Compass(COMP) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, highlighting significant revenue growth, reduced net loss, and a strengthened balance sheet post-IPO Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $810.7 | $440.1 | | Total assets | $1,911.6 | $1,365.1 | | Total liabilities | $836.1 | $741.3 | | Total stockholders' equity (deficit) | $1,075.5 | $(862.9) | Condensed Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $1,951.4 | $682.1 | $3,065.3 | $1,302.0 | | Loss from operations | $(7.8) | $(85.6) | $(220.4) | $(219.8) | | Net loss | $(7.1) | $(84.2) | $(219.5) | $(216.9) | | Net loss per share | $(0.02) | $(0.77) | $(0.87) | $(1.99) | Condensed Consolidated Statements of Cash Flows Highlights (in millions) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $44.1 | $(159.9) | | Net cash (used in) provided by investing activities | $(123.9) | $24.4 | | Net cash provided by financing activities | $450.4 | $3.0 | - In April 2021, the company completed its IPO, issuing 26,296,438 shares and receiving net proceeds of $438.7 million[39] - In connection with the IPO, all outstanding convertible preferred stock was converted into 223,033,725 shares of common stock[39] - On March 31, 2021, the company recognized $148.5 million in stock-based compensation expense related to the vesting of certain RSUs and other equity awards upon the effectiveness of the IPO registration statement[40][108] - During the first six months of 2021, the company completed several acquisitions, including KVS Title and Glide Labs, for a total consideration of $117.0 million in cash, $5.8 million in stock, and up to $4.7 million in contingent payments[59][60][61] - These acquisitions resulted in the recognition of $57.6 million in goodwill[61] - Subsequent to the quarter end, on July 13, 2021, the company announced a joint venture with Guaranteed Rate, Inc. to form a new mortgage origination company called OriginPoint[131] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses strong performance, attributing significant revenue growth to increased agents and transactions, improved operating leverage, positive Adjusted EBITDA, and enhanced IPO liquidity Results of Operations Revenue surged in Q2 and H1 2021 due to increased agents and transactions, with operating expenses decreasing as a percentage of revenue, significantly reducing the loss from operations Revenue and Transaction Growth | Metric | Three Months Ended June 30, 2021 | YoY Change | Six Months Ended June 30, 2021 | YoY Change | | :--- | :--- | :--- | :--- | :--- | | Revenue (millions) | $1,951.4 | +186.1% | $3,065.3 | +135.4% | | Total Transactions | 65,743 | +140.3% | 106,011 | +106.0% | | Avg. Principal Agents | 10,629 | +24.5% | 10,221 | +22.5% | - Commissions and other related expense, excluding non-cash stock-based compensation, decreased as a percentage of revenue to 80.9% in Q2 2021 from 81.9% in Q2 2020, primarily due to changes in the mix of commission arrangements and geographic mix[172] - Sales and marketing expense, excluding non-cash stock-based compensation, decreased significantly as a percentage of revenue to 5.9% in Q2 2021 from 12.9% in Q2 2020, demonstrating economies of scale[173] - Research and development and Operations and support expenses also decreased as a percentage of revenue, excluding non-cash stock-based compensation, reflecting improved operating leverage as revenue grew faster than support and technology investment costs[175][176] Key Business Metrics and Non-GAAP Financial Measures Key business metrics show substantial growth in transactions, GTV, and agents, leading to a significant turnaround in non-GAAP profitability with positive Adjusted EBITDA Key Business Metrics | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Total Transactions | 65,743 | 27,357 | | Gross Transaction Value (billions) | $77.0 | $26.9 | | Average Number of Principal Agents | 10,629 | 8,534 | Reconciliation of Net Loss to Adjusted EBITDA (in millions) | Line Item | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net loss | $(7.1) | $(84.2) | | Stock-based compensation | $54.3 | $13.0 | | Depreciation and amortization | $14.9 | $12.7 | | Other adjustments | $9.2 | $2.0 | | Adjusted EBITDA | $71.3 | $(56.4) | | Adjusted EBITDA Margin | 3.7% | -8.3% | Liquidity and Capital Resources Liquidity significantly improved with $810.7 million in cash and cash equivalents, primarily from IPO proceeds, alongside positive operating cash flow and substantial credit facilities - As of June 30, 2021, the company had cash and cash equivalents of $810.7 million and an accumulated deficit of $1.3 billion[203] - Net cash provided by financing activities was $450.4 million for the first six months of 2021, primarily consisting of $439.6 million in net proceeds from the IPO[221] - In March 2021, the company entered into a new $350.0 million Revolving Credit Facility, which was undrawn as of June 30, 2021[211] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations affecting cash and variable-rate debt, though exposure is deemed immaterial due to short-term investments and limited international operations - The company is exposed to interest rate risk on its cash and cash equivalents ($810.7 million) and its LIBOR-based credit facilities[233][234] - As of June 30, 2021, the outstanding balance on debt facilities was $11.1 million; a 100-basis point change in interest rates would not have a material impact on interest expense[234] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal control over financial reporting, stemming from insufficient experience, processes, and IT controls, with remediation ongoing - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2021, due to material weaknesses in internal control over financial reporting[240] - The material weaknesses relate to an inadequate control environment, lack of formal accounting policies and procedures, and insufficient IT general controls for systems relevant to financial reporting[241][316] - Remediation efforts are underway, including hiring personnel and implementing new financial systems and processes, but the material weaknesses are not yet fully remediated[243][244] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in ordinary course legal proceedings, including a lawsuit by Avi Dorfman and a complaint from Realogy Holdings Corp., with outcomes currently unpredictable - In the case of Avi Dorfman v. Robert Reffkin and Urban Compass, Inc., the plaintiff seeks compensation for alleged contributions to the company's formation; a trial is scheduled for January 2022[84] - In the case of Realogy Holdings Corp., et al v. Urban Compass, Inc. and Compass Inc., the plaintiff alleges unfair competition; discovery is proceeding with an end date of June 30, 2022, and the outcome is currently unpredictable[85][88] Item 1A. Risk Factors This section outlines significant risks, including dependence on the cyclical U.S. real estate market, agent retention, history of net losses, intense competition, internal control weaknesses, and concentrated CEO voting power - The business is highly dependent on the health of the U.S. real estate industry, which is subject to economic downturns and seasonal and cyclical trends[251] - The company has a history of net losses ($219.5 million for H1 2021) and may not achieve or sustain profitability as it continues to invest in growth[258] - The company faces significant competition from traditional real estate brokerages and technology companies, which could impact its ability to attract and retain agents[272][274] - Material weaknesses in internal controls over financial reporting have been identified, which could impair the ability to produce timely and accurate financial statements[315] - The multi-class stock structure concentrates approximately 45% of voting power with the founder and CEO, Robert Reffkin, limiting the influence of other stockholders[385][386] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on unregistered equity sales, including Class A shares for acquisitions and Class B to Class A conversion, and details the use of IPO proceeds for working capital and general corporate purposes - The company raised $449.7 million in net proceeds from its IPO in April 2021, which is being used for working capital and other general corporate purposes[412] - On July 1, 2021, all outstanding 4,562,160 shares of non-voting Class B common stock were converted into an equal number of voting Class A common stock shares[411] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including an amended credit agreement, equity award forms, and CEO/CFO certifications - Exhibits filed include the Amended and Restated Revolving Credit and Security Agreement, forms of equity award agreements, and officer certifications pursuant to Sarbanes-Oxley Sections 302 and 906[415]