UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2021

OR

For the transition period from _______ to _______

Commission File Number: 001-40291

COMPASS, INC.

(Exact Name of Registrant as Specified in its Charter)

(212) 913-9058

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of May 10, 2021, there were 393,973,089 shares of the registrant’s common stock outstanding.

Compass, Inc.

Index to Condensed Consolidated Financial Statements

Unless otherwise expressly stated or the context otherwise requires, references in this Quarterly Report on Form 10-Q, which we refer to as this Quarterly Report, to “Compass,” “Company,” “our,” “us,” and “we” and similar references refer to Compass, Inc. and its wholly-owned subsidiaries.

WHERE YOU CAN FIND MORE INFORMATION

Investors and others should note that we may announce material business and financial information to our investors using our investor relations website (www.compass.com), filings we make with the Securities and Exchange Commission, webcasts, press releases and conference calls. We use these mediums, including our website, to communicate with our stockholders and the public about our company, our product candidates and other matters. It is possible that the information that we make available may be deemed to be material information. We therefore encourage investors and others interested in our company to review the information that we make available on our website.

From time to time, we intend to announce material information to the public through filings with the Securities and Exchange Commission, or the SEC, the investor relations page on our website (www.compass.com), press releases, public conference calls, public webcasts, and our Twitter feed (@Compass), our Facebook page, our LinkedIn page, our Instagram account, our YouTube channel, and Robert Reffkin’s Twitter feed (@RobReffkin) and Robert Reffkin’s Instagram account (@robreffkin).

Any updates to the list of disclosure channels through which we will announce information will be posted on the investor relations page on our website.

The information contained on the website referenced in this Quarterly Report on Form 10-Q is not incorporated by reference into this filing, and the website address is provided only as an inactive textual reference.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements within the meaning of the federal securities laws. All statements contained in this Quarterly Report, other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth, and our objectives for future operations, and potential impacts of the COVID-19 pandemic, or expectations regarding actions we may take in response to the pandemic, are forward-looking statements. Words such as “believes,” “may,” “will,” “estimates,” “potential,” “continues,” “anticipates,” “intends,” “expects,” “could,” “would,” “projects,” “plans,” “targets,” and variations of such words and similar expressions are intended to identify forward-looking statements.

Forward-looking statements contained in this Quarterly Report on Form 10-Q include, but are not limited to, statements about:

We have based these forward-looking statements largely on our current expectations and projections as of the date of this filing about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Part II, Item 1A, “Risk Factors” in this Quarterly Report and the impact of the COVID-19 pandemic. Readers are urged to carefully review and consider the various disclosures made in this Quarterly Report and in other documents we file from time to time with the Securities and Exchange Commission, which we refer to as the SEC, that disclose risks and uncertainties that may affect our business. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for us to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and circumstances discussed in this Quarterly Report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements. In addition, the forward-looking statements in this Quarterly Report are made as of the date of this filing, and we do not undertake, and expressly disclaim any duty, to update such statements for any reason after the date of this Quarterly Report or to conform statements to actual results or revised expectations, except as required by law.

You should read this Quarterly Report and the documents that we reference herein and have filed with the SEC as exhibits to this Quarterly Report with the understanding that our actual future results, performance, and events and circumstances may be materially different from what we expect.

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Compass, Inc.

Condensed Consolidated Balance Sheets

(In millions, except share and per share data, unaudited)

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

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Compass, Inc.

Condensed Consolidated Statements of Operations

(In millions, except share and per share data, unaudited)

The accompanying footnotes are an integral part of these condensed consolidated financial statements

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Compass, Inc.

Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ Deficit

(In millions, except share amounts, unaudited)

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

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Compass, Inc.

Condensed Consolidated Statements of Cash Flows

(In millions, unaudited)

The accompanying footnotes are an integral part of these condensed consolidated financial statements.

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Description of the Business

Compass, Inc. (the “Company”) was incorporated in Delaware on October 4, 2012 under the name Urban Compass, Inc. On January 8, 2021, the board of directors of the Company approved a change to the Company’s name from Urban Compass, Inc. to Compass, Inc.

Compass provides an end-to-end platform that empowers its residential real estate agents to deliver exceptional service to seller and buyer clients. The Company’s 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 which enables the Company’s core brokerage services. The platform also uses proprietary data, analytics, AI, and machine learning to deliver high value recommendations and outcomes for Compass agents and their clients.

The Company’s agents are independent contractors who affiliate their real estate licenses with Compass, operating their businesses on Compass’s platform and under the Compass brand. The Company generates revenue from clients through its agents by assisting home sellers and buyers in listing, marketing, selling and finding homes as well as through the provision of services adjacent to the transaction, like title and escrow services, which comprise a smaller portion of the Company’s revenue to date. The Company currently generates substantially all of its revenue from commissions paid by clients at the time that a home is transacted.

Stock Split

In March 2021, the Company’s board of directors and the stockholders of the Company approved a ten-for-one forward stock split of the Company’s common stock and convertible preferred stock (collectively, the “Capital Stock”), which became effective on March 19, 2021. The authorized number of each class and series of Capital Stock was proportionally increased in accordance with the ten-for-one stock split and the par value of each class of Capital Stock was adjusted from $0.0001 to $0.00001 as a result of this forward stock split. All common stock, convertible preferred stock, stock options, restricted stock units (“RSUs”) and per share information presented within these condensed consolidated financial statements have been adjusted to reflect this forward stock split on a retroactive basis for all periods presented, except where otherwise noted.

Initial Public Offering

On April 6, 2021, the Company completed its Initial Public Offering (“IPO”) and the Company’s 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, the Company issued and sold 26,296,438 shares of its common stock at a public offering price of $18.00 per share. The condensed consolidated financial statements as of March 31, 2021 and for the period then-ended do not reflect the transaction since the IPO closed subsequent to the period end. The Company received aggregate proceeds of $449.7 million from the IPO, net of the underwriting discount and before offering costs of approximately $11.0 million. Offering costs, including the legal, accounting, printing and other IPO-related costs paid prior to the IPO, have been capitalized in Other non-current assets within the accompanying condensed consolidated balance sheet as of March 31, 2021 and upon completion of the IPO, these deferred offering costs will be reclassified to Additional paid-in capital and recorded against the proceeds from the offering. During April 2021, also in connection with the IPO, all series of the Company’s convertible preferred stock then outstanding were converted into 223,033,725 shares of common stock and the Company reclassified $1.4 billion of Convertible preferred stock to Additional paid-in-capital.

On March 31, 2021, in connection with the effectiveness of the Company’s IPO registration statement, the Company recognized $148.5 million in stock-based compensation expense for (i) certain RSUs that contained both service-based and liquidity event-based vesting conditions as the liquidity event-based vesting condition was satisfied upon effectiveness of the registration statement and (ii) certain stock options and RSU awards with service, performance and market-based vesting conditions that include stock price targets to be met after the listing of the Company’s stock on a public exchange.

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Basis of Presentation

The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. The Company’s condensed consolidated financial statements were prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all controlled subsidiaries. The condensed consolidated statements of operations include the results of entities acquired from the date of the acquisition.

The unaudited interim condensed consolidated financial statements and related disclosures have been prepared by management on a basis consistent with the annual consolidated financial statements and, in the opinion of management, include all adjustments necessary for a fair presentation of the interim periods presented.

The results for the three months ended March 31, 2021 are not necessarily indicative of the operating results expected for the year ending December 31, 2021 or any other future period. Certain information and notes normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted under the Securities and Exchange Commission’s rules and regulations. Accordingly, the unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the Company’s audited consolidated financial statements and notes for the year ended December 31, 2020, which are included in the Company’s IPO prospectus on Form S-1 filed with the Securities and Exchange Commission.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods covered by the consolidated financial statements and accompanying notes. These judgments, estimates and assumptions are used for, but not limited to (i) valuation of the Company’s common stock and stock awards, (ii) fair value of acquired intangible assets and goodwill, (iii) contingent considerations in connection with business combinations, (iv) incremental borrowing rate used for the Company’s operating leases, (v) useful lives of long-lived assets, (vi) impairment of intangible assets and goodwill, (vii) allowance for Compass Concierge receivables and (viii) income taxes and certain deferred tax assets. The Company determines its estimates and judgments based on historical experience and on various other assumptions that it believes are reasonable under the circumstances. However, actual results could differ from these estimates and these differences may be material.

There are many uncertainties regarding the ongoing coronavirus (“COVID-19”) pandemic, and the Company is closely monitoring the impact of the pandemic on all aspects of its business, including how it has impacted and may continue to impact the Company’s operations and its customers for an indefinite period of time, including as a result of travel restrictions and/or business shutdowns. While it is not possible at this time to estimate the impact that COVID-19 will have on worldwide economic activity and the Company’s business, the continued spread of COVID-19 and the measures taken by the governments, businesses and other organizations in response to COVID-19 may adversely impact the Company’s business, financial condition or results of operations. The Company will continue to assess the evolving impact of the COVID-19 pandemic and will adjust its operations as necessary.

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Business Combinations

Business combinations are accounted for under the acquisition method of accounting. This method requires, among other things, allocation of the fair value of purchase consideration to the tangible and intangible assets acquired and liabilities assumed at their estimated fair values on the acquisition date. The excess of the fair value of purchase consideration over the values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the condensed consolidated statements of operations. Acquisition costs, consisting primarily of third-party legal and consulting fees, are expensed as incurred.

Stock-Based Compensation

The Company measures 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. The Company recognizes forfeitures as they occur.

For stock options, which the Company issues to employees and affiliated agents, the Company generally estimates 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.

The Company also issues RSUs to employees and affiliated agents. In addition to the issuance of RSUs to agents as equity compensation for the provision of services, beginning in 2020, the Company offers RSUs to affiliated agents through its 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.

The Company’s 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 the Company’s IPO. Upon the satisfaction of both vesting conditions and any delayed settlement period, the Company will issue shares to the award holders from the pool of authorized but unissued common stock. The fair value of these RSUs is measured based on the fair value of the Company’s common stock on the grant date and will begin to be recognized as expense when both the required service-based vesting condition and the liquidity event-based vesting condition has been achieved using the accelerated attribution method. The liquidity event-based vesting requirement was met on March 31, 2021, the effective date of the Company’s registration statement, see Note 1—“Business and Basis of Presentation—Initial Public Offering.”

Beginning in December 2020, the Company began issuing RSUs that vest upon the satisfaction of only a service-based vesting condition that is generally satisfied over four years. The fair value of these RSUs is measured based on the fair value of the Company’s common stock on the grant date and will be recognized as expense on a straight-line basis as the required service-based vesting condition is satisfied. Any vested RSUs that require only a service-based vesting condition will convert to common stock following vesting and their prescribed delayed settlement periods.

For RSUs to be granted in connection with the 2021 Agent Equity Program, the Company determines the value of the stock-based compensation expense at the time the underlying commission is earned and begins to recognize the associated expense on a straight-line basis over the requisite service periods beginning on the closing date of the underlying real estate commission transactions. The stock-based compensation expense is recorded as a liability and will be reclassified to additional paid-in capital at the end of the vesting period when the underlying RSUs are issued. As of March 31, 2021, the Company has recognized stock-based compensation expense and an associated liability of $2.5 million in connection with RSUs earned as a part of the 2021 Agent Equity Program. The associated liability is recorded within Accrued expenses and other current liabilities in the condensed consolidated balance sheet.

On a limited basis, the Company has 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 the Company’s 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.

Deferred Offering Costs

Deferred offering costs, consisting of legal, accounting and other fees and costs relating to the IPO, are capitalized and recorded on the condensed consolidated balance sheets. The deferred offering costs will be offset against the proceeds received upon the closing of the IPO. As of March 31, 2021 and December 31, 2020, $11.0 million and $1.8 million, respectively, of deferred offering costs were capitalized in Other non-current current assets on the condensed consolidated balance sheets.

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

New Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The ASU is part of the FASB’s simplification initiative, and it is expected to reduce cost and complexity related to accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740, Income Taxes related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The new standard became effective for public companies with fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this guidance on January 1, 2021 and the adoption of this standard did not have a material impact on the Company’s financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. An update was also issued expanding the scope of this guidance. The guidance provides optional expedients and exceptions for applying GAAP to contracts or other transactions affected by reference rate reform if certain criteria are met. The guidance became effective starting March 12, 2020 and may be applied prospectively through December 31, 2022. The Company is evaluating applicable contracts and transactions to determine whether to elect the optional guidance. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

During the three months ended March 31, 2021, the Company completed several business acquisitions including the acquisition of 100% of the ownership interests in KVS Title, LLC, a title insurance and escrow settlement services company, and two smaller real estate brokerages. The purpose of these acquisitions was to expand the Company’s title and escrow offerings and existing brokerage business in key domestic markets. The Company has accounted for these transactions as business combinations.

Total Consideration

The total consideration for acquisitions completed during the three months ended March 31, 2021 comprised $72.2 million of cash, net of cash acquired, and up to $2.0 million of additional cash that may be paid contingent on certain earnings-based targets being met through 2023. During the three months ended March 31, 2021, $59.2 million in cash was paid in connection with these acquisitions, net of cash acquired, and an aggregate of $13.0 million will be paid subsequent to March 31, 2021. Future cash payments were recorded as Accrued expenses and other current liabilities in the condensed consolidated balance sheet.

The fair value of the assets acquired and the liabilities assumed primarily resulted in the recognition of: broker relationships of $31.4 million; trademark intangible assets of $6.5 million; operating lease right-of-use assets of $5.8 million; $5.4 million of other current and non-current assets; lease liabilities of $5.8 million; and $3.8 million of other current and non-current liabilities. The excess of the purchase price over the fair value of the acquired net assets was recorded as goodwill of $34.7 million. A significant amount of this goodwill will be deductible for tax purposes in the future, but will not have an impact on the income tax provision while the Company maintains a full valuation allowance on its U.S. deferred tax assets. Acquired intangible assets are being amortized over their estimated useful lives of approximately 4 to 5 years.

The Company has recorded the preliminary purchase price allocation as of the acquisition dates and expects to finalize its analysis within the measurement period (up to one year from the acquisition date) of the respective transaction. Any adjustments during the measurement period would have a corresponding offset to goodwill. Upon conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, any subsequent adjustments are recorded to the consolidated statements of operations.

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Pro forma revenue and earnings for 2021 acquisitions have not been presented because they are not material to the Company’s consolidated revenue and results of operations, either individually or in the aggregate.

Contingent Consideration

Contingent consideration represents obligations of the Company to transfer cash and common stock to the sellers of certain acquired entities in the event that certain targets and milestones are met. Changes in contingent consideration measured at fair value on a recurring basis were as follows (in millions):

Other Acquisition Related Compensation

In connection with the Company’s acquisitions, certain amounts paid or to be paid to selling shareholders are subject to clawback and forfeiture dependent on certain employees and agents providing continued service to the Company. These retention-based payments are accounted for as compensation for future services and the Company recognizes the expenses over the service period. As of March 31, 2021, the Company expects to pay an additional $29.3 million in future compensation to such selling shareholders in connection with its acquisitions. For the three months ended March 31, 2021 and 2020, the Company recognized $4.2 million and $1.3 million, respectively, in compensation expense within Operations and support in the accompanying condensed consolidated statements of operations related to these arrangements.

The Company’s cash and cash equivalents of $329.6 million and $440.1 million as of March 31, 2021 and December 31, 2020, respectively, are held in cash and money market funds which are classified as Level 1 within the fair value hierarchy because they are valued using quoted prices in active markets. These are the Company’s only Level 1 financial instruments. The Company does not hold any Level 2 financial instruments. The Company’s contingent consideration liabilities of $28.0 million and $39.8 million as of March 31, 2021 and December 31, 2020, respectively, are the Company’s only Level 3 financial instruments.

See Note 3 – “Business Combinations” for changes in contingent consideration for the three months ended March 31, 2021 and 2020. The following table presents the balances of contingent consideration (in millions):

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

There were no transfers of financial instruments between Level 1, Level 2 and Level 3 during the periods presented.

Level 3 Financial Liabilities

The Company’s Level 3 financial liabilities relate to acquisition-related contingent consideration arrangements. Contingent consideration represents obligations of the Company to transfer cash and common stock to the sellers of certain acquired entities in the event that certain targets and milestones are met. As of March 31, 2021, the undiscounted maximum payment under these arrangements was $85.5 million, which is expected to be paid over a period of up to five years. The Company estimated the fair value of the contingent consideration using a Monte Carlo simulation, which is based on significant inputs, primarily forecasted future results of the acquired businesses, not observable in the market, discount rates and earnings volatility measures. The changes in the fair value of Level 3 financial liabilities are included within Operations and support in the accompanying condensed consolidated statements of operations (see Note 3 – “Business Combinations”).

The following tables present quantitative information regarding the significant unobservable inputs utilized by the Company in the fair value measurement of Level 3 liabilities, consisting of different contingent consideration agreements, measured at fair value on a recurring basis:

Concierge Credit Facility

In July 2020, the Company entered into a Revolving Credit and Security Agreement (the “Concierge Facility”) with Barclays Bank PLC, as administrative agent, and the several lenders party thereto. The Concierge Facility provides for a $75.0 million revolving credit facility and is solely used to finance, in part, the Company’s Compass Concierge Program. The Concierge Facility is secured primarily by the Concierge Receivables and cash of the Compass Concierge Program. Borrowings under the Concierge Facility accrue interest at rates equal to (i) the adjusted London interbank offered rate (“LIBOR”) plus a margin of 3.00%, which may be adjusted, or an alternate rate of interest upon the occurrence of certain changes in LIBOR. The Company is required to pay an annual commitment fee of 0.50% on a quarterly basis based on the unused portion of the Concierge Facility. The principal amount, if any, is payable in full in January 2022, unless earlier terminated or extended. The interest rate on the Concierge Facility was 3.22% as of March 31, 2021. As of March 31, 2021 and December 31, 2020, there were $10.2 million and $8.4 million, respectively, in borrowings outstanding under the Concierge Facility.

The Company has the option to repay the borrowings under the Concierge Facility without premium or penalty prior to maturity. The Concierge Facility contains customary affirmative covenants, such as financial statement reporting requirements, as well as 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 the Company fails to comply with certain financial covenants that require the Company to meet certain liquidity-based measures, the commitments under the Concierge Facility will automatically be reduced to zero and the Company will be required to repay any outstanding loans under the Concierge Facility. As of March 31, 2021, the Company was in compliance with the covenants under the Concierge Facility.

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company incurred debt issuance costs of $1.4 million in connection with the Concierge Facility, which are included in Other current assets and Other non-current assets, net of accumulated amortization, in the condensed consolidated balance sheets. The unamortized debt issuance costs will be amortized within Interest expense in the consolidated statements of operations over the remaining term on a straight-line basis.    

Revolving Credit Facility

In March 2021, the Company entered into a Revolving Credit and Guaranty Agreement (the “Revolving Credit Facility”) with several lenders and issuing banks and Barclays Bank PLC, as administrative agent and as collateral agent. The Revolving Credit Facility provides for a $350.0 million revolving credit facility, which may be increased by the greater of $250.0 million and 18.5% of the Company’s consolidated total assets, plus such additional amount so long as the Company’s total net leverage ratio does not exceed 4.50:1.00 on a pro forma basis as of the most recent test period, subject to the terms of the Revolving Credit Facility. The Revolving Credit Facility also includes a letter of credit sublimit which is the lesser of (i) $125.0 million and (ii) the aggregate unused amount of the revolving commitments then in effect under the Revolving Credit Facility. The Company’s obligations under the Revolving Credit Facility are guaranteed by certain of the Company’s subsidiaries and are secured by a first priority security interest in substantially all of the Company’s assets and the Company’s subsidiary guarantors.

Borrowings under the Revolving Credit Facility bear interest, at the Company’s option, at either (i) a floating rate per annum equal to the base rate plus a margin of 0.50% or (ii) a floating rate per annum equal to the rate at which dollar deposits are offered in the London interbank market plus a margin of 1.50%. In the Revolving Credit Facility, the base rate is defined as the highest of (a) the prime rate as quoted by The Wall Street Journal, (b) the federal funds effective rate plus 0.50%, (c) the rate at which dollar deposits are offered in the London interbank market for a one-month interest period plus 1.00% and (d) 1.00%. During an event of default under the Revolving Credit Facility, the applicable interest rates are increased by 2.0% per annum.

The Company is 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 Company has the option to repay the Company’s borrowings, and to permanently reduce the loan commitments whole or in part, under the Revolving Credit Facility without premium or penalty prior to maturity. As of March 31, 2021, there were no borrowings outstanding under the Revolving Credit Facility.

The Revolving Credit Facility contains customary representations, warranties, affirmative covenants, such as financial statement reporting requirements, negative covenants and financial covenants, applicable to the Company and to the Company’s restricted subsidiaries. The negative covenants include restrictions that, among other things, restrict the Company and the Company’s subsidiaries’ ability 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 (a) the Company maintains liquidity of at least $150.0 million as of the last day of each fiscal quarter and each date of a credit extension and (b) the Company’s 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. In the Revolving Credit Facility, liquidity is defined as the aggregate of (i) revolving commitments under the Revolving Credit Facility minus the aggregate principal amount of all outstanding loans, any drawn and unreimbursed amounts under letters of credit and the maximum amount that may be drawn under letters of credit, plus (ii) unrestricted cash that is generally available for use by the Company and the Company’s subsidiaries. As of March 31, 2021, the Company was in compliance with the covenants under the Revolving Credit Facility.

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Revolving Credit Facility includes customary events of default that include, among other things, nonpayment of principal, interest or fees, inaccuracy of representations and warranties, violation of certain covenants, cross default to certain other indebtedness, bankruptcy and insolvency events, material judgments, change of control and certain material ERISA events. The occurrence of an event of default could result in the acceleration of the obligations under the Revolving Credit Facility.

The Company incurred debt issuance costs of $1.4 million in connection with the Revolving Credit Facility, which are included in Other current assets and Other non-current assets in the condensed consolidated balance sheet. The unamortized debt issuance costs will be amortized within Interest expense in the consolidated statements of operations over the remaining term on a straight-line basis.

Legal Proceedings

From time to time, the Company may be involved in disputes or regulatory inquiries that arise in the ordinary course of business. When the Company determines that a loss is both probable and reasonably estimable, a liability is recorded and disclosed if the amount is material to the Company’s business taken as a whole. When a material loss contingency is only reasonably possible, the Company does not record a liability, but instead discloses the nature and the amount of the claim and an estimate of the loss or range of loss, if such an estimate can reasonably be made. Legal costs related to the defense of loss contingencies are expensed as incurred.

Claims or regulatory actions against the Company, whether meritorious or not, could have an adverse impact on the Company due to legal costs, diversion of management resources and other elements. Except as identified with respect to the matters below, the Company does not believe that the outcome of any individual existing legal or regulatory proceeding to which it is a party will have a material adverse effect on its results of operations, financial condition or overall business in each case, taken as a whole.

Avi Dorfman v. Robert Reffkin and Urban Compass, Inc.

In July 2014, Avi Dorfman (“Dorfman”) and RentJolt, Inc. (“RentJolt”) (collectively, “Plaintiffs”) filed suit against the Company and Robert Reffkin (“Defendants”), seeking compensation for certain services, trade secrets and other contributions allegedly provided in the formation of the Company. After miscellaneous motion practice, in June 2018, Defendants moved for summary judgment, the court held oral argument in October 2018 and ultimately denied the Defendants’ motion for summary judgment in October 2019. In November 2019, Defendants appealed portions of the court’s summary judgment ruling. In February 2020, the appellate court granted in part and denied in part Defendants’ appeal resulting in one plaintiff (RentJolt) voluntarily discontinuing its only remaining claim and leaving the case. Defendants have one motion in limine pending. A trial date has been set for September 2021.

Realogy Holdings Corp., et al v. Urban Compass, Inc. and Compass Inc.

In July 2019, Realogy Holdings Corp., NRT New York LLC (“Corcoran”) and many of its related entities (collectively, “Plaintiffs”) filed a complaint against the Company in the New York Supreme Court. The complaint alleges various violations of New York and California state law related to claims of unfair competition and seeks unspecified damages. The Company filed a Motion to Dismiss in September 2019. In September 2019, Plaintiffs filed an amended complaint, removing one claim and adding a claim for defamation. In November 2019, the Company moved to compel arbitration related to claims asserted by Corcoran and moved to dismiss all of the counts. In June 2020, the Court denied the motion to dismiss and denied the motion to compel arbitration as moot, granting Plaintiffs leave to amend the complaint as to claims asserted by Corcoran without prejudice to Defendants’ ability to move to compel or dismiss the Second Amended Complaint.

15

Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

On July 3, 2020, Plaintiffs filed their Second Amended Complaint. On December 18, 2020, the Court denied the Company’s motion to compel arbitration on Plaintiffs’ second amended complaint without prejudice. Defendants’ Answer to the Second Amended Complaint and Counterclaims were filed on January 28, 2021. Additionally, the Company filed its appeal of the lower Court’s denial of the Company’s motion to dismiss and motion to compel arbitration on February 1, 2021. The appeal has been fully briefed and is awaiting determination. Discovery is proceeding. The Company is unable to predict the outcome of this action or to reasonably estimate the possible loss or range of loss, if any, arising from the claims asserted therein.

Letter of Credit Agreements

The Company has irrevocable letters of credit with various financial institutions, primarily related to security deposits for leased facilities. As of March 31, 2021 and December 31, 2020, the Company was contingently liable for $51.7 million and $50.7 million, respectively, under these letters of credit. These letters of credit are collateralized by the Company’s cash and cash equivalents.

Escrow and Trust Deposits

As a service to its home buyers and home sellers, the Company administers escrow and trust deposits which represent undistributed amounts for the settlement of real estate transactions. The escrow and trust deposits totaled $238.7 million and $46.1 million, respectively as of March 31, 2021 and December 31, 2020. These deposits are not assets of the Company and therefore are excluded from the accompanying condensed consolidated balance sheets. However, the Company remains contingently liable for the disposition of these deposits.

Convertible Preferred Stock

In March 2020, the Company issued an additional 64,820 shares of its Series G convertible preferred stock for proceeds of $1.0 million.

In March 2021, the holders of 15,920,450 shares of the Company’s Series D convertible preferred stock elected to convert into an equal number of shares of Class A common stock.

The Company’s convertible preferred stock authorized, issued and outstanding and the aggregate liquidation preferences, including dividends that would be due if and when declared by the board of directors are as follows (in millions, except share and per share amounts):

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

During April 2021, all remaining shares of convertible preferred stock converted into 223,033,725 shares of Class A common stock. The rights, preferences, restrictions and privileges of the holders of convertible preferred stock are included in the Company’s IPO prospectus on Form S-1 filed with the Securities and Exchange Commission.

Common Stock

In February 2021, the Company approved the establishment of Class C common stock and an agreement with the Company’s CEO to exchange his Class A common stock for Class C common stock. On March 31, 2021, in connection with the effectiveness of the registration statement for the Company’s IPO, 15,244,490 shares of Class A common stock held by the Company’s founder and CEO were automatically exchanged for an equivalent number of shares of Class C common stock. In addition, any Class A common stock issued to the CEO from awards granted to him prior to February 2021 will also automatically be exchanged for Class C common stock. Each share of Class C common stock is entitled to twenty votes per share and will be convertible at any time into one share of Class A common stock and will automatically convert into Class A common stock under certain “sunset” provisions. Other than certain permitted transfers for estate planning purposes, upon a transfer of Class C common stock, the Class C common stock will convert into Class A common stock.

As of March 31, 2021, the Company had three classes of common stock: Class A common stock, Class B common stock and Class C common stock. Each class has par value of $0.00001.

As of December 31, 2020, the Company had two classes of common stock: Class A common stock and Class B common stock. Each class has a par value of $0.00001.

In April 2021, the Company adopted a restated certificate of incorporation and changed its authorized capital stock to consist of 12,500,000,000 shares of Class A common stock, 1,250,000,000 shares of Class B common stock, 100,000,000 shares of Class C common stock and 25,000,000 shares of undesignated preferred stock.

17

Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Holders of Class A common stock are entitled to one vote per share. Holders of Class B common stock are not entitled to vote. Holders of Class C common stock are entitled to twenty votes per share.

Each share of Class C common stock is convertible at any time of the option of the holder into one share of Class A common stock. Each share of Class C common stock will automatically convert into a share of Class A common stock upon sale or transfer, except for certain permitted transfers.

A description of all other rights, preferences and privileges of the holders of the Company’s common stock are included in the Company’s IPO prospectus on Form S-1 filed with the Securities and Exchange Commission.

As of March 31, 2021 and December 31, 2020, the Company had shares of common stock reserved for issuance as follows:

As of March 31, 2021 and December 31, 2020, the Company had 2,250,000 shares of Class A common stock issued and held as treasury stock.

2012 Stock Incentive Plan

In October 2012, the Company adopted the 2012 Stock Incentive Plan (the “2012 Plan”). Under the 2012 Plan, employees and non-employees could be granted options on common stock, RSUs and other stock-based awards, including awards earned in connection with the Agent Equity Program. Generally, these awards were based on stock agreements with ten-year contractional terms for stock options, and seven-year contractual terms for RSU’s, subject to board approval.

2021 Equity Incentive Plan

In February 2021, the Company’s board of directors and stockholders adopted and approved the 2021 Equity Incentive Plan (the “2021 Plan”), with an initial pool of 29,666,480 shares of common stock available for granting stock-based awards plus any reserved shares of common stock not issued or subject to outstanding awards granted under the Company’s 2012 Plan. The 2021 Plan became effective on March 30, 2021 and as of that date, the Company ceased granting new awards under the 2012 Plan. As of March 31, 2021, there were 41,105,315 shares available for future grants under the 2021 Plan.

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Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

2021 Employee Stock Purchase Plan

In February 2021, the board of directors and stockholders also adopted and approved the 2021 Employee Stock Purchase Plan (the “ESPP”). The ESPP authorizes the issuance of 7,416,620 shares of common stock to purchase rights granted to the Company’s employees or to employees of its designated affiliates. In addition, on January 1 of each year beginning in 2022 and continuing through 2031, the aggregate number of shares of common stock authorized for issuance under the ESPP shall be increased automatically by the number of shares equal to one percent (1%) of the total number of outstanding shares of common stock and shares of preferred stock of the Company outstanding (on an as converted to common stock basis) on the immediately preceding December 31 (rounded down to the nearest whole share), although the board of directors or one of its committees may reduce the amount of the increase in any particular year. No more than 150,000,000 shares of common stock may be issued over the term of the ESPP, subject to certain exceptions set forth in the ESPP. As of the date of this filing, no shares have been granted under the ESPP.

Stock Options

A summary of stock option activity under the 2012 Plan and the 2021 Plan, including 1,061,250 stock options that were granted outside of the 2012 Plan in 2019, is presented below (in millions, except share and per share amounts):

During the three months ended March 31, 2021 and 2020, the intrinsic value of options exercised was $79.8 million and $0.5 million, respectively.

Restricted Stock Units

A summary of RSU activity under the 2012 Plan and the 2021 Plan is presented below:

Included in the table above are 8,611,810 RSUs granted to an executive employee during the three months ended March 31, 2021. These RSUs have service, performance and market-based vesting conditions that include stock price targets to be met after the listing of the Company’s stock on a public exchange.

19

Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Stock-Based Compensation Expense

Total stock-based compensation expense included in the condensed consolidated statements of operations is as follows (in millions):

As more fully described in Note 1 – “Business and Basis of Presentation”, the Company recognized $148.5 million in stock-based compensation expense in connection with the effectiveness of the Company’s IPO registration statement on March 31, 2021.

As of March 31, 2021, unrecognized stock-based compensation expense totaled $451.5 million and is expected to be recognized over a weighted-average period of 3.4 years.

The Company has not recognized any tax benefits from stock-based compensation as a result of the full valuation allowance maintained on its deferred tax assets.

Early Exercise of Stock Options

A majority of the stock options granted under the 2012 Plan provide option holders the right to elect to exercise unvested options in exchange for restricted common stock. Shares received from such early exercises are subject to repurchase in the event of the optionee’s termination of service until the stock options are fully vested at the lesser of the original issuance price or the fair value the Company’s common stock.

During the three months ended March 31, 2021, 737,560 stock options were early exercised for total proceeds of $4.5 million. As of March 31, 2021, 1,740,600 shares of common stock received by holders from an early exercise were subject to repurchase. The cash proceeds received for unvested shares of common stock recorded within Accrued expenses and other current liabilities and Other non-current liabilities in the condensed consolidated balance sheets was $9.0 million as of March 31, 2021. Amounts recorded are transferred into Common stock and Additional paid-in capital within the condensed consolidated balance sheets as the shares vest.

The Company recognized a benefit from income taxes of $0.7 million for the three months ended March 31, 2021. This benefit resulted from a partial reduction in the valuation allowance related to the carryover tax basis in deferred tax liabilities from acquisitions. Additionally, the Company incurred current tax expense from its operations in India, which was fully offset by a deferred tax benefit for future AMT tax credits. No benefit from income taxes was recognized during the three months ended March 31, 2020.

20

Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

The Company continues to maintain a full valuation allowance on all domestic net deferred tax assets based on numerous factors including estimated future taxable income and historic profitability.

The Company does not have any amount related to uncertain tax positions as of the period ended March 31, 2021 nor does it expect a substantial increase in the next 12 months. If applicable, the Company recognizes interest and penalties related to uncertain tax positions in the income tax provision.

The United States is the Company’s only material tax jurisdiction and as a result of net operating loss carryforwards, the Company is subject to audit for all years for US federal tax purposes.

The Company computes net loss per share under the two-class method required for multiple classes of common stock and participating securities. The rights, including the liquidation and dividend rights, of the Class A common stock, Class B common stock and Class C common stock are substantially identical, other than voting rights. Accordingly, the net loss per share attributable to common stockholders will be the same for Class A common stock, Class B common stock and Class C common stock on an individual or combined basis.

The following table sets forth the computation of basic and diluted net loss per share attributable to common stockholders (in millions, except share and per share amounts):

The following participating securities were excluded from the computation of diluted net loss per share attributable to common stockholders for the periods presented, because including them would have been anti-dilutive (on an as-converted basis):

In 2018, the Company launched the Compass Concierge Program for home sellers who have engaged Compass as their exclusive listing agent. The program, initially launched by the Company, is based on a services model (“Concierge Classic”) provided by Compass Concierge, LLC (“Compass Concierge”), which includes items such as consultation on suggested cosmetic updates or modifications to a specific property or guidance on securing licensed contractors or vendors to perform non-structural property improvements. The Concierge Classic program provides for the payment of the up-front costs of specified home improvement services provided by unrelated vendors.

In 2019, the Compass Concierge Program was expanded to include a loan program underwritten by an independent third-party lender (the “Lender”) through a commercial arrangement with Compass Concierge (“Concierge Capital”). Under the Concierge Capital program, the Lender originates and services unsecured consumer loans to home sellers following its independent underwriting process pursuant to program-level criteria provided by the Company. Pursuant to the Company’s agreement with the Lender, the consumer loans are unsecured, interest-free and have no associated fees except for late fees that the Lender may charge in its sole discretion. The Company has no right or obligation with respect to any individual consumer loan originated by the Lender. Under the agreement with the Lender, the Company has repayment rights against the Lender in connection with a corporate loan.

Payment to the Company for these services under the Concierge Classic model or repayment of the loan funds under the Concierge Capital model is due upon the earlier of a successful home sale, the termination of the listing agreement, or one year from the date in which costs were originally funded. Compass Concierge receivables (“Concierge Receivables”) are stated at the amount advanced to the home sellers, net of an estimated allowance for credit losses (“ACL”). The Company does not recognize any revenue or earn any fees from the Compass Concierge Program. The Company incurs service fees payable to the Lender and incurs bad debt expense in connection with the Compass Concierge Program.

The Company manages its credit risk by establishing a comprehensive credit policy for the approval of projects under the Concierge Classic program and new loans under the Concierge Capital program, while monitoring and reviewing the performance of its existing Concierge Receivables. Factors considered include but not limited to:

Credit Quality

The Company monitors credit quality by evaluating various attributes and utilizes such information in its evaluation of the appropriateness of the ACL. Based on the Company’s experience, the key credit quality indicator is whether the underlying properties associated with the Concierge Receivables will be sold or not. Concierge Receivables associated with properties that are eventually sold have a lower credit risk than those that are associated with properties that are not sold. For Concierge Receivables where repayments have not been triggered (i.e., earlier of (i) sale of the property, (ii) termination of a listing agreement or (iii) 12 months from the date costs were originally funded), the Company establishes an estimate as to the percentage of underlying properties that will be sold based on historical data. This estimate is updated quarterly and on an annual basis. As of March 31, 2021 and December 31, 2020, the amount of outstanding Concierge Receivables related to unsold properties was approximately 95% and 93%, respectively.

Allowance for credit losses

The Company maintains an ACL for the expected credit losses over the contractual life of the Concierge Receivables. The amount of ACL is based on ongoing, quarterly assessments by management. Historical loss experience is generally the starting point when the Company estimates the expected credit losses. The Company then considers whether (i) current conditions, such as the impact of COVID-19 and related economic uncertainty surrounding the pandemic, (ii) future economic conditions and (iii) any potential changes in the Compass Concierge Program that are reasonable and supportable would impact on its ACL. The following table summarizes the activity of the ACL for Concierge Receivables for the three months ended March 31, 2021 (in millions):

Aging Status

The Company generally considers Concierge Receivables to be past due after being outstanding for over 30 days after initial billing. Changes in the Company’s estimate to the ACL is recorded through bad debt expense as Sales and marketing expense in the condensed consolidated statements of operations and individual accounts are charged against the allowance when all reasonable collection efforts are exhausted. The following tables present the aging analysis of Concierge Receivables as of March 31, 2021 (in millions):

21

Compass, Inc.

Notes to Condensed Consolidated Financial Statements

(unaudited)

Beginning in March 2020, the onset of the COVID-19 pandemic resulted in a negative impact on the Company’s business in the second quarter of 2020 due to shelter-in-place and stay-at-home restrictions (in certain of the Company’s markets) which prohibited or reduced in-person residential real estate showings and the related impact on customer demand and housing inventory, as well as deteriorating economic conditions, such as increased unemployment rates. In light of the uncertain and rapidly evolving situation relating to COVID-19, the Company took a range of measures to address the uncertainties related to the COVID-19 pandemic including, but not limited to, reducing the size of its workforce, terminating certain lease obligations and reducing certain discretionary expenses during the first quarter of 2020. As a result of these cost-saving measures, the Company reduced its workforce by approximately 15%. As of March 31, 2021, the impacts of the pandemic have not significantly impacted the carrying amount of the Company’s assets and liabilities. Although the demand in the Company’s services had recovered in the second half of 2020, the duration of the pandemic, the resulting stay-at-home orders, and any impacts on consumer behavior are unknown, and the amount of that demand which will persist after the reversal of the stay-at-home orders is unknown. Additionally, the pandemic’s impacts on the overall economy and credit markets could significantly impact the Company’s estimates of fair value, which could affect the carrying amount of certain assets and liabilities.

The expenses resulting from these cost-saving measures were included in the consolidated statement of operations for the three months ended March 31, 2020, as follows (in millions):

The Company did not recognize any restructuring expenses during the three-months ended March 31, 2021. As of March 31, 2021 and December 31, 2020, the Company did not have any material remaining liabilities related to restructuring costs.

Business Combinations

In May 2021, the Company acquired Glide Labs, Inc., a real estate technology company that provides transaction management tools to Compass and non-Compass agents.

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ITEM 2. 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 condensed consolidated financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final IPO prospectus filed with the Securities and Exchange Commission, or the SEC, on March 31, 2021 pursuant to Rule 424(b) under the Securities Act of 1933, as amended, or the Securities Act. 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 identified below and in our final IPO prospectus, particularly those discussed in the sections entitled “Risk Factors” and “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 condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly 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

Our Company

Compass, Inc. (the “Company”) was incorporated in Delaware on October 4, 2012 under the name Urban Compass, Inc. On January 8, 2021, the board of directors of the Company approved a change to the Company’s name from Urban Compass, Inc. to Compass, Inc.

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Our Business and Business Model

We provide an end-to-end platform that empowers our residential real estate agents to deliver exceptional service to seller and buyer clients. 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, AI, 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 and under our brand. We generate revenue from clients through our agents by assisting home sellers and buyers in listing, marketing, selling and finding homes as well as through the provision of services adjacent to the transaction, like title and escrow services. We currently generate substantially all of our revenue from commissions paid to us by clients at the time that a home is transacted on our platform. While adjacent services comprise a smaller 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.

Initial Public Offering

On April 6, 2021, we completed our Initial Public Offering (“IPO”) and our Class A common stock began trading on the New York Stock Exchange on April 1, 2021 under the symbol “COMP”. In connection with the IPO, we issued and sold 26,296,438 shares of our common stock at a public offering price of $18.00 per share. Our condensed consolidated financial statements as of March 31, 2021 and for the period then-ended do not reflect the transaction since the IPO closed subsequent to the period end. We received aggregate proceeds of $449.7 million from the IPO, net of the underwriting discount and before offering costs of approximately $11.0 million.

On March 31, 2021, in connection with the effectiveness of our IPO registration statement, we recognized $148.5 million in stock-based compensation expense for (i) certain restricted stock units (“RSUs”) that contained both service-based and liquidity event-based vesting conditions as the liquidity event-based vesting condition was satisfied upon effectiveness of the registration statement and (ii) certain stock options and RSU awards with 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.

Operational Highlights

We look to continue to attract the most talented agents to our platform, which is critical to our long-term success. We grow our revenue by increasing the productivity of our agents and by selectively attracting high-performing agents looking to grow their business. We also continue to significantly invest in our proprietary, integrated platform, designed for real estate agents, to enable them to grow their business and save them time and money. This value proposition allows us to recruit more agents, help them grow their business and retain them on our platform at industry leading retention rates.

We have nearly 21,000 Compass agents on our platform as of March 31, 2021. A subset of our agents are considered principal agents, which we define as either agents who are leaders of their respective agent teams or individual agents operating independently on our platform.

For the three months ended March 31, 2021, the Average Number of Principal Agents was 9,812, an increase of 602 from the three months ended December 31, 2020 and an increase of 1,661 for the three months ended March 31, 2020. The principal agent additions came in both new and existing markets.

During the three months ended March 31, 2021, our agents closed 40,268 Total Transactions⁽¹⁾, which is a 67% increase when compared to the three months ended March 31, 2020. Total Transactions for the first three months of 2021, was the highest number of transactions for a first quarter in our history and was our third highest quarterly level of transactions ever. Our growth in Total Transactions was due to a combination of new agents joining the platform, enhanced productivity for existing agents already on the platform and a robust housing market.

Our Gross Transaction Value⁽¹⁾ for the three months ended March 31, 2021 was $43.8 billion, which is a 75% increase when compared to the three months ended March 31, 2020. This was a record for a first quarter, reflecting strong transaction volume, higher productivity per principal agent and higher Average Transaction Values. Average Transaction Value is calculated by dividing Gross Transaction Value by Total Transactions.

We believe there remains a meaningful opportunity to grow our business by continuing to expand our geographic coverage. During the three months ended March 31, 2021, we launched three new markets, bringing total markets served to 47 at the end of the quarter. We now operate real estate brokerage services in 20 states. For the three months ended March 31, 2021, our Gross Transaction Value represented 5.2% of residential real estate transacted in the United States. 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 NAR. Faster data integration and ingestion, more efficient agent onboarding, and the ability to customize our solutions to local market requirements will allow us to enter new markets more quickly and effectively over time. We have a dedicated expansion team responsible for launching new markets that partners closely with our enterprise sales team to rapidly identify talented agents in each new market. As we move forward, the priority with which we enter new markets will be based on the addressable size of each market, agent feedback and local market dynamics. Expansion within existing markets is particularly cost efficient as we are able to leverage existing infrastructure, personnel and our agent network. We also use alternative models like Compass Anywhere to provide a more tailored offering for key customer segments in order to accelerate expansion in a cost efficient manner.

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Platform Highlights

Our proprietary technology platform enables our agents to deliver an exceptional experience to their buyer and seller clients. It makes our agents more productive, allowing them to drive increased transaction volume by using technology to accelerate, automate and simplify many of the routine tasks an agent performs on a daily basis. It also uses artificial intelligence and machine learning to better analyze the data sets, yielding better outcomes for our agents and their clients.

We continue to invest in the platform, adding new engineers to build out the depth and breadth of the platform for our agents. As of March 31, 2021, we employed approximately 850 engineers and product specialists in New York, Washington DC, Seattle, and Hyderabad.

Usage on our platform continues to increase. For the three months ended March 31, 2021, total sessions on the platform grew by 120% as compared to the three months ended March 31, 2020 as both our agents and buyer and seller clients saw the advantages of discovering, collaborating, and transacting for home purchases and sales in a digital setting. Additionally, during the three months ended March 31, 2021, 91% of our agent teams used our proprietary technology platform weekly. This usage represents a 5% increase when compared to the three months ended March 31, 2020. The ratio of daily active users to weekly active users (DAU/WAU) was 69%, an increase of 7 percentage points from the prior year period.

During the three months ended March 31, 2021, new product introductions included Business Tracker and enhancements to Likely to Sell among many others. The Business Tracker product provides agents with a single view of their pipeline, from lead to active to closed, allowing them to view their business holistically. This product is intended to increase productivity by centralizing all the tools agents need to run their business in a single location. The Likely to Sell product uses machine learning to estimate a home’s likelihood to sell in the next 12 months. Our agents match the Likely to Sell data output with their client lists to drive a higher listings win rate.

We are investing aggressively in technologies and services that empower our agents. To that end, we recently announced the acquisition of Glide Labs, Inc., a real estate technology company. The addition of Glide to our suite of services accelerates our ability to offer critical transaction management tools to our customers, and provides us with a fast-growing software services business.

Our ability to grow our agents, retain our agents and increase agent success on our platform, depends in part, on our ability to continue innovating in the industry and our ability to successfully launch new products for agents and clients. As such, we plan to continue making significant investments in research and development.

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. 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. The seasonality trends described here have been impacted by the COVID-19 Pandemic in 2020 and early 2021, as we have seen deviations from the typical seasonality trends described here as a result. See “Impact of COVID-19 Pandemic on our Business” elsewhere in this section for more information.

The residential real estate industry is also highly cyclical, and individual markets can have their own cyclical dynamics that diverge from broad market conditions. Generally, when economic conditions are favorable, the real estate industry tends to perform well. When the economy is weak, if interest rates dramatically increase, if mortgage lending standards tighten, or if there are economic or political disturbances, the residential real estate industry tends to perform poorly. Our revenue growth rate tends to increase as the real estate industry performs well, and to decrease when the real estate industry performs poorly.

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Impact of the COVID-19 Pandemic on Our Business

In March 2020, the World Health Organization declared the outbreak of the COVID-19 coronavirus pandemic, which continues to spread throughout the United States and the world and has resulted in authorities implementing numerous measures to contain the virus, including quarantines, shelter-in-place orders, and business limitations and shutdowns.

The COVID-19 pandemic significantly affected the U.S. residential real estate market during the spring months. As a result of health concerns, stay-at-home orders and economic uncertainty, many metro areas saw a significant decline in home sales. In April and May, nationwide home sales dropped to their lowest levels since the housing and financial crisis that began in 2007, with a significant increase in the number of delisted homes. During that time, new listings and home buying activity were down significantly year over year, however, the combination of low supply and historically low interest rates allowed prices to remain steady.

Despite the large drops in home sales due to the pandemic, real estate activity began to improve in late spring, approaching pre-pandemic levels by the summer. Potential buyers started to increase their housing search and purchase activity by the end of May. Home showings per listing rose from their lows in March and April, and were well above pre-pandemic levels by May, aided by the increase in online and socially distant viewings. Housing supply did not recover at the same pace, with housing inventory down over significantly year-over-year in the second half of 2020.

Following year-over-year revenue declines in April and May 2020, we saw a dramatic increase in year-over-year revenue growth starting in June 2020. This momentum continued through the second half of 2020 and into early 2021 across all of our markets.

While our performance in the face of COVID-19 does not necessarily reflect our future performance in every industry downturn, our adaptable team, backed by our strong digital platform, proved its ability to respond quickly in times of significant market dislocation.

However, the full impact of the COVID-19 pandemic on the global economy and the extent to which the COVID-19 pandemic will continue to adversely impact our financial condition, results of operations, and cash flows remains uncertain. The extent and duration of the impact of the COVID-19 pandemic over the longer term remain uncertain and dependent on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of COVID-19, the extent and effectiveness of containment actions taken, including shelter-in-place orders, the timing, availability, and effectiveness of vaccines, and the impact of these and other factors on residential real estate values, real estate transaction behavior in general, and on our business in particular.

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RESULTS OF OPERATIONS

The following table sets forth our consolidated statements of operations data for the period indicated:

Comparison of the Three Months Ended March 31, 2021 and 2020

Revenue

Revenue increased by $494.0 million, or 79.7%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase during the three months ended March 31, 2021 compared to the prior year period was primarily driven by an increase in the number of agents that joined our platform during 2020 and 2021, a higher volume of transactions from both new and existing agents, continued geographic expansion both within our existing and new markets, as well as from a modest increase in average transaction value. The Average Number of Principal Agents for the three months ended March 31, 2021 grew 20% to 9,812 compared to 8,151 for the three months ended March 31, 2020. Total Transactions for the three months ended March 31, 2021 grew 67% to 40,268 compared to 24,111 for the three months ended March 31, 2020.

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Operating Expenses

Commissions and other related expense

Commissions and other related expense increased by $433.4 million, or 85.2%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Included in commissions and other related expense were non-cash expenses related to stock-based compensation of $44.6 million and $4.1 million, for the three months ended March 31, 2021 and 2020, respectively. The increase in stock-based compensation expense for the three months ended March 31, 2021 as compared to March 31, 2020 was primarily related to a one-time acceleration of stock-based compensation expense of $41.7 million in connection with our IPO. Commissions and other related expense excluding such non-cash stock-based compensation expense was $897.6 million and $504.7 million, or 80.6% and 81.4% of revenue for the three months ended March 31, 2021 and 2020, respectively. The increase in absolute dollars of commissions and other related expense, excluding the non-cash stock-based compensation, was primarily driven by our higher revenue. The favorable 80 basis points decrease in commissions and other related expense, excluding the non-cash stock based compensation expense, expressed as a percentage of revenue in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020, was primarily due to the change in mix of the commission arrangements we have with our agents and changes in geographic mix.

Sales and marketing

Sales and marketing expense increased by $4.8 million, or 4.5%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Included in Sales and marketing expense were non-cash expenses related to stock-based compensation of $9.0 million and $2.9 million for the three months ended March 31, 2021 and 2020, respectively. The increase in stock-based compensation expense for the three months ended March 31, 2021 as compared to March 31, 2020 was partially due to a one-time acceleration of stock-based compensation expense of $1.8 million in connection with our IPO. Sales and marketing expense excluding such non-cash stock-based compensation expense was $102.3 million and $103.6 million, or 9.2% and 16.7% of revenue for the three months ended March 31, 2021 and 2020, respectively. The slight decrease in sales and marketing expense, excluding the non-cash stock-based compensation expense was partially due to $2.7 million of restructuring charges incurred during the three months ended March 31, 2020 that did not recur in the current year period. The decrease in sales and marketing expense excluding the non-cash stock-based compensation expense, expressed as a percentage of revenue during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 was primarily due to the economies of scale as we were able to grow revenue more quickly than the costs of our sales and marketing efforts.

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Operations and support

Operations and support expense increased by $8.9 million, or 14.6%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Included in Operations and support expense were non-cash expenses related to stock-based compensation of $5.0 million and $0.8 million for the three months ended March 31, 2021 and 2020, respectively. The increase in stock-based compensation expense for the three months ended March 31, 2021 as compared to March 31, 2020 was primarily due to a one-time acceleration of stock-based compensation expense of $3.1 million in connection with our IPO. Operations and support expense excluding such non-cash stock-based compensation expense was $65.0 million and $60.3 million, or 5.8% and 9.7% of revenue for the three months ended March 31, 2021 and 2020, respectively. The increase in absolute dollars, excluding such non-cash stock based-compensation expense, was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount, partially offset by a one-time restructuring charges of $2.8 million taken as a cost-reduction measure in response to COVID-19 during the three months ended March 31, 2020 which did not recur in the current year period. The decrease in operations and support expense excluding the non-cash stock-based compensation expense, expressed as a percentage of revenue during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 was primarily due to the economies of scale as we were able to grow revenue more quickly than the costs to support our agents on our platform.

Research and development

Research and development expense increased by $57.8 million, or 149.0%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Included in research and development expense were non-cash expenses related to stock-based compensation of $49.5 million and $0.5 million for the three months ended March 31, 2021 and 2020, respectively. The increase in stock-based compensation expense for the three months ended March 31, 2021 as compared to March 31, 2020 was primarily due to a one-time acceleration of stock-based compensation expense of $46.9 million in connection with our IPO. Research and development expense excluding such non-cash stock-based compensation expense was $47.1 million and $38.3 million, or 4.2% and 6.2% of revenue for the three months ended March 31, 2021 and 2020, respectively. The increase in absolute dollars, excluding such non-cash stock based-compensation expense was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount. The decrease in research and development expense, excluding the non-cash stock based compensation expense, expressed as a percentage of revenue during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 was primarily due to the economies of scale as we were able to grow revenue more quickly than the costs to invest in our technology infrastructure and platform.

General and administrative

General and administrative expense increased by $66.4 million, or 250.6%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Included in general and administrative expense were non-cash expenses related to stock-based compensation of $59.4 million and $2.8 million for the three months ended March 31, 2021 and 2020, respectively. The increase in stock-based compensation expense for the three months ended March 31, 2021 as compared to March 31, 2020 was primarily due to a one-time acceleration of stock-based compensation expense of $55.0 million in connection with our IPO. General and administrative expense excluding such non-cash stock-based compensation expense was $33.5 million and $23.7 million, or 3.0% and 3.8% of revenue for the three months ended March 31, 2021 and 2020, respectively. The increase in absolute dollars, excluding such non-cash stock based-compensation expense was primarily driven by an increase in compensation and other personnel-related costs due to increased headcount. Our general and administrative expense, excluding the non-cash stock-based compensation expense, expressed as a percentage of revenue decreased during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 as we were able to grow our revenues more quickly than the general and administrative expenses of our business.

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Depreciation and amortization

Depreciation and amortization expense increased by $1.1 million, or 8.9%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase 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, 2020 and the three months ended March 31, 2021. Depreciation and amortization expense as a percentage of revenue decreased in the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 primarily due to capital expenditures growing at a slower rate relative to our revenue growth.

Investment income, net

Investment income, net decreased by $1.5 million, or 100.0%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease was primarily driven by lower average interest rates on interest-bearing investments being held during the three months ended March 31, 2021 as compared to the three months ended March 31, 2020.

Interest expense

Interest expense increased by $0.5 million, or 100.0%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase was primarily 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.

Benefit from income taxes

Benefit from income taxes increased by $0.7 million, or 100.0%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The increase resulted from a partial reduction in the valuation allowance related to the carryover tax basis in deferred tax liabilities from acquisitions.

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KEY BUSINESS METRICS AND NON-GAAP FINANCIAL MEASURES

In addition to the measures presented in our condensed 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.

Key Business Metrics

Total Transactions

Total Transactions is a key measure of the scale of our platform, which drives our financial performance. We define Total Transactions as the sum of all transactions closed on our platform in which our agent represented the buyer or seller in the purchase or sale of a home. We include a single transaction twice when one or more of our agents represent both the buyer and seller in any given transaction. We exclude transactions related to rentals in this metric.

Total Transactions have increased over time as we recruited new agents in existing markets, expanded into new markets, retained top-performing agents, and as existing agents increased their productivity on our platform.

Our Total Transactions for the three months ending March 31, 2021 and 2020 were 40,268 and 24,111, respectively, a 67% increase. This increase is due to a combination of agent additions, enhanced productivity from the platform, and a robust housing market. Robust housing demand was driven by a number of factors including: (i) favorable economic conditions supported by historically low mortgage rates, (ii) higher mobility rates as consumers reassess the requirements of their homes, have more flexibility on location, and accelerate the purchase of second homes and (iii) positive demographic trends as millennials are entering the housing market in larger numbers and household formations increase.

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Gross Transaction Value

Gross Transaction Value is a key measure of the scale of our platform and success of our agents, which ultimately impacts revenue. Gross Transaction Value is the sum of all closing sale prices for homes transacted by agents on our platform. We include the value of a single transaction twice when our agents serve both the home buyer and home seller in the transaction. This metric excludes rental transactions.

Gross Transaction Value is primarily driven by home values in the markets we serve and by changes in the number of our agents in those markets, as well as seasonality and macroeconomic factors.

Our Gross Transaction Value for the three months ending March 31, 2021 and 2020 were $43.8 billion and $25.1 billion, respectively, representing a 75% increase. We have experienced consistent and significant growth in the number of agents on our platform and the markets we serve, resulting in strong year-over-year growth rates in both Total Transactions and associated Gross Transaction Value.

Average Number of Principal Agents

The Average Number of Principal Agents represents the number of agents who are leaders of their respective agent teams or individual agents operating independently on our platform during a given period. The Average Number of Principal Agents is an indicator of the potential future growth of our business, as well as the size and strength of our platform. This figure is calculated by taking the average of the number of principal agents at the end of each month included in the period. We use the Average Number of Principal Agents, in combination with our other key metrics such as Total Transactions and Gross Transaction Value, as a measure of agent productivity.

Our Average Number of Principal Agents for the three months ending March 31, 2021 and 2020 were 9,812 and 8,151, respectively, representing a 20.4% increase. For the three months ended March 31, 2021, our Average Number of Principal Agents was 48% of our average number of total agents. Many of our agents are influential high performers in their respective markets, who joined us because they wanted to maximize their potential and deliver superior results for clients. Our principal agents generate revenue across a diverse set of real estate markets in the United States.

Non-GAAP Financial Measures

Adjusted EBITDA and Adjusted EBITDA Margin

Adjusted EBITDA is a non-GAAP financial measure that represents our net loss adjusted for depreciation and amortization, investment income, net, interest expense, stock-based compensation expense, benefit from income taxes and other items. During the periods presented, other items included (i) restructuring charges associated with lease termination and severance costs and (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. 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, however, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Because of these limitations, you should consider Adjusted EBITDA and Adjusted EBITDA Margin alongside other financial performance measures, including net loss and our other GAAP

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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 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.

The following table provides a reconciliation of net loss to Adjusted EBITDA (in millions):