.08) | $(0.36) | $(0.52) | $(1.04) | - The computation of net loss per share uses the two-class method, with identical per-share loss for Class A, B, and C common stock due to similar rights[109] - Approximately 92.4 million participating securities (stock options, RSUs, ESPP shares, etc.) were excluded from diluted EPS calculation for the three and nine months ended September 30, 2023, as their inclusion would be anti-dilutive[110] 11. Compass Concierge Receivables and Allowance for Credit Losses This note describes the Compass Concierge Program, its credit quality monitoring, and the allowance for credit losses - The Compass Concierge Program includes 'Concierge Classic' (company-funded services, substantially ceased new payments in 2022) and 'Concierge Capital' (loans underwritten by a third-party lender)[111][112][113] - Payment for services or loan repayment is due upon the earlier of home sale, listing agreement termination, or one year from funding[114] - Credit quality is monitored by evaluating attributes like property sale likelihood, with 97% of outstanding Concierge Receivables related to unsold properties as of September 30, 2023[115] Allowance for Credit Losses (ACL) Activity (in millions) | Metric | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :------------------------------------- | :-------------------------- | :-------------------------- | | Beginning of period | $14.2 | $14.7 | | Allowances | $0.2 | $0.7 | | Net write-offs and other | $(0.9) | $(1.9) | | End of period | $13.5 | $13.5 | Aging Analysis of Concierge Receivables (as of Sep 30, 2023, in millions) | Status | Amount | | :----------------- | :----- | | Current | $38.3 | | 31-90 days past due | $2.7 | | Over 90 days past due | $6.8 | | Total | $47.8 | 12. Restructuring Activities This note details the costs and future obligations associated with the company's restructuring actions, including workforce reductions and lease terminations - Restructuring actions in 2022 and 2023 included workforce reductions, winding down Modus, and terminating operating leases to improve organizational alignment and drive cost efficiencies[119] - During the nine months ended September 30, 2023, the company incurred $27.7 million in restructuring costs (severance, lease terminations) and $5.3 million in non-cash charges for fixed asset write-downs[120][121] Restructuring Costs Incurred (in millions) | Cost Type | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :------------------------------------- | :-------------------------- | :-------------------------- | | Severance related personnel costs | $0.0 | $8.9 | | Lease termination costs | $1.7 | $18.8 | | Write-down of fixed assets | $0.0 | $5.3 | | Total expense | $1.7 | $33.0 | - Future lease and lease-related payments for restructuring activities are estimated at $30.8 million, with $4.4 million due in the remainder of 2023 and $14.7 million in 2024[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Compass, Inc.'s financial condition and operational results, highlighting the impact of macroeconomic conditions on the real estate market, key business metrics, and non-GAAP financial measures. It details revenue and expense trends, liquidity, and critical accounting estimates Overview This section provides a high-level summary of Compass, Inc.'s business model, recent restructuring efforts, and the impact of macroeconomic conditions on its performance - Compass operates as a residential real estate brokerage, providing an end-to-end platform with cloud-based software, data, analytics, AI, and machine learning to empower agents[126][127] - The company's revenue is primarily derived from commissions from agents' clients, with a small portion from adjacent services like title, escrow, and mortgage[128] - Restructuring activities, including workforce reductions and office consolidations, continued in 2023 to drive cost efficiencies and move towards profitability[129][130] - As of September 30, 2023, the company had over 29,000 agents on its platform, with Average Number of Principal Agents increasing by 3.8% year-over-year to 14,055[132][163] - Total Transactions decreased by 11.9% and Gross Transaction Value by 11.2% for the three months ended September 30, 2023, primarily due to macroeconomic conditions impacting the U.S. residential real estate market[132][134] - The U.S. residential real estate market slowdown, driven by rising inflation and mortgage interest rates, has adversely impacted the company's business and financial results[139] Results of Operations This section analyzes Compass, Inc.'s revenue and expense trends, detailing changes in commissions, operating expenses, and their impact on loss from operations Consolidated Statements of Operations Data (in millions, except percentages) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $1,337.4 (100.0%) | $1,493.7 (100.0%) | $3,788.6 (100.0%) | $4,910.8 (100.0%) | | Commissions and other related expense | $1,096.2 (82.0%) | $1,218.0 (81.5%) | $3,111.1 (82.1%) | $4,017.3 (81.8%) | | Sales and marketing | $103.9 (7.8%) | $144.4 (9.7%) | $332.5 (8.8%) | $444.3 (9.0%) | | Operations and support | $83.2 (6.2%) | $95.1 (6.4%) | $247.3 (6.5%) | $308.9 (6.3%) | | Research and development | $45.8 (3.4%) | $81.5 (5.5%) | $140.1 (3.7%) | $296.9 (6.0%) | | General and administrative | $24.2 (1.8%) | $56.5 (3.8%) | $93.3 (2.5%) | $167.0 (3.4%) | | Restructuring costs | $1.7 (0.1%) | $29.0 (1.9%) | $27.7 (0.7%) | $47.9 (1.0%) | | Depreciation and amortization | $21.3 (1.6%) | $21.0 (1.4%) | $68.5 (1.8%) | $65.1 (1.3%) | | Loss from operations | $(38.9) (-2.9%) | $(151.8) (-10.2%) | $(231.9) (-6.1%) | $(436.6) (-8.9%) | - Revenue decreased by 10.5% for Q3 2023 and 22.9% for the nine months ended September 30, 2023, primarily due to the U.S. residential real estate market slowdown, despite a 3.8% increase in Average Number of Principal Agents[141] - Commissions and other related expense decreased by 10.0% for Q3 2023 and 22.6% for the nine months ended September 30, 2023, largely due to lower transaction volumes and the discontinuation of the Agent Equity Program[142] - Sales and marketing expense decreased by 28.0% for Q3 2023 and 25.2% for the nine months ended September 30, 2023, driven by reduced agent marketing, advertising, and personnel costs due to decreased headcount[144] - Research and development expense decreased significantly by 43.8% for Q3 2023 and 52.8% for the nine months ended September 30, 2023, primarily due to lower headcount from workforce reductions and cost-cutting initiatives[146] - General and administrative expense decreased by 57.2% for Q3 2023 and 44.1% for the nine months ended September 30, 2023, benefiting from lower headcount, cost reduction initiatives, and a $7.2 million tax refund from prior year state tax estimate changes[147] - Investment income, net, increased due to higher average interest rates on short-term investments, while interest expense rose due to higher outstanding balances and interest rates on credit facilities[150][151] Key Business Metrics and Non-GAAP Financial Measures This section presents key operational metrics and non-GAAP financial measures, including total transactions, gross transaction value, agent count, and Adjusted EBITDA, to assess business performance Key Business Metrics and Non-GAAP Financial Measures | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Transactions | 48,134 | 54,606 | 138,227 | 168,819 | | Gross Transaction Value (in billions) | $50.9 | $57.3 | $144.3 | $187.8 | | Average Number of Principal Agents | 14,055 | 13,544 | 13,734 | 13,181 | | Net loss attributable to Compass, Inc. (in millions) | $(39.4) | $(154.2) | $(237.6) | $(443.4) | | Net loss attributable to Compass, Inc. margin | (2.9%) | (10.3%) | (6.3%) | (9.0%) | | Adjusted EBITDA (in millions) | $21.8 | $(42.2) | $(15.2) | $(134.7) | | Adjusted EBITDA margin | 1.6% | (2.8%) | (0.4%) | (2.7%) | - Total Transactions decreased by 11.9% for Q3 2023 and 18.1% for the nine months ended September 30, 2023, reflecting the slowdown in the U.S. residential real estate market[158] - Gross Transaction Value declined by 11.2% for Q3 2023 and 23.2% for the nine months ended September 30, 2023, primarily due to macroeconomic conditions[161] - Average Number of Principal Agents increased by 3.8% for Q3 2023 and 4.2% for the nine months ended September 30, 2023, indicating continued agent attraction[163] - Adjusted EBITDA improved significantly, turning positive to $21.8 million for Q3 2023 (from $(42.2) million loss in Q3 2022) and reducing loss to $(15.2) million for the nine months ended September 30, 2023 (from $(134.7) million loss in 9M 2022), due to cost reduction initiatives outpacing revenue slowdown[167][169] Liquidity and Capital Resources This section discusses Compass, Inc.'s cash position, expected cash flows, and available credit facilities to assess its ability to meet short-term and long-term financial obligations - As of September 30, 2023, the company had $220.0 million in cash and cash equivalents and an accumulated deficit of $2.4 billion[173] - The company expects continued operating losses and negative cash flows in certain periods due to the U.S. residential real estate market slowdown but believes existing cash, the Concierge Facility, and Revolving Credit Facility will provide sufficient liquidity for at least the next 12 months[174] Cash Flows Summary (in millions) | Activity | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by (used in) operating activities | $12.8 | $(173.9) | | Net cash used in investing activities | $(8.2) | $(86.9) | | Net cash used in financing activities | $(146.5) | $(2.6) | | Net decrease in cash and cash equivalents | $(141.9) | $(263.4) | - Operating activities generated $12.8 million in cash for the nine months ended September 30, 2023, a significant improvement from the $173.9 million cash used in the prior year[179] - Net cash used in financing activities increased to $146.5 million for the nine months ended September 30, 2023, primarily due to $150.0 million in net repayments on the Revolving Credit Facility[183] - The company administers $153.5 million in escrow and trust deposits as of September 30, 2023, for which it is contingently liable, but these are not assets of the company[186] Critical Accounting Estimates and Policies This section highlights the significant judgments, estimates, and assumptions management uses in preparing the financial statements, which are crucial for understanding reported amounts - The preparation of financial statements requires management to make judgments, estimates, and assumptions that affect reported amounts, with no material changes to critical accounting policies and estimates disclosed in the 2022 Form 10-K[188][189] Recent Accounting Pronouncements This section refers to detailed information on recently adopted and not-yet-adopted accounting pronouncements, as provided in the notes to the financial statements - Information on recently adopted and not-yet-adopted accounting pronouncements is detailed in Note 2 to the condensed consolidated financial statements[191] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses Compass, Inc.'s exposure to market risks, primarily focusing on interest rate risk related to its cash and debt facilities. It also briefly addresses foreign currency exchange risk - The company's market risk exposure primarily stems from potential changes in interest rates, affecting its $220.0 million in cash and cash equivalents and its debt facilities[192][193] - Borrowings under the Concierge Facility bear interest at term SOFR plus 2.75% (8.90% as of Sep 30, 2023), with $27.9 million outstanding[194] - The Revolving Credit Facility bears interest at a base rate plus 1.50%, with no outstanding borrowings as of September 30, 2023[194] - A 100-basis point increase or decrease in market interest rates is not expected to materially change the company's interest expense due to current outstanding amounts[194] - The company does not face significant foreign currency exchange risk due to limited international operations and foreign currency balances[195] Item 4. Controls and Procedures This section addresses the effectiveness of Compass, Inc.'s disclosure controls and procedures and internal control over financial reporting. It identifies material weaknesses and outlines the company's remediation plans - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2023, due to identified material weaknesses in internal control over financial reporting[198] - Despite material weaknesses, management concluded that the consolidated financial statements fairly present the company's financial position, results of operations, and cash flows in conformity with U.S. GAAP[198] - Material weaknesses include: 1) lack of sufficient oversight in the control environment, 2) inadequate formal accounting policies and controls across business processes, and 3) ineffective IT general controls for financial systems[201] - Remediation efforts include hiring internal audit personnel, developing action plans, engaging advisory firms, formalizing accounting policies, and enhancing IT general controls[204][205] - The implementation of remediation is ongoing and requires sustained testing, with no material changes in internal control over financial reporting during the quarter ended September 30, 2023[206][208] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section incorporates by reference the legal proceedings information detailed in Note 6 to the condensed consolidated financial statements, which includes ongoing antitrust lawsuits - Information on legal proceedings, including the Gibson and Batton antitrust lawsuits, is incorporated from Note 6 of the financial statements[210] Item 1A. Risk Factors This section updates the risk factors from the 2022 Form 10-K, specifically highlighting new risks related to ongoing antitrust litigation and the operational, compliance, and reputational risks associated with integrating machine learning and AI into the company's platform - Ongoing antitrust regulatory and private plaintiff litigation activities, including the recently filed Antitrust Lawsuits, could lead to significant industry-wide changes in agent and broker practices and compensation, materially affecting the business[212][214] - The company has integrated machine learning and AI into its platform tools (e.g., 'Likely to Sell' feature, marketing content generation), which presents operational, compliance, and reputational risks[215] - Risks associated with AI include unexpected results ('hallucinatory behavior'), potential for biased or discriminatory content, ethical concerns, and compliance challenges with new laws and regulations[215] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities This section details the unregistered sales of equity securities by Compass, Inc. during the third quarter of 2023, including exchanges by the CEO, shares issued for a strategic transaction, and shares for acquisitions - From July 1 to September 30, 2023, CEO Robert Reffkin exchanged 240,588 shares of Class A common stock for an equivalent number of Class C common stock[216] - 8,957,910 shares of Class A common stock were issued on August 24, 2023, for $32.3 million in connection with a Strategic Transaction[216] - 637,406 shares of Class A common stock were issued for $2.4 million in connection with a company acquisition and in lieu of cash holdback/earnout payments for prior acquisitions[216] - These securities were exempt from registration under Section 3(a)(9) and Section 4(a)(2) of the Securities Act, with recipients intending to acquire for investment[217][218] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - There were no defaults upon senior securities during the period[219] Item 4. Mine Safety Disclosures This section indicates that there are no mine safety disclosures applicable to the company - There are no mine safety disclosures[220] Item 5. Other Information This section confirms that no director or executive officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the third quarter of 2023 - No director or executive officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023[221] Item 6. Exhibits This section lists all exhibits filed as part of the Form 10-Q, including amendments to credit agreements, certifications, and XBRL documents - Exhibits include Amendment No. 1 to the Second Amended and Restated Revolving Credit and Security Agreement, certifications of principal executive and financial officers, and Inline XBRL documents[224] Signatures This section contains the signatures of the company's Chairman and Chief Executive Officer, Robert Reffkin, and Chief Financial Officer, Kalani Reelitz, certifying the report - The report is signed by Robert Reffkin, Chairman and Chief Executive Officer, and Kalani Reelitz, Chief Financial Officer, on November 7, 2023[228]