As filed with the Securities and Exchange Commission on April 22, 2022.

Registration No. 333-262057

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

AMENDMENT NO. 1

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

HomeSmart Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware		6531		85-3653341
(State or other jurisdiction of incorporation or organization)		(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification Number)

 

HomeSmart Holdings, Inc.

8388 East Hartford Drive, Suite 100

Scottsdale, Arizona 85255

(602) 230-7600

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Matthew Widdows

Chief Executive Officer

HomeSmart Holdings, Inc.

8388 East Hartford Drive, Suite 100

Scottsdale, Arizona 85255

(602) 230-7600

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Rezwan D. Pavri Allison B. Spinner Andrew S. Gillman Wilson Sonsini Goodrich & Rosati, P.C. 650 Page Mill Road Palo Alto, California 94304 (650) 493-9300		Ashley Bowers Alan Goldman HomeSmart Holdings, Inc. 8388 East Hartford Drive, Suite 100 Scottsdale, Arizona 85255 (602) 230-7600		Richard A. Kline Sarah B. Axtell Latham & Watkins LLP 140 Scott Drive Menlo Park, California 94025 (650) 328-4600

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer		☐		Accelerated filer		☐
Non-accelerated filer		☒		Smaller reporting company		☐
				Emerging growth company		☒

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 7(a)(2)(B) of the Securities Act.  ☐

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant will file a further amendment which specifically states that this registration statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement will become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS (Subject to Completion)

Issued                     , 2022

                 Shares

 

Common Stock

HomeSmart Holdings, Inc. is offering                 shares of its common stock. The selling stockholder, Matthew Widdows, our founder and Chief Executive Officer, and/or certain of his affiliated entities, identified in this prospectus is offering to sell an additional              shares of common stock. This is an initial public offering and no public market currently exists for our shares. It is currently estimated that the initial public offering price per share will be between $                and $                . We will not receive any of the proceeds from the sale of the shares being sold by the selling stockholder.

We have applied to list the common stock on the Nasdaq Global Select Market under the symbol “HS.”

Following this offering, Matthew Widdows, our founder and Chief Executive Officer, and his affiliated entities will hold     % of our issued and outstanding common stock and will control more than a majority of the voting power of our common stock. As a result of his ownership, he will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our certificate of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets. We will be a “controlled company” within the meaning of the corporate governance rules of Nasdaq. See the sections titled “Prospectus Summary—Corporate Reorganization and Basis for Presentation” and “Management—Controlled Company.”

We are an “emerging growth company” as that term is defined under the federal securities laws and, as such, we have elected to comply with certain reduced reporting requirements for this prospectus and may elect to do so in future filings.

Investing in our common stock involves risks. See the section titled “Risk Factors” beginning on page 20 to read about factors you should consider before buying shares of our common stock.

Price $                 per share

 

Price to Public

Underwriting Discounts and Commissions(1)

Proceeds to HomeSmart

Proceeds to Selling Stockholder

Per Share

$

$

$

$

Total

$

$

$

$

 

(1)

See the section titled “Underwriters” for a description of the compensation payable to the underwriters.

We and the selling stockholder have granted the underwriters the right to purchase up to                additional shares of our common stock to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York, on or about            , 2022.

 

J.P. Morgan				BofA Securities
Stifel				Oppenheimer & Co.
D.A. Davidson & Co.				Stephens Inc.

 

 

Prospectus dated             , 2022

Table of Contents

 

Prospectus Summary			1
Risk Factors			20
Special Note Regarding Forward-Looking Statements			58
Industry, Market and Other Data			60
Use of Proceeds			61
Dividend Policy			62
Capitalization			63
Dilution			65
Unaudited Pro Forma Combined Financial Information			68
Management’s Discussion and Analysis of Financial Condition and Results of Operations			75
Letter from Matthew Widdows, Founder and Chief Executive Officer			103
Business			105
Management			130
Executive Compensation			137
Certain Relationships and Related Party Transactions			153
Principal and Selling Stockholders			157
Description of Capital Stock			159
Shares Eligible for Future Sale			163
Material U.S. Federal Income Tax Considerations for Non-U.S. Holders of our Common Stock			166
Underwriters			171
Legal Matters			181
Experts			181
Where You Can Find Additional Information			181
Index to Financial Statements			F-1

 

 

Through and including         , 2022 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

 

Neither we, the selling stockholder, nor any of the underwriters have authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. Neither we, the selling stockholder, nor any of the underwriters take responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date, regardless of the time of delivery of this prospectus or of any sale of our common stock.

 

i

For investors outside the United States: Neither we, the selling stockholder, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of our common stock and the distribution of this prospectus outside the United States.

 

ii

 

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Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information in this prospectus, including the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Unaudited Pro Forma Combined Financial Information” and our combined and consolidated financial statements and related notes, before making a decision to invest in our common stock. Our business, financial condition, results of operations, or prospects could also be harmed by risks and uncertainties not currently known to us or that we currently do not believe are material. If any of the risks actually occur, our business, financial condition, results of operations, and prospects could be adversely affected. In that event, the market price of our common stock could decline, and you could lose part or all of your investment.

Risks Related to our Business and Industry

Our recent revenue growth rates may not be indicative of our future growth, and our ability to grow our revenue is significantly dependent upon our and our franchisees’ ability to attract and retain independent sales agents and on our ability to attract and retain franchisees.

Our revenue grew from $325 million in 2019 to $393 million in 2020 and to $628 million in 2021, which represented growth rates of 21% and 60% for 2020 and 2021, respectively, as compared to the prior year. In the future, our revenue may not grow as rapidly as it has over the past several years. We believe that our future revenue growth will depend, among other factors, on our ability to expand our network of independent sales agents for our company-owned brokerages, attract and retain franchisees, improve and develop our platform, pursue opportunistic mergers and acquisitions and expand our services in adjacent markets, such as mortgage and title.

The core of our integrated business strategy is aimed at significantly growing the base of productive independent sales agents at our company-owned and franchised brokerages and providing them with compelling data and technology products and services to make them more productive and their businesses more profitable. In addition, in order to grow revenue, we need to enter into franchise agreements with new franchisees and renew existing franchise agreements without reducing contractual royalty rates or increasing the amount and prevalence of sales incentives.

We have experienced growth in our real estate broker and agent base, and a failure to maintain that growth could harm our revenue growth. During the year ended December 31, 2021, our net agent and broker base grew by about 17%, from 19,845 agents and brokers at December 31, 2020 to 23,154 agents and brokers at December 31, 2021 and during the year ended December 31, 2020, our net agent and broker base grew by about 11%, from 17,841 agents and brokers at December 31, 2019. Because we derive revenue from real estate transactions in which our brokers and agents receive commissions, increases in our agent and broker base correlate to increases in revenues. The rate of growth of our agent and broker base cannot be predicted and is subject to many factors outside of our control, including actions taken by our competitors and macroeconomic factors affecting the real estate industry generally. If we are unable to successfully grow the base of productive independent sales agents at our company-owned and franchised brokerages (or if we or they fail to replace departing successful sales agents with similarly productive sales agents) or grow our base of franchisees, we may be unable to maintain or grow revenues or earnings and our results of operations may be adversely affected.

We have experienced growth in part through our acquisition of transaction fee-based brokerages and a failure to maintain that type of growth could harm our revenue. In recent periods, we acquired large brokerages which accelerated agent count and transaction count growth. However, the availability of transaction fee-based brokerages with significant market share is limited. If we cannot find additional brokerages to acquire that we

 

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believe will fit with our business model, our ability to grow agent count through acquisitions in the long-term may be limited, which could adversely affect our revenue.

Our technology platform is designed to enhance our value proposition to independent sales agents and franchisees. Agents and franchisees may not find our technology platform compelling and, if we fail to successfully enhance our value proposition through further development of our technology platform, we may fail to attract new or retain independent sales agents or franchisees, resulting in a reduction in commission income and royalty fees paid to us, which would have an adverse effect on our results of operations. In addition, the continued execution of our strategy may also take longer or cost more than we currently anticipate and, even if we are successful in our recruitment and retention efforts, any additional revenue generated may not offset the related expenses we incur.

We may not be successful in our efforts to do any of the foregoing, and any failure to be successful in these matters could adversely affect our revenue growth.

Competition in each of our products and services is intense, and, if we cannot compete effectively, our business will be harmed.

We face intense competition nationally and in each of the markets we serve for each of our products and services (residential brokerage, mortgage, and title and escrow) and if we cannot compete effectively, our business will be harmed. We believe that our ability to compete depends upon many factors, including the following:

 

•

Our ability to attract and retain agents;

 

•

The timing and market acceptance of our products and services;

 

•

The attractiveness of our technology platform;

 

•

Transaction fees and commissions;

 

•

Our adjacent services; and

 

•

Our brand strength.

Many of our competitors, including Realogy, eXp Realty, Compass and Redfin, may have substantial competitive advantages across our products and services, such as longer operating histories, stronger brand recognition, greater financial resources, more management, sales, marketing and other resources, superior local referral networks, perceived local knowledge and expertise, and extensive relationships with participants in the residential real estate industry, including third-party data providers such as multiple listing services (“MLSs”). Consequently, these competitors may have an advantage in recruiting and retaining agents and franchisees, attracting consumers, and growing their businesses. They may also be able to provide consumers with adjacent offerings that are different from or superior to those we provide. The success of our competitors could result in our loss of market share and harm our business.

Each of our products and services also faces competition from potential new entrants, particularly those driven by technology. These potential competitors may have substantial financial support that allows them to offer services superior to ours or at lower costs. The introduction of additional competitors may also adversely impact our market share and harm our business. For example, if large technology companies such as Amazon or Google were to utilize their resources to enter the real estate industry through programs such as iBuying, through which companies buy and sell real estate properties directly through technology and without the use of real estate agents, their access to financial support and brand recognition may provide them with substantial competitive advantages. Major and new entrants such as Zillow, OpenDoor and OfferPad heighten the risk created by the iBuying movement.

Any of the above situations could have a negative effect on our business, financial condition and results of operations.

 

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Our efforts to expand our business and offer additional adjacent services may not be successful.

In the past, we have expanded our business to offer additional products and services on our platform to agents and consumers. For example, we currently offer mortgage, title, escrow and other ancillary services, and we have invested significant resources in these and other new product and services offerings we expect to launch in the future. However, if we are unable to expand our footprint in market adjacencies in a timely manner, or at all, or if these services are not utilized by our agents at the rate we expect, or at all, our business, financial condition, and results of operations may be adversely affected.

Listing aggregator concentration and market power creates, and is expected to continue to create, disruption in the residential real estate brokerage industry, which may have an adverse effect on our business, financial condition and results of operations.

The concentration and market power of the top listing aggregators allow them to monetize their platforms by a variety of actions, including expanding into the brokerage business, charging significant referral fees, charging listing and display fees, diluting the relationship between agents and brokers (and between agents and the consumer), tying referrals to use of their products, consolidating and leveraging data, and engaging in preferential or exclusionary practices to favor or disfavor other industry participants. These actions divert and reduce the earnings of other industry participants, including our company-owned and franchised brokerages.

One dominant listing aggregator has introduced an iBuying offering to consumers and recently launched a brokerage with employee sales agents in several locations to support this offering and has joined many local MLSs as a participating broker to gain electronic access directly to real estate listings rather than relying on disparate electronic feeds from other brokers participating in the MLSs or MLS syndication feeds. If this listing aggregator or another aggregator is successful in gaining market share with such offering, it could control significant industry inventory and an increasing portion of agent referrals, including the ability to direct referrals to agents and brokers that share revenue with them. In addition, this listing aggregator has purchased several software companies whose products were already in use by many real estate agents and MLSs, and associations, and may attempt to use its growing access to key data spanning the home buying experience to displace or pre-empt its competitors before they can reach customers.

Aggregators could intensify their current business tactics or introduce new programs that could be disadvantageous to our business and other brokerage participants in the industry, including:

 

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Broadening their programs that charge brokerages and their affiliated sales agents fees, including referral, listing, display, advertising and related fees;

 

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Pursuing mergers or other combinations with competitor brokerages;

 

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Pursuing acquisitions, mergers or other combinations with independent software and technology companies, providing access to more aggregated data and consumer information;

 

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Setting up competing brokerages;

 

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Increasing the fees associated with such programs;

 

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Introducing new fees for new or existing services;

 

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Not including our or our franchisees’ listings on their websites;

 

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Reducing listing fees they pay to industry participants;

 

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Controlling significant inventory and agent referrals;

 

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Utilizing their aggregated data for competitive advantage;

 

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Disintermediating our relationship with affiliated franchisees and independent sales agents; and/or

 

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Disintermediating the relationship between the independent sales agent and the buyers and sellers of homes.

Such tactics could further increase pressures on the profitability of our company-owned and franchised brokerages and affiliated independent sales agents, reduce our franchisor service revenue and dilute our relationships with our franchisees and our and our franchisees’ relationships with affiliated independent sales agents and buyers and sellers of homes.

As our markets mature, we may be unable to maintain our agent growth rate, which could adversely affect our revenue and margin growth in our mature markets.

When we enter a new market, we generally have experienced rapid and accelerating growth in our real estate broker and agent base. Because we derive revenue from gross commissions, franchise royalties, mortgage banking and title insurance fees from our agents, brokers and consumers, increases in our agent and broker base correlate to increases in revenues, and the rate of growth of our revenue correlates to the rate of growth of our agent and broker base. Our agent growth rates were 11% and 17%, respectively, for 2020 and 2021 as compared to the prior year. The rate of growth of our agent and broker base cannot be predicted and is subject to many factors outside of our control, including actions taken by our competitors and macroeconomic factors affecting the real estate industry generally. We generally experience a faster growth rate of our agents and brokers in our newer markets, and as the market matures the growth rate slows. In addition, our franchisees and our corporate-owned brokerages may experience different growth rates in the same market, and specifically, our franchises may experience a slower rate of growth compared to our corporate-owned brokerages, as we work to onboard our franchisees and provide them with the tools and training that are already integrated into our corporate-owned brokerages. We cannot ensure that we will be able to maintain our recent agent growth rate or that our agent and broker base will continue to expand in future periods. A slowdown or decline in our agent growth rate would harm our revenue growth and could adversely affect our results of operations.

The health of the U.S. residential real estate industry and macroeconomic factors may significantly impact our business.

Our success depends largely on the health of the U.S. residential real estate industry. This industry, in turn, is affected by changes in general economic conditions, which are beyond our control. Any of the following factors, individually, or in combination with other factors, could adversely affect the industry and negatively impact our business, results of operations and financial condition:

 

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Seasonal or cyclical downturns in the U.S. residential real estate industry;

 

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Periods of slow economic growth or recessionary conditions;

 

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Increased unemployment rates or stagnant or declining wages;

 

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Fluctuations in interest rates;

 

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Inflationary conditions;

 

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Low consumer confidence in the economy or the U.S. residential real estate industry;

 

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Adverse changes in local or regional economic conditions in the markets that we serve and markets into which we are attempting to expand;

 

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Increased mortgage rates, reduced availability of mortgage financing, or increased down payment requirements;

 

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Decline in home prices;

 

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Low home inventory levels, which may result from unforeseen adverse events such as a pandemic or other public crisis that restricts people’s movement, zoning regulations and higher construction cost, among other factors;

 

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Lack of affordably priced homes, which may result from home prices growing faster than wages;

 

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Volatility and general declines in the stock market or lower yields on individuals’ investment portfolios;

 

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Rising insurance costs that increase the expenses associated with home ownership;

 

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Newly enacted and potential federal, state, and local legislative actions that would affect the residential real estate industry generally, including (i) actions that would increase the tax liability arising from buying, selling or owning real estate, (ii) actions that would change the way real estate brokerage commissions are negotiated, calculated, or paid, (iii) potential reform relating to Fannie Mae, Freddie Mac, and other government sponsored entities (“GSE”) that provide liquidity to the mortgage market; and (iv) actions or potential reform that brings relaxed lending policies, regulation and oversight that results in predatory lending, risky loans and products, fraud and complex products that could weaken the financial system when economic conditions change and hinder homebuyers’ ability to finance and purchase homes;

 

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Changes that cause U.S. real estate to be more expensive for foreign purchasers, such as (i) increases in the exchange rate for the U.S. dollar compared to foreign currencies and (ii) foreign regulatory changes or capital controls that make it more difficult for foreign purchasers to withdraw capital from their home countries or purchase and hold U.S. real estate;

 

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Decreasing home ownership rates, declining demand for real estate, changed generational views on homeownership and generally decreased financial resources available for purchasing homes;

 

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War, terrorism, political uncertainty, natural disasters, national or global health crises, inclement weather, and acts of God;

 

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Increased number of home purchases by investors, reducing the ability of the average home buyer to purchase a home; and

 

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Real estate professionals being able to maintain independent contractor employment status.

The above factors are things we cannot control as we operate in the real estate industry. The above factors, and other factors discussed in this prospectus, could cause a decline in the housing or mortgage markets and have a material adverse effect on our business by causing slowdowns in our growth or a decline in the number of home sales and/or home prices. This could adversely affect the real estate industry, and, as a result, negatively impact our business, financial condition and results of operations.

We experience variability in our financial results and operating metrics on a quarterly and annual basis and, as a result, our historical performance may not be a meaningful indicator of future performance.

We historically have experienced, and expect to continue to experience, variability, on both a quarterly and annual basis, in our financial results and operating metrics for a variety of reasons, many of which are outside of our control and difficult to predict. As a result of such variability, our historical performance, including from

 

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recent quarters or years, may not be a meaningful indicator of future performance and period-to-period comparisons also may not be meaningful. Numerous factors can influence our results of operations, including:

 

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Our ability to attract and retain agents and franchisees;

 

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Our ability to develop adjacent services on our platform;

 

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Changes in interest rates or mortgage underwriting standards;

 

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The actions of our competitors;

 

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Costs and expenses related to the strategic acquisitions and partnerships;

 

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Increases in and timing of operating expenses that we may incur to grow and expand our operations and to remain competitive;

 

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Changes in the legislative or regulatory environment, including with respect to real estate commission rates and disclosures;

 

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System failures or outages, or actual or perceived breaches of security or privacy, and the costs associated with preventing, responding to, or remediating any such outages or breaches;

 

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Adverse judgments, settlements, or other litigation-related costs and the fees associated with investigating and defending claims;

 

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The overall tax rate for our business and the impact of any changes in tax laws or judicial or regulatory interpretations of tax laws, which are recorded in the period such laws are enacted or interpretations are issued and may significantly affect the effective tax rate of that period;

 

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The application of new or changing financial accounting standards or practices; and

 

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Changes in regional or national business or macroeconomic conditions, including as a result of the COVID-19 pandemic, which may impact the other factors described above.

If we fail to grow in the various local markets that we serve or are unsuccessful in identifying and pursuing new opportunities to expand our service offerings into new markets, our long-term prospects and profitability will be harmed.

If we fail to grow in the various local markets that we serve, our business may be harmed. To capture and retain market share in the various local markets that we serve, we must compete successfully against other brokerages for agents and brokers and for the consumer relationships that they bring. Our competitors could lower the fees that they charge to agents and brokers or could raise the compensation structure for those agents. In addition, our model of charging a fixed transaction fee may have a negative perception in certain markets. Our competitors may have access to greater financial resources than us, allowing them to undertake expensive local advertising or marketing efforts. In addition, our competitors may be able to leverage local relationships, referral sources, and strong local brand and name recognition that we have not established. Our competitors could, as a result, have greater leverage in attracting new and established agents in the market and in generating business among local consumers. Our ability to grow in the local markets that we serve will depend on our ability to compete with these local brokerages.

Additionally, our decision to expand our service offerings into new markets may consume significant financial and other resources and may not achieve the desired results. We regularly evaluate expanding our brokerage and non-brokerage services into new markets. For example, we may expand our title and mortgage services to other jurisdictions. Any expansion may require significant expenses and the time of our key personnel,

 

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particularly at the outset of the expansion process. Expansion may also subject us to new regulatory environments, which could increase our costs as we evaluate compliance with the new regulatory regime. Notwithstanding the expenses and time devoted to expansion into a new market, we may fail to achieve the financial and market share goals associated with the expansion.

If we fail to continue to grow in the local markets we serve or if we fail to successfully identify and pursue new opportunities to expand our service offerings into new markets, our long-term prospects, financial condition and results of operations may be harmed.

A lack of financing for homebuyers in the U.S. residential real estate market at favorable rates and on favorable terms harm our financial performance and results of operations.

Our business is significantly impacted by the availability of financing at favorable rates or on favorable terms for homebuyers, which may be affected by government regulations and policies.

The Dodd-Frank Act, which was passed to more closely regulate the financial services industry, created the Consumer Financial Protection Bureau (“CFPB”), an independent federal bureau, which was designed to enforce consumer protection laws, including various laws regulating mortgage finance. The Dodd-Frank Act also established new standards and practices for mortgage lending, including a requirement to determine a prospective borrower’s ability to repay a loan, removing perceived incentives to originate higher cost mortgages, requiring additional disclosures to potential borrowers and restricting the fees that mortgage originators may collect. Rules implementing many of these changes protect creditors from certain liabilities for loans that meet the requirements for “qualified mortgages.” The rules placed several restrictions on qualified mortgages, including caps on certain closing costs as well as limits on debt to income ratios for qualified mortgages.

Certain potential regulatory changes such as the termination by the CFPB of a regulatory exemption known as the “QM patch” for loans backed by Fannie Mae or Freddie Mac, the requirement to implement a new uniform residential loan application which may increase Equal Credit Opportunity Act and other operational risks, and more activist supervision and regulation of housing finance at the state level may adversely impact the housing industry, including homebuyers’ ability to finance and purchase homes.

The monetary policy of the U.S. government, and particularly the Federal Reserve Board, which regulates the supply of money and credit in the U.S., significantly affects the availability of financing at favorable rates and on favorable terms, which in turn affects the domestic real estate market. While currently interest rates are low, changes in the Federal Reserve Board’s policies are beyond our control, are difficult to predict, and could restrict the availability of financing on reasonable terms at favorable interest rates for homebuyers, which could have an adverse effect on our business, results of operations and financial condition. For example, in December 2021, the Federal Reserve Board announced its intention to accelerate the reduction of its purchases of mortgage-backed securities and released economic projections that showed officials expect to raise interest rates three times in 2022 and could determine to taper its purchases of other securities as well, any of which could increase interest rates.

In addition, a reduction in government support for home financing, including the possible winding down or privatization of GSEs could further reduce the availability of financing for homebuyers in the U.S. residential real estate market. No consensus has emerged in Congress concerning potential reforms relating to Fannie Mae and Freddie Mac and a potential transition to alternative structures for the secondary market, so we cannot predict either the short- or long-term effects of such regulation and its impact on homebuyers’ ability to finance and purchase homes.

Furthermore, many lenders have tightened their underwriting standards since the real estate downturn that began in 2008, and many subprime and other alternative mortgage products are no longer as common in the

 

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marketplace. While some loosening of credit standards and a resurgence of alternative mortgage products, including non-qualified mortgages has occurred, if these mortgage loans continue to be somewhat more difficult to obtain, including in the jumbo mortgage markets, the ability and willingness of prospective buyers to finance home purchases or to sell their existing homes could be adversely affected, which would adversely affect our operating results. In addition, many lenders have further tightened their underwriting standards during the COVID-19 pandemic, and it is unclear whether such tightened standards will be relaxed again in the future.

We cannot predict whether or not such legislation, regulation and policies may increase down payment requirements, increase mortgage costs, or result in increased costs and potential litigation for housing market participants, any of which could harm our business, financial condition and results of operations.

We may be unable to effectively manage rapid growth in our business.

We may not be able to scale our business quickly enough to meet the growing needs of our affiliated agents, brokers and franchisees, and, if we are not able to grow efficiently, our operating results could be harmed. As we add new agents, brokers and franchisees, we will need to devote additional financial and human resources to improving our internal systems, integrating with third-party systems, and maintaining infrastructure performance. In addition, we will need to appropriately scale our internal business systems and our services organization, including support of our affiliated agents, brokers and franchisees as our demographics expand over time. Any failure of or delay in these efforts could cause impaired system performance and reduced real estate professional satisfaction. These issues could reduce the attractiveness of our company to existing agents, brokers and franchisees who might leave the company as well as resulting in decreased attraction of new agents, brokers and franchisees. Even if we are able to upgrade our systems and expand our staff, such expansion may be expensive, complex, and place increasing demands on our management. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure and we may not be successful in maintaining adequate financial and operating systems and controls as we expand. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce our revenue and margins and adversely impact our results of operations.

If we fail to maintain an effective system of disclosure controls and internal control over financial reporting, our ability to produce timely and accurate financial statements or comply with applicable regulations could be impaired.

As a public company, we will be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Sarbanes-Oxley Act of 2002 (“SOX”) and the rules and regulations of the applicable listing standards of the Nasdaq Global Select Market (“Nasdaq”). We expect that the requirements of these rules and regulations will continue to increase our legal, accounting, and financial compliance costs, make some activities more difficult, time-consuming, and costly, and place significant strain on our personnel, systems, and resources.

SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are continuing to develop and refine our disclosure controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we will file with the SEC is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that information required to be disclosed in reports under the Exchange Act is accumulated and communicated to our principal executive and financial officers. We are also continuing to improve our internal control over financial reporting. In order to maintain and improve the effectiveness of our disclosure

 

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controls and procedures and internal control over financial reporting, we have expended, and anticipate that we will continue to expend, significant resources, including accounting-related costs, and significant management oversight.

Our current controls and any new controls that we develop may become inadequate because of changes in conditions in our business. Further, weaknesses in our disclosure controls and internal control over financial reporting may be discovered in the future. Any failure to develop or maintain effective controls or any difficulties encountered in their implementation or improvement could harm our results of operations or cause us to fail to meet our reporting obligations and may result in a restatement of our financial statements for prior periods. Any failure to implement and maintain effective internal control over financial reporting also could adversely affect the results of periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that we will eventually be required to include in our periodic reports that will be filed with the SEC. Ineffective disclosure controls and procedures and internal control over financial reporting could also cause investors to lose confidence in our reported financial and other information, which would likely have a negative effect on the trading price of our common stock. In addition, if we are unable to continue to meet these requirements, we may not be able to remain listed on Nasdaq. We are not currently required to comply with the SEC rules that implement Section 404 of SOX and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to provide an annual management report on the effectiveness of our internal control over financial reporting.

While preparing the combined and consolidated financial statements that are included in this prospectus, our management has determined that we have material weaknesses in our internal control over financial reporting. The identified material weaknesses were associated with the following areas:

 

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Insufficient and appropriate controls were not established associated with the recording of journal entries;

 

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Ineffective controls established to ensure proper reconciliations between our transaction management platform and our general ledger which affected the completeness and accuracy of our revenue recognition and commission and other agent related costs; and

 

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Inadequate establishment of a compliant SOX control environment including items such as instituting formal and written accounting policies consistent with GAAP, having documented internal controls which are also associated with control owners, and having a sufficient number of employees with experience establishing and maintaining an effective internal control over financial reporting environment.

We are establishing plans and working to remediate the material weaknesses identified above including taking the following actions:

 

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Contract with SOX consultants as well as establish an internal audit team;

 

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Perform an enterprise-wide SOX environment scoping analysis as well as develop an implementation plan;

 

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Create policies and procedures regarding the creation and oversight of journal entries;

 

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Establish controls ensuring appropriate GAAP is identified and applied to new or modified revenue transaction streams; and

 

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Institute regular and recurring detailed reconciliations between our transaction management systems and our general ledger.

To date, we have completed the following:

 

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Created certain policies and procedures regarding oversight of journal entries;

 

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Implemented systematic restrictions following appropriate segregation of duties and methodologies; and

 

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Hired additional personnel within the financial reporting team who have prior experience establishing, maintaining and working within SOX environments.

Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until after we are no longer an “emerging growth company” (“EGC”) as defined in the JOBS Act. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our internal control over financial reporting is documented, designed, or operating. The actions that we are taking are subject to ongoing executive management review and will also be subject to audit committee oversight. If we are unable to successfully remediate the material weaknesses, or if in the future, we identify further material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated.

The COVID-19 pandemic may harm our businesses, financial condition and results of operations.

The COVID-19 pandemic is having a profound effect on the global economy and financial markets. In the United States, federal, state, and local governments continue to react to this evolving public health crisis by, among other actions, recommending or requiring the avoidance of gatherings of people or significantly or entirely curtailing activities categorized as non-essential. We are constantly monitoring the spread of COVID-19, including the emergence of new variants of the virus, especially in the states and regions in which we currently operate. In the second quarter of 2020, the COVID-19 pandemic significantly and adversely affected residential real estate transaction volume. Since that time, in addition to general macroeconomic instability, many governmental authorities put in place limitations on in-person activities related to the sale of residential real estate, such as prohibitions or restrictions on in-home showings, inspections and appraisals, and availability or hours of local real property documentation searches and new recordings. Although these measures were largely lifted later in 2020, there can be no assurance that such measures will not be implemented in the future or that the pandemic will not again adversely affect transaction volume. This unprecedented situation has created considerable risks and uncertainties for the U.S. real estate services industry in general and for us in particular, including those arising from the potential adverse effects on the economy as well as risks related to employees, independent agents, and consumers. The extent of the impact of the pandemic on our business and financial results will depend largely on future developments, including the extent and duration of the spread of the outbreak and new variants of the virus, the extent of governmental regulation (including, but not limited to, local, state and/or federally mandated “shelter in place” or other regulations that, for example, preclude or strictly limit open houses or in-person showings of properties), the timing, availability, and effectiveness of vaccines and vaccination rates, the impact on capital and financial markets and the related impact on consumer confidence and spending, and the magnitude of the financial and operational consequences to our agents and brokers, all of which are highly uncertain and cannot be predicted.

Our value proposition for agents includes allowing them to keep more of their commissions than traditional real estate brokerages do, which is not typical in the real estate industry. If agents do not understand our value proposition, we might not be able to attract, retain and incentivize agents.

Providing technological tools and a transaction fee system that allows agents to retain more of their commissions is a key component of our agent and broker value proposition, and, if agents do not understand our value proposition, our ability to attract and retain agents may be harmed. Unlike traditional brokerages, we offer a fixed fee for agents, allowing the agents to keep more of their commissions than they would be able to keep with a traditional brokerage. Agents might not understand or appreciate this value if agents do not appreciate other components of our value proposition including the systems and tools that we provide to agents, and the professional development opportunities we create and deliver. If agents do not understand the

 

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elements of our agent value proposition, or do not perceive it to be more valuable than the models used by most competitors, we might not be able to attract, retain and incentivize new and existing agents to grow our revenues, which would have an adverse effect on our business, financial condition and results of operations.

If we are unable to sell the mortgage loans that we originate, then we will need to service the loans ourselves or hire a third-party servicer, and either option could impose significant costs, time, and resources on us. Additionally, we may become more exposed to adverse market conditions affecting mortgage loans.

If we are unable to sell the mortgage loans that we originate through our subsidiary, Minute Mortgage, then we could be subject to significant costs, time, and resources spent on Minute Mortgage. We intend to sell the mortgage loans that we originate through Minute Mortgage to investors in the secondary mortgage market. Our ability to sell originated loans in the secondary market depends largely on there being sufficient liquidity in the secondary market and our compliance with contracts with investors who have agreed to purchase the loans. If we were unable to sell loans originated through Minute Mortgage, then we may need to establish a servicing platform or hire a third party to service the loans. We do not currently have a servicing platform and establishing such a platform may result in significant costs and require substantial time and resources from management. Additionally, we may be unable to retain a third-party servicer on economically feasible terms.

Our inability to sell loans in the secondary market would also expose us to adverse market conditions affecting mortgage loans. For example, we may be required to write down the value of the loan, which reduces the amount of our current assets. Additionally, if a homeowner were unable to make his or her mortgage payments, then we may be required to foreclose on the home securing the loan. In these situations, the proceeds from selling the home may be significantly less than the remaining amount outstanding under the loan. Finally, if we borrowed under one of our warehouse credit facilities for the loan, then we may be required to immediately repay the borrowed amount, which reduces our cash on hand that is available for other corporate uses. As a result, our inability to sell loans originated through Minute Mortgage may adversely affect our business, financial condition and results of operations.

A significant adoption by consumers of alternatives to full-service agents or loan originators could harm our business, prospects and results of operations.

A significant increase in consumer use of technology that eliminates or minimizes the role of the real estate agent or mortgage loan originator could have an adverse effect on our business, prospects and results of operations. These options include direct-buyer companies that purchase directly from the seller at below-market rates in exchange for speed and convenience, and then resell them shortly thereafter at market prices, and discounters who reduce the role of the agent in order to offer sellers a low commission or a flat fee while giving rebates to buyers. How consumers want to buy or sell houses and finance their purchase will determine if these models reduce or replace the long-standing preference for full-service agents and loan originators.

While real estate brokers using historical real estate brokerage models typically compete for business primarily on the basis of services offered, reputation, utilization of technology, personal contacts and brokerage commission, participants pursuing non-traditional methods of marketing real estate may compete in other ways, including companies that employ technologies intended to disrupt historical real estate brokerage models or minimize or eliminate the role brokers and sales agents perform in the home sale transaction process.

A growing number of companies are competing in non-traditional ways for a portion of the gross commission income generated by home sale transactions. For example, listing aggregators and other web-based real estate service providers compete for our company-owned brokerage business by establishing relationships with independent sales agents and/or buyers and sellers of homes, and actions by such listing aggregators have and may continue to put pressure on our and other industry participants’ revenues and profitability. If these new systems of purchasing and selling homes gain market share in the residential real estate industry, it could disintermediate real estate brokers and independent sales agents from buyers and sellers of homes either

 

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entirely or by reducing brokerage commissions that may be earned on those transactions. If these alternatives to full-service agents were to gain traction in the market, it could harm our business, financial condition and results of operations.

Our business depends on successfully establishing our brand and developing brand awareness, and a failure to establish, promote and maintain our brand may hurt our ability to grow our business, particularly in markets where we have limited brand recognition.

Our brand is not yet as well-known as other real estate brands. Our business depends in part on successfully establishing and promoting our brand in the new markets that we enter, and any failure to protect and enhance our brand would hurt our ability to grow our business in new markets. As such, maintaining, protecting, and enhancing our brand is critical to growing our business, particularly in markets where we have limited brand recognition and compete with well-known traditional brokerages with longer histories and established community presence. This will partially depend on our ability to continue to provide high-value, customer-oriented, and differentiated services, and we may not be able to do so effectively. Enhancing and maintaining the quality of our brand may require us to make substantial investments, such as in marketing and advertising, technology, and agent training. In addition, despite these investments, our brand could be damaged from other events that are or may be beyond our control, such as litigation and claims, our failure to comply with local laws and regulations, and illegal activity such as phishing scams or cybersecurity attacks targeted at us, our customers, or others. We also believe that developing and maintaining widespread awareness of our brand is critical to attracting new customers. If we fail to successfully establish, promote and maintain our brand, our business could be harmed.

Inasmuch as our business is in part dependent on our brand, our business may be subject to risks related to events and circumstances that have a negative impact on our brands in our current or new markets. If we are exposed to adverse publicity or events that damage our brand and/or image, including through action by our agents, our business may suffer from the deterioration in or failure to establish our brand and image.

Actions by our franchisees, their independent sales agents, or independent sales agents of our company-owned brokerages could adversely affect our reputation and subject us to liability.

The negligent or intentional actions or poor-quality service of our franchisees and their independent sales agents could harm our business. Our franchisees are independent business operators and we do not exercise control over their day-to-day operations. Our franchisees may not successfully operate a real estate brokerage business in a manner consistent with our standards or industry standards or may not affiliate with effective independent sales agents or employees. Further, if our franchisees or their independent sales agents were to engage in negligent or intentional misconduct or provide diminished quality of service to customers, our image and reputation may suffer and adversely affect our results of operations. Negligent or improper actions involving our franchisees, including regarding their relationships with independent sales agents, clients and employees, may also lead to direct claims against us based on theories of vicarious liability, negligence, joint operations and joint employer liability which, if determined adversely, could increase costs, negatively impact the business prospects of our franchisees and subject us to incremental liability for their actions.

The actions of the independent sales agents engaged by our company-owned brokerages could also adversely affect our reputation and subject us to liability. Our company-owned brokerage operations rely on the performance of independent sales agents. If the independent sales agents were to provide lower quality services to our customers or engage in negligent or intentional misconduct, such as failing to make necessary disclosures about properties sold by our agents, our image and reputation could be adversely affected. For example, we have been subject to litigation alleging that we are vicariously responsible for our agents’ failures to disclose material information about the condition of a property sold, such as the presence of physical

 

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defects, defects to title, or restrictive zoning regulations. In addition, we could also be subject to litigation and regulatory claims arising out of their performance of brokerage services, which if adversely determined, could adversely affect our business.

A decline in home sale inventory could impact the number of home sale transactions we close and negatively impact our business and financial condition.

A decline in home sale inventory could impact the number of transactions we close and negatively impact our business and financial condition. Home sale inventory levels for the existing U.S. home market have been declining over the past several years due to strong demand, in particular in certain highly sought-after geographies and at lower price points. According to NAR, at the end of December 2021, the inventory of existing homes for sale in the United States fell to an all-time low of 860,000, which is equivalent to 1.6 months of the monthly sales pace, also an all-time low. If interest rates were to rise, homebuilders may determine to discontinue or delay new projects, which could further contribute to inventory constraints. In addition, real estate industry models that purchase homes for rental or corporate use (rather than immediate resale) can put additional pressure on available housing inventory. While a continuation of low inventory levels may contribute to favorable demand conditions and improved home sale price growth, insufficient inventory levels have a negative impact on home sale volume growth and can contribute to a reduction in housing affordability, which can result in some potential home buyers deferring entry into the residential real estate market. Ongoing constraints on home inventory levels may continue to have an adverse impact on the number of home sale transactions closed by us and our franchisees, which would have a negative effect on our business, financial condition and results of operations.

We may be unable to maintain or improve our current technology offerings at a competitive level or develop new technology offerings that meet customer or agent expectations. Our technology offerings may also contain undetected errors or vulnerabilities.

We may be unable to maintain or improve our current technology offerings at a competitive level or develop new technology offerings that meet customer or agent expectations, and any failure to do so may harm our business. Our suite of technology offerings, including RealSmart Broker, RealSmart Agent and RealSmart Client, is key to our competitive plan for hiring and retaining lead agents. Developing, improving and maintaining our innovative technology, including the digital tools we have created to assist agents in facilitation transactions, is challenging and expensive. For example, the nature of development cycles may result in delays between the time we incur expenses and the time we introduce new technology and generate revenue, if any, from those investments. Anticipated demand for a technology offering, either from agents or homebuyers could also decrease after the development cycle has commenced, and we would not be able to recoup costs, which may be substantial, that we incurred.

As industry standards and expectations evolve and new technology becomes available, we may be unable to identify, design, develop, and implement, in a timely and cost-effective manner, new technology offerings to meet those standards and expectations. As a result, we may be unable to compete effectively, and to the extent our competitors develop new technology offerings faster than us, they may render our offerings noncompetitive or obsolete. Additionally, even if we implemented new technology offerings in a timely manner, our customers and agents may not accept or be satisfied by the offerings.

Furthermore, our development and testing processes may not detect errors and vulnerabilities in our technology offerings prior to their implementation. Any inefficiencies, errors, technical problems, or vulnerabilities arising in our technology offerings after their release could reduce the quality of our services or interfere with our customers’ and agents’ access to and use of our technology and offerings and harm our business. Should any of these issues occur, they could result in harm to our business, financial condition and results of operations.

 

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Some of our potential losses may not be covered by insurance. We may not be able to obtain or maintain adequate insurance coverage.

We maintain insurance to cover costs and losses from certain risk exposures in the ordinary course of our operations, but our insurance may not cover one hundred percent of the costs and losses from all events. We are responsible for certain retentions and deductibles that vary by policy, and we may suffer losses that exceed our insurance coverage limits. We may also incur costs or suffer losses arising from events against which we have no insurance coverage. In addition, large-scale market trends or the occurrence of adverse events in our business may raise our cost of procuring insurance or limit the amount or type of insurance we are able to secure. We may not be able to maintain our current coverage, or obtain new coverage, in the future on commercially reasonable terms or at all. Incurring uninsured or underinsured costs or losses could harm our business, financial condition and results of operations.

Our financial results are affected by the operating results of our franchisees.

We generate revenue from franchisees based on the number of agents at the franchisee and transactions closed, in each case primarily based on a flat-fee per agent or transaction, as applicable. Accordingly, our financial results are dependent upon the operational and financial success of our franchisees. If industry trends or economic conditions worsen or do not improve or if one or more of our top performing franchises become less competitive or leaves our franchise system, our franchisees’ financial results may worsen and our revenues from franchisees may decline, which could have an adverse effect on our business, financial condition and results of operations. In addition, we may have to increase our bad debt and note reserves. We may also have to terminate franchisees due to non-payment.

In addition, our franchisees face the same market pressures generally facing the industry (such as margin compression) and may seek lower fees or higher incentives from us. If franchisees, in particular our largest franchisees that have substantial agent counts, fail to renew their franchise agreements (or otherwise leave our franchise system), or if we induce franchisees to renew these agreements through lower fees or higher incentives, then our revenues may decrease, and profitability may be lower than in the past. If any of these risks were to occur, it may harm our business, financial condition and results of operations.

We may evaluate acquisitions in order to accelerate growth but might not succeed in identifying suitable candidates or may acquire businesses that negatively impact us.

As part of our growth strategy, we may evaluate the potential acquisition of businesses offering products or services that complement our services offerings but may not succeed in identifying suitable candidates, may not complete an acquisition of a suitable candidate or may acquire businesses that negatively impact us. If we identify a business that we deem to be suitable for acquisition and complete an acquisition, our evaluation may prove faulty and the acquisition may prove unsuccessful. We may also be unable to successfully complete the acquisition of a business that we have deemed to be suitable for acquisition after devoting resources towards the acquisition. In addition, an acquisition may prove unsuccessful if we fail to effectively execute a post-acquisition integration strategy. We may be unable to successfully integrate the systems and personnel of the acquired businesses. For example, if we are unable to successfully integrate the systems and personnel related to our recent acquisitions of PalmerHouse Properties, LLC and its affiliates or Champions Real Estate Group and its affiliates, we may not realize the growth or benefits sought through these acquisitions and our business, financial condition, and results of operations may be harmed. An acquisition could negatively impact our culture or undermine its core values. Acquisitions could disrupt our existing operations or cause management to divert its focus from our core business. An acquisition could cause potentially dilutive issuances of equity securities, incurrence of debt, contingent liabilities or could cause us to assume or incur unknown or unforeseen liabilities. From time to time, we acquire brokerages in order to accelerate growth and to provide us

 

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greater access to a particular market and might not succeed in identifying suitable candidates or we may acquire brokerages that negatively impact us. For example, agents may decide to leave the brokerage following its acquisition. Any of these situations could harm our business, financial condition or results of operations.

We may not realize the expected benefits from our title services joint ventures or from other existing or future joint ventures.

Our title services joint ventures may be adversely affected by changes affecting the title industry, including but not limited to regulatory changes, high levels of competition and decreases in operating margins. In addition, our joint venture or our partner could face operational or liquidity risks, such as litigation or regulatory investigations that may arise. Our joint ventures are serviced by our other operating companies and could be subject to fluctuation due to staffing other operational impacts to the parent organization. Any of the foregoing could have an adverse impact on our earnings and dividends from our title agencies. Operational, liquidity, regulatory, macroeconomic and competitive risks also apply to our other existing joint ventures and would likely apply to any joint venture we may enter into in the future. If any of these risks were to occur, they could adversely affect our business, financial condition and results of operations.

We may be unable to attract homebuyers and home sellers to our website and mobile application in a cost-effective manner.

Our website and mobile application are our primary channels for meeting new customers. Accordingly, our success depends on our ability to attract homebuyers and home sellers to our website and mobile application in a cost-effective manner. To meet new customers, we rely heavily on traffic generated from search engines, traffic generated on the recommendation of our agents by our agents’ clients, and downloads of our mobile application from mobile application stores. We also rely on marketing methods such as targeted email campaigns, paid search advertising, social media marketing, yard sign marketing, and traditional media.

The number of visitors to our website and downloads of our mobile application depend in large part on how and where our website and mobile application rank in Internet search results and mobile application stores, respectively. While we use search engine optimization to help our website rank highly in search results, maintaining or improving our search result rankings is outside our control. Internet search engines frequently update and change their ranking algorithms, referral methodologies, or design layouts, which determine the placement and display of a user’s search results. In some instances, Internet search engines may change these rankings in order to promote their own competing services or the services of one or more of our competitors. Similarly, mobile application stores can change how searches are displayed and how mobile applications are featured. For instance, editors at the Apple iTunes Store can feature prominently editor-curated mobile applications and cause the mobile application to appear larger than other applications or more visibly on a featured list.

Additionally, our marketing efforts may fail to attract the desired number of new customers for a variety of reasons, including the creative treatment for our advertisements may be ineffective or new third-party email delivery policies that make it more difficult for us to execute targeted email campaigns.

Cybersecurity incidents, data security incidents or other cybercrime could disrupt our business or result in the loss of critical and confidential information.

We and our partners, service providers, agents, and other third parties with which we interact rely extensively on information technology systems, including systems provided by third party service providers, including cloud-based systems and on premise servers, to record and process transactions and manage our operations, among other matters. Cybersecurity incidents and other data security incidents directed at us, agents, our third-party service providers, or other third parties can range from uncoordinated individual attempts to gain

 

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unauthorized access to information technology systems to sophisticated and targeted measures known as advanced persistent threats. Cybersecurity incidents and other data security incidents can also vary in scope and intent from economically-driven attacks to malicious attacks targeting our key operating systems with the intent to disrupt, disable or otherwise cripple our operations and service offerings. This can include any combination of phishing attacks, insider threats, malware and/or viruses targeted at our key systems. Cybersecurity incidents and other data security incidents are also constantly evolving, increasing the difficulty of detecting and successfully defending against them. In the ordinary course of our business, we and our third-party service providers collect and store sensitive data, including our proprietary business information and intellectual property and that of our customers and employees, including personally identifiable information. Additionally, we rely on third parties and their security procedures for the secure storage, processing, maintenance, and transmission of information that are critical to our operations. Despite measures designed to prevent, detect, address, and mitigate cybersecurity incidents, such incidents may occur to us or our third-party providers and, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption, or unavailability of critical data and confidential or proprietary information (our own or that of third parties, including personally identifiable information of our customers and employees) and the disruption of business operations. Given the unpredictability of the timing, nature and scope of cyber-attacks and other security incidents, we cannot guarantee that the technologies we use will adequately secure the data we maintain, including confidential information and personal information, against such attacks, and we cannot entirely eliminate the risk of improper or unauthorized access to or disclosure of such data, or other security incidents that impact the integrity or availability of such data, or our systems and operations. Any such attempted or actual compromises to our security, systems, or information, or that of our third-party providers, could expose us to a risk of loss or misuse of personal, confidential or sensitive information, and cause customers, partners, agents, franchisees and other third parties to lose trust and confidence in us and stop using our website, mobile applications, and services. In addition, we may incur significant costs associated with mitigating the risk of future incidents, remediating any such incidents, which may include liability for stolen assets or information, repair of system damage, and compensation to customers, employees, and business partners, and other capital costs regarding systems technology, personnel, monitoring and other investments. We may also be subject to government enforcement proceedings and legal claims by private parties, which may include, fines and penalties, costs related to remediation, potential costs and liabilities arising from governmental, regulatory or third-party investigations, proceedings or litigation, diversion of management attention and harm to our reputation.

Moreover, the real estate industry is actively targeted by cyber-attacker attempts to conduct electronic fraudulent activity (such as phishing), security breaches and similar attacks directed at participants in real estate services transactions. These attacks, when successful, can result in fraud, including wire fraud related to the diversion of home sale transaction funds, or other harm, which could result in significant claims and reputational damage to us, our brands, our franchisees, and our independent sales agents and could also result in increases in our operational costs. For example, a cyber-attacker has contacted a customer via email, impersonating one of our agents, resulting in the customer wiring money to the cyber-attacker. These threats to our business may be wholly or partially beyond our control as our franchisees as well as our customers, franchisee and company-owned brokerage independent sales agents and their customers and third-party service providers may use e-mail, computers, smartphones and other devices and systems that are outside of our security control environment. In addition, real estate transactions involve the transmission of funds by the buyers and sellers of real estate and consumers or other service providers selected by the consumer may be the subject of direct cyber-attacks that result in the fraudulent diversion of funds, notwithstanding efforts we have taken to educate consumers with respect to these risks.

 

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If cybersecurity incidents, other cybercrimes, or other data security incidents occur, they could harm our business, financial condition and results of operations.

We process, transmit, and store personal information, which is subject to various contractual commitments and data privacy and security laws, and any failure to comply with those commitments, laws and regulations could result in significant liability or reputational harm. Any actual or attempted unauthorized access to, or the unintended release of, this information could also result in a claim for damages, regulatory action, loss of business, or unfavorable publicity.

We process, transmit, and store personal information about our customers, agents, employees, franchisees, and representatives of our business partners. We process personal information to provide services and fulfill our obligations as an employer. As a result, we are subject to certain contractual terms, as well as federal, state, and foreign laws and regulations regarding personal information, including the Federal Trade Commission Act (and other of the Federal Trade Commission’s (“FTC”) regulations), and various state consumer protection and privacy laws, and therefore are subject to federal and state enforcement. We receive information, including personal information, from various sources, such as data aggregators and real estate databases, including the Multiple Listing Network Ltd. As a result, we are subject to additional contractual terms and commitments. In the event we no longer have access to our various sources of data, for example from an actual or perceived failure to comply with certain contractual commitments, this loss could significantly impact our business operations and costs, including our ability to provide our services.

While we take measures to protect the security and privacy of this information, it is possible that our security controls over personal information and other practices we follow may not prevent the unauthorized access to, or the unintended release of, personal information. If such unauthorized access or unintended release occurs, we could suffer significant damage to our brand and reputation, customers could lose confidence in the security and reliability of our services, and we could incur significant costs to address and fix these security incidents. These incidents could also lead to lawsuits and regulatory investigations and enforcement actions.

Additionally, laws, regulations, and standards covering marketing and advertising activities conducted by telephone, email, mobile devices, and the internet, may be applicable to our business, such as the Telephone Consumer Protection Act (“TCPA”) (as implemented by the Telemarketing Sales Rule), the Controlling the Assault of Non-Solicited Pornography And Marketing Act (“CAN-SPAM”), and similar state consumer protection laws. We seek to comply with industry standards and are subject to the terms of our own privacy policies and privacy-related obligations to third parties. We strive to comply with all applicable laws, policies, legal obligations and industry codes of conduct relating to privacy and data security protection to the extent possible. However, it is possible that these obligations may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or regulations, making enforcement, and thus compliance requirements, ambiguous, uncertain, and potentially inconsistent. Any failure or perceived failure by us to comply with our privacy policies, privacy-related obligations to customers, agents, employees, franchisees, representatives of our business partners, or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized access to or unintended release of personally identifiable information or other agent or client data, may result in governmental enforcement actions, litigation, or public statements against us by consumer advocacy groups or others. Any of these events could cause us to incur significant costs in investigating and defending such claims and, if found liable, pay significant damages. Further, these proceedings and any subsequent adverse outcomes may cause us to incur significant costs, which could affect our business outcome or cause our agents and clients to lose trust in us, which could have an adverse effect on our reputation and business.

 

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Any significant change to applicable laws, regulations or industry practices regarding the use or disclosure of personal information, or regarding the manner in which the express or implied consent of individuals (e.g., agents, customers or employees ) for the use and disclosure of personal information is obtained, could require us to modify our products and features, possibly in a material manner and subject to increased compliance costs, which may limit our ability to develop new products and features that make use of the personal information that consumers voluntarily share, which could significantly impact our business operations and costs. For example, California enacted legislation, the California Consumer Privacy Act (“CCPA”), that became operative on January 1, 2020 and became enforceable by the California Attorney General on July 1, 2020, along with related regulations which came into force on August 14, 2020. The CCPA gives California residents expanded rights related to their personal information, including the right to access and delete their personal information, and receive detailed information about how their personal information is used and shared and increases the privacy and security obligations of businesses handling personal information. The CCPA is enforceable by the California Attorney General and there is also a private right of action relating to certain data security incidents. The CCPA provides for civil penalties for violations, which could result in statutory penalties of up to $2,500 per violation, or up to $7,500 per violation if the violation is intentional. We cannot yet fully predict the impact of the CCPA or subsequent guidance on our business or operations, but it may require us to further modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. Decreased availability and increased costs of information could adversely affect our ability to meet our agents’ requirements and could have an adverse effect on our business, results of operations, and financial condition.

Additionally, a recent California ballot initiative, the California Privacy Rights Act (“CPRA”), imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt-outs for certain uses of sensitive data and sharing of personal information starting in January 2023. As voted into law by California residents in November 2020, the CPRA could have an adverse effect on our business, results of operations, and financial condition. The effects of the CCPA and CPRA are potentially significant and may require us to modify our data collection or processing practices and policies and to incur substantial costs and expenses in an effort to comply and increase our potential exposure to regulatory enforcement and/or litigation. Any of the foregoing could adversely affect our business, financial condition and results of operations. Also, Virginia has adopted a new state data protection act referred to as the Virginia Consumer Data Protection Act, which is set to take effect on January 1, 2023. Further, Colorado has adopted a new state data protection act titled the Colorado Privacy Act, which is set to take effect on July 1, 2023. Similar laws have been proposed in other states and at the federal level, and if passed, such laws may have potentially conflicting requirements that would make compliance challenging, as well as potentially resulting in further uncertainty and requiring us to incur additional costs and expenses in an effort to comply.

Our agents operate as independent contractors and are responsible for their own data privacy compliance. However, we provide training and our platform provides tools and security controls to assist our agents with their data privacy compliance to the extent they store relevant data on our platform. However, if an agent on our platform were to be subject to a claim for breach of data privacy laws, we could be found liable for their claims due to our relationship, which can require us to take more costly data security and compliance measures or to develop more complex systems, and could also result in significant costs to us regarding any fines and penalties, costs related to remediation, potential costs and liabilities arising from governmental, regulatory or third-party investigations, proceedings or litigation, diversion of management attention and harm to our reputation. Also, any suspected liability associated with such claims may expose us to a risk of loss and could also result in reputational harm.

 

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We offer our independent agents the opportunity to earn a greater portion of their commissions through our revenue share program which pays under a multi-tiered compensation structure similar in some respects to network marketing. Network marketing is subject to intense government scrutiny, and regulation and changes in the law, or the interpretation and enforcement of the law, might adversely affect our business.

Various laws and regulations in the United States and other countries regulate network marketing. These laws and regulations exist at many levels of government in many different forms, including statutes, rules, regulations, judicial decisions, and administrative orders. Network marketing regulations are inherently fact-based and often do not include “bright line” rules. Additionally, we are subject to the risk that the regulations, or a regulator’s interpretation and enforcement of the regulations, could change. From time to time, we may receive requests to supply information regarding our revenue share plan to regulatory agencies. We could potentially in the future be required to modify our revenue sharing plan in certain jurisdictions in order to comply with the interpretation of the regulations by local authorities.

In the United States, the FTC has entered into several highly publicized settlements with network marketing companies that required those companies to modify their compensation plans and business models. Those settlements resulted from actions brought by the FTC involving a variety of alleged violations of consumer protection laws, including misleading earnings representations by the companies’ independent distributors, as well as the legal validity of the companies’ business model and distributor compensation plans. FTC determinations such as these have created an ambiguity regarding the proper interpretation of the law and regulations applicable to network marketing companies in the U.S. Although a consent decree between the FTC and a specific company does not represent judicial precedent, FTC officials have indicated that the network marketing industry should look to these consent decrees, and the principles contained therein, for guidance. Additionally, following the issuance of these consent decrees, the FTC issued non-binding guidance to the network marketing industry, suggesting it was intending to reinforce the principles contained in the consent decrees and provide other operational guidance to the network marketing industry.

While we strive to ensure that our overall business model, and revenue share plan, complies with regulations in each of our markets, we cannot assure you that a regulator, if it were to review our business, would agree with our assessment and would not require us to change one or more aspects of our operations. Any action against us in the future by the FTC or another regulator could adversely affect our operations.

We cannot predict the nature of any future law, regulation, or guidance, nor can we predict what effect additional governmental regulations, judicial decisions, or administrative orders, when and if promulgated, would have on our business. Failure by us, or our independent agents, to comply with these laws, could adversely affect our business.

In addition, this revenue share fee plan option requires complex tracking and administration of the collection of fees and monies and the payout of over-rides and revenue sharing distributions as per the fee plan documents, exhibits to the participating agents’ Independent Contractor Agreements (“ICAs”), Franchise Addendums and Franchise Disclosure Documents (“FDDs”) and Policies and Procedures Manuals; and is heavily reliant upon outside software that is integrated with our RealSmart Technology Suite and assists the company in the management and administration of this revenue sharing program. Failure by us, our independent franchises, or our independent agents to not follow or administer the plan guidelines, plan policies and procedures, knowingly or unknowingly, and/or any failure of the outside software company or its integration with our technology suite could harm us and/or cause us to alter or discontinue this program, or be party to an action against us, and could adversely affect our business.

 

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The third-party networks, mobile infrastructure and hosting services that we depend on may fail, and we may be unable to maintain and scale the technology underlying our offerings.

Our brand, reputation and ability to attract homebuyers and home sellers and provide our offerings depend on the reliable performance of third-party networks and mobile infrastructure to provide our technology offerings to consumers and agents. If such performance fails, we may be unable to maintain and scale the technology underlying our offerings. The proper operation of these networks and infrastructure is beyond our control, and if they fail, we may be unable to deliver our services to our customers or provide the necessary support for our agents.

As the number of homebuyers and home sellers, agents, and listings shared on our website and mobile application and the extent and types of data grow, our need for additional network capacity and computing power will also grow. Operating our underlying technology systems is expensive and complex, and we could experience operational failures. If we experience interruptions or failures in these systems, whether due to system failures, computer viruses, physical or electronic break-ins, attacks on domain name servers or other third parties on which we rely, or for any reason, the security and availability of our services and technologies could be affected. Any such event could harm our reputation, result in a loss of consumers, customers and agents using our offerings, and cause us to incur additional costs.

Moreover, if the facilities that host our website and mobile application were to experience outages or downtimes for any reason, including human error, natural disaster, power loss, telecommunications failure, physical or electronic break-ins, terrorist attack, or act of war, we could suffer a significant interruption of our website and mobile application while we implement our disaster recovery procedures. Any service interruption may be extended if we discover previously unknown errors in our disaster recovery procedures.

Any disruptions or failures within our third-party networks, mobile infrastructure, or our hosting facility could result in our inability to maintain and scale the technology underlying our offerings and harm our business.

Monetary policies of the federal government and its agencies and potential reform of Fannie Mae or Freddie MAC may harm our operations.

Our business is significantly affected by the monetary policies of the federal government and its agencies. We are particularly affected by the policies of the Federal Reserve Board. These policies regulate the supply of money and credit in the United States and impact the real estate market through their effect on interest rates as well as the cost of our interest-bearing liabilities.

Increases in mortgage rates adversely impact housing affordability and we have been and could again be negatively impacted by a rising interest rate environment. For example, a rise in mortgage rates could result in decreased home sale transaction volume if potential home sellers choose to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another home or, similarly, if potential home buyers choose to rent rather than pay higher mortgage rates. Increases in mortgage rates could also reduce the number of home sale refinancing transactions, which could adversely impact our earnings from our mortgage origination joint venture as well as the revenue stream of our title and settlement services offering. Changes in the Federal Reserve Board’s policies, the interest rate environment, and the mortgage market are beyond our control, are difficult to predict, and could have an adverse effect on our business, financial condition and results of operations.

Numerous pieces of legislation seeking various types of changes for GSEs have been introduced in Congress to reform the U.S. housing finance market including among other things, changes designed to reduce government support for housing finance and the winding down of Fannie Mae or Freddie Mac over a period of years. Legislation, if enacted, or additional regulation which curtails Fannie Mae’s and/or Freddie Mac’s

 

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activities and/or results in the wind down of these entities could increase mortgage costs and could result in more stringent underwriting guidelines imposed by lenders or cause other disruptions in the mortgage industry. Other legislation or regulation limiting participation of the Federal Housing Administration and Department of Veterans Affairs could increase mortgage costs or limit availability of mortgages for consumers. Any of the foregoing could harm the housing market in general, which would negatively impact our business, financial condition and results of operations.

We could be subject to significant losses if banks do not honor our escrow and trust deposits.

Our title services businesses act as escrow agents for numerous customers, and some of our brokerage entities hold end consumer funds in trust accounts. These title services businesses and brokerage entities face the risk of loss if banks do not honor our escrow and trust deposits. As an escrow agent, we receive money from customers to hold until certain conditions are satisfied. Upon the satisfaction of those conditions, we release the money to the appropriate party. We deposit this money with various banks and while these deposits are not assets of our company (and therefore excluded from our consolidated balance sheet), we remain contingently liable for the disposition of these deposits. These escrow and trust deposits totaled $13.2 million at December 31, 2021. The banks may hold a significant amount of these deposits in excess of the federal deposit insurance limit. If any of our depository banks were to become unable to honor any portion of our deposits, customers could seek to hold us responsible for such amounts and, if the customers prevailed in their claims, we could be subject to significant losses.

We rely on business data to make decisions, and errors or inaccuracies in such data may adversely affect our business decisions and the customer experience.

We regularly analyze business data to evaluate growth trends, measure our performance, establish budgets, and make strategic decisions, and any errors or inaccuracies in such data may adversely impact our business. Much of this data is internally generated and has not been independently verified. There are inherent challenges in measuring and interpreting data, and we cannot be certain that the data are accurate. Errors or inaccuracies in the data could result in poor business decisions, resource allocation, or strategic initiatives. For example, if we overestimate traffic to our website and mobile application, we may not invest an adequate amount of resources in attracting consumers or we may hire more lead agents in a given market than necessary to meet customer demand. If any of these errors or inaccuracies occur, it could adversely affect our business decisions and the customer experience.

The estimates of market opportunity and forecasts of market growth included in this prospectus may prove to be inaccurate, and even if the market in which we compete achieves the forecasted growth, our business could fail to grow at similar rates, if at all.

Market opportunity estimates and growth forecasts included in this prospectus are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. The variables that go into the calculation of our market opportunity are subject to change over time, and there is no guarantee that our market opportunity estimates will reflect actual revenue that we will generate from our platform in the future. Any expansion in our markets depends on a number of factors, including the cost, performance, and perceived value associated with our platform and the products and services of our competitors. Even if the markets in which we compete achieve the forecasted growth, our business could fail to grow at similar rates, if at all.

Loss of our current executive officers or other key management or our inability to attract and retain other qualified personnel could significantly harm our business.

We depend on the industry experience and talent of our current executives, in particular our Chief Executive Officer, Matthew Widdows, and a loss of those executives could harm our business. We also believe that our

 

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future results will depend in part upon our ability to attract and retain highly skilled and qualified management and other personnel. The loss of our executive officers could have an adverse effect on our operations because other officers may not have the experience and expertise to readily replace these individuals. In addition, changes in executives and key personnel could be disruptive to our business and require additional time and attention from our remaining executives and key personnel. We do not have any key person insurance. To the extent that one or more of our top executives or other key management personnel depart, our business and operations may be adversely affected.

Risks Related to Legal and Regulatory Environment

Employee or agent litigation and unfavorable publicity could negatively affect our future business.

Employee or agent litigation and unfavorable publicity could negatively affect our future business. Our employees or agents may, from time to time, bring lawsuits against us alleging injury, creating a hostile workplace, discrimination, wage and hour disputes, sexual harassment, or other employment issues. We have faced employment claims such as disputes over employment agreements or reasons for termination. Coupled with the expansion of social media platforms and similar devices that allow individuals access to a broad audience, claims can have a significant negative impact on some businesses. If we were to face any claims related to our employees or agents, our business, financial condition and results of operations could be negatively affected.

We may experience significant claims relating to our operations, and losses resulting from fraud, misappropriation of funds or misconduct.

We issue title insurance policies which provide coverage for real property to mortgage lenders and buyers of real property. When acting as a title agent issuing a policy on behalf of an underwriter, our insurance risk is typically limited to the first five thousand dollars for claims on any one policy, though our insurance risk is not limited if we are negligent. Our title underwriter typically underwrites title insurance policies of up to $1 million. To date, our title underwriter has experienced claims losses that are significantly below the industry average; however, our claims experience could increase in the future, which could negatively impact the profitability of that business.

We may also be subject to legal claims or additional claims losses arising from the handling of escrow transactions and closings by our owned title agencies or our underwriter’s independent title agents. We carry errors and omissions insurance for errors made by our company-owned brokerage business during the real estate settlement process as well as errors by us related to real estate services.

Our franchise agreements also require our franchisees to name us as an additional insured on their errors and omissions and general liability insurance policies. The occurrence of a significant claim in excess of our insurance coverage (including any coverage under franchisee insurance policies) in any given period could have an adverse effect on our financial condition and results of operations during the period. In addition, insurance carriers may dispute coverage for various reasons and there can be no assurance that all claims will be covered by insurance.

Fraud, defalcation and misconduct by employees are also risks inherent in our business, particularly given the high transactional volumes in our company-owned brokerage and affiliated business services. We may also from time to time be subject to liability claims based upon the fraud or misconduct of our franchisees. To the extent that any loss or theft of funds substantially exceeds our insurance coverage, our business could be adversely affected.

 

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There may be adverse financial and operational consequences to us and our franchisees if independent sales agents are reclassified as employees.

There may be adverse financial and operational consequences to us and our franchisees if independent sales agents are reclassified as employees. The legal relationship between residential real estate brokers and licensed sales agents throughout most of the real estate industry historically has been that of independent contractors. Although we believe our classification practices are proper and consistent with the legal framework for such classification, our company-owned brokerage operations could face substantial litigation or disputes in direct claims or regulatory procedures, including the risk of court or regulatory determinations that certain groups of real estate agents should be reclassified as employees and entitled to unpaid minimum wage, overtime, benefits, expense reimbursement and other employment obligations. Franchisees affiliated with one of our brands face the same risks with respect to their affiliated independent sales agents. In addition, our franchise business may face similar claims as an alleged joint employer of an affiliated franchisee’s independent sales agents.

Real estate laws generally permit brokers to engage sales agents as independent contractors. Federal and state agencies have their own rules and tests for classification of independent contractors as well as to determine whether employees meet exemptions from minimum wages and overtime laws. These tests consider many factors that also vary from state to state. The tests continue to evolve based on state case law decisions, regulations and legislative changes. There is active worker classification litigation in numerous jurisdictions against a variety of industries—including residential real estate brokerages—where the plaintiffs seek to reclassify independent contractors as employees or to challenge the use of federal and state minimum wage and overtime exemptions.

Certain jurisdictions, such as California where we have company-owned and franchised brokerages, have adopted or are considering adopting standards that are significantly more restrictive than those historically used in wage and hour cases. Under the newer test, an individual is considered an employee unless the hiring entity satisfies three specific criteria that focus on control of the performance of the work and whether the nature of the work involves a separate trade that is outside the usual course of the hiring entity’s business.

Similar to California, a number of other states have separate statutory structures and existing case law that articulate different, less stringent standards for real estate agents operating as independent contractors. How these differing tests will be reconciled is presently unclear, and given the evolving nature of this issue, we are currently unable to estimate what impact, if any, this would have on our operations or financial results.

Significant sales agent reclassification determinations in the absence of available exemptions from minimum wage or overtime laws, including damages and penalties for prior periods (if assessed), could be disruptive to our business, constrain our operations in certain jurisdictions and could harm our operational and financial performance.

The real estate business is highly regulated and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.

We and our franchisees operate in the real estate business, which is highly regulated, and any failure to comply with such regulations or any changes in such regulations could adversely affect our business.

We and our franchisees (other than in commercial brokerage transactions) must comply with the Real Estate Settlement Procedures Act (“RESPA”). RESPA and comparable state statutes, among other things, restrict payments which real estate brokers, agents and other settlement service providers may receive for the referral of business to other settlement service providers in connection with the closing of real estate transactions. Such laws may to some extent restrict preferred vendor arrangements involving our franchisees. RESPA and similar

 

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state laws also require timely disclosure of certain relationships or financial interests that a broker has with providers of real estate settlement services.

We and our franchisees must comply with laws and regulations regarding the proper licensure of our businesses. If we or our franchisees fail to comply with the requirements governing the licensing of brokerages, mortgage and title businesses in the jurisdictions in which we operate, then our ability to operate those businesses in those jurisdictions may be harmed. We as a brokerage, our franchisees, and our agents must comply with the requirements governing the licensing and conduct of real estate brokerage and brokerage-related businesses in the markets where we operate. Furthermore, we are also required to comply with the requirements governing the licensing and conduct of mortgage and title and settlement businesses in the markets where we operate. Due to the geographic scope of our operations, we, our franchisees, and our agents may not be in compliance with all of the required licenses at all times. Additionally, if we enter into new markets, we may become subject to additional licensing requirements. If we, our franchisees, or our agents fail to obtain or maintain the required licenses or fail to strictly adhere to associated regulations, the relevant government authorities may order us to suspend relevant operations or impose fines or other penalties.

We and our franchisees are also subject to various other rules and regulations such as the Gramm-Leach-Bliley Act, the CCPA, the Fair Housing Act, laws and regulations regarding franchises, and other laws and regulations in the jurisdictions in which we do business. For example, the sale of franchises is regulated by various state laws as well as by the FTC. The FTC requires that franchisors make extensive disclosure to prospective franchisees but does not require registration. A number of states require registration and/or disclosure in connection with franchise offers and sales. In addition, several states have “franchise relationship laws” or “business opportunity laws” that limit the ability of franchisors to terminate franchise agreements or to withhold consent to the renewal or transfer of these agreements. Our or our franchisees’ failure to comply with any of the foregoing laws and regulations may result in fines, penalties, injunctions and/or potential criminal violations. There is also a risk that we or our franchisees could be adversely affected if more restrictive laws, regulations or interpretations are adopted in the future that could make compliance more difficult or expensive. Any failure by us or our franchisees to comply with these laws or regulations, changes to these laws or regulations, or any new laws or regulations may subject us to costs associated with investigation or litigation, make it more difficult for us to operate our business, and have an adverse effect on our reputation and business.

Any of the issues discussed above could harm our business, financial condition and results of operations.

If we do not comply with the rules, terms of service, and policies of MLSs, our access to and use of listings data may be restricted or terminated.

If we do not comply with the rules, terms of service, and policies of MLSs, our access to and use of listings data may be restricted or terminated. We belong to numerous MLSs, and each has adopted its own rules, terms of service, and policies governing, among other things, how MLS data may be used and how listings data must be displayed on our website and mobile application. Complying with the rules of each MLS requires significant investment, including personnel, technology and development resources, and the exercise of considerable judgment. If we are deemed to be noncompliant with an MLS’s rules, we may face disciplinary sanctions in that MLS, which could include monetary fines, restricting or terminating our access to that MLS’s data, or other disciplinary measures. The loss or degradation of this listings data may adversely affect traffic to our website and mobile application, making us less relevant to consumers and restricting our ability to attract customers. It also may reduce agent and customer confidence in our services and harm our business.

 

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Changes to the rules governing MLSs may disrupt the functioning of the residential real estate market and could adversely affect our operations and financial results.

Through our brokerages, we participate in many MLSs and are subject to each MLS’s rules, policies, data licenses, and terms of service. The rules of each MLS to which we belong can vary widely and are complex. Any changes to these rules could disrupt the functioning of the residential real estate market and result in harm to our operations and financial results.

From time to time, certain industry practices, including MLS rules, have come under regulatory scrutiny. For example, in June 2018, the U.S. Department of Justice (“DOJ”) and the FTC held a joint public workshop to explore competition issues in the residential real estate brokerage industry including potential barriers to competition. In the workshop, there were various panels and participants submitted comments that raised a variety of issues, including: whether the current industry practice involving commission sharing by listing brokers was anti-competitive, whether offers of commission sharing-including commission rates-should be public, and whether average broker commission rates were too high. There can be no assurances as to whether DOJ or the FTC will determine that any industry practices or developments have an anti-competitive effect on the industry. Any such determination by DOJ or the FTC could result in industry investigations, legislative or regulatory action or other actions, any of which could have the potential to disrupt our business.

Meaningful changes in industry operations or structure, as a result of governmental pressures, the actions of certain competitors or the introduction or growth of certain competitive models, changes to MLS rules, or otherwise could adversely affect our operations, revenues, earnings and financial results.

Adverse decisions in litigation against companies unrelated to us could impact our business practices and those of our franchisees in a manner that adversely impacts our financial condition and results of operations.

Litigation, claims, and regulatory proceedings against other participants in the residential real estate industry may impact us when the rulings in those cases cover practices common to the broader industry. Examples may include claims associated with RESPA compliance, broker fiduciary duties, and sales agent classification. Similarly, we may be impacted by litigation and other claims against companies in other industries. To the extent plaintiffs are successful in these types of litigation matters, and we or our franchisees cannot distinguish our or their practices (or our industry’s practices), we and our franchisees could face significant liability and could be required to modify certain business relationships, either of which could adversely impact our financial condition and results of operations.

We are an “emerging growth company,” and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.

We are an EGC as defined in the Jumpstart Our Business Startups Act enacted in April 2012, and, for as long as we continue to be an EGC, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to EGCs, including, but not limited to, not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of SOX, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We could be an EGC for up to five years following the completion of this offering, although, if we have more than $1.07 billion in annual revenue, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of June 30 of any year, or we issue more than $1.0 billion of non-convertible debt over a three-year period before the end of that five-year period, we would cease to be an EGC as of the following December 31. We cannot predict if investors will find our common stock less

 

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attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.

We use third-party contractors outside of the United States to supplement our research and development capabilities, which may expose us to risks, including risks inherent in foreign operations.

We use third-party contractors outside of the United States to supplement our technology development capabilities. We currently use third-party contractors located in India and the United Kingdom. Managing operations that are remote from our U.S. headquarters is difficult and we may not be able to manage these third-party contractors successfully. If we fail to maintain productive relationships with these contractors generally, we may be required to develop our solutions in a less efficient and cost-effective manner and our product release schedules may be delayed while we hire software developers or find alternative contract development resources. Additionally, while we take precautions to ensure that software components developed by our third-party contractors are reviewed and that our source code is protected, misconduct by our third-party contractors could result in infringement or misappropriation of our intellectual property. Furthermore, any acts of espionage, malware attacks, theft of confidential information or other privacy, security, or data protection incidents attributed to our third party contractors may compromise our system infrastructure, expose us to litigation and lead to reputational harm that could result in harm to our financial condition and results of operations.

We plan to expand our operations into international markets, which may subject us to risks not generally experienced by our U.S. operations.

Part of our future growth strategy involves the expansion of our operations and establishment of an agent base internationally. We are continuing to adapt and develop strategies to address international markets, but there is no guarantee that such efforts will have the desired effect. For example, we may need to establish relationships with new partners or acquire businesses in order to expand into certain countries, and if we fail to identify, establish, and maintain such relationships or successfully identify and acquire businesses, we may be unable to execute on our expansion plans. In addition, there may be laws and regulations in place that are not generally experienced by our U.S. operations that could hinder or impact our marketing tactics and results. We currently have the ability to operate or franchise in Canada. The risks involved in our global operations and relationships could result in losses against which we are not insured and therefore affect our profitability. These risks include:

 

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Fluctuations in foreign currency exchange rates;

 

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Exposure to local economic conditions and local laws and regulations, including those relating to the agents of our franchisees;

 

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Economic and/or credit conditions abroad;

 

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Potential adverse changes in the political stability of foreign countries or in their diplomatic relations with the United States;

 

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Restrictions on the withdrawal of foreign investment and earnings;

 

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Government policies against businesses owned by foreigners;

 

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Diminished ability to legally enforce our contractual rights in foreign countries;

 

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Withholding and other taxes on remittances and other payments by subsidiaries; and

 

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Changes in tax laws regarding taxation of foreign profits.

 

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Conducting business in foreign countries involves inherent risks, as described above. If we were to experience any of these risks, or any other difficulties related to global operations, our global development efforts and financial growth could be harmed.

As we expand our global operations, we are subject to anti-corruption, anti-bribery, anti-money laundering, trade compliance, economic sanctions and similar laws, and non-compliance with such laws may subject us to criminal or civil liability and harm our business, financial condition and results of operations. We may also be subject to governmental export and import controls that could impair our ability to compete in international markets or subject us to liability if we violate the controls.

As we expand our global operations, we are subject to the U.S. Foreign Corrupt Practices Act of 1977, as amended, U.S. domestic bribery laws, and other anti-corruption and anti-money laundering laws in the countries in which we conduct business. Anti-corruption and anti-bribery laws have been enforced aggressively in recent years and are interpreted broadly to generally prohibit companies, their employees, and their third-party intermediaries from authorizing, offering, or providing, directly or indirectly, improper payments or benefits to recipients in the public or private sector. If we engage in international sales and business with partners and third-party intermediaries to market our products, we may be required to obtain additional permits, licenses, and other regulatory approvals. In addition, we or our third-party intermediaries may have direct or indirect interactions with officials and employees of government agencies or state-owned or affiliated entities. If we engage in international sales and business with the public sector, we can be held liable for the corrupt or other illegal activities of these third-party intermediaries, our employees, agents, representatives, contractors, and partners, even if we do not explicitly authorize such activities.

While we have policies and procedures to address compliance with such laws, there is a risk that our employees and agents will take actions in violation of our policies and applicable law, for which we may be ultimately held responsible. If we further expand internationally, our risks under these laws may increase. Any such noncompliance with anti-corruption, anti-bribery, or anti-money laundering laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, enforcement actions, fines, damages, other civil or criminal penalties or injunctions, and adversely affect our business, financial condition, and results of operations.

Additionally, if we expand our brokerage business in international markets, our platform may become subject to U.S. export controls, including the U.S. Export Administration Regulations. Obtaining the necessary export license or other authorization for a particular sale may be time-consuming and may result in the delay or loss of sales opportunities. Furthermore, our activities are subject to applicable economic and trade sanctions laws and regulations, such as those administered and enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control, the U.S. Department of State, the United Nations Security Council and other relevant sanctions authorities. Our expanding global operations expose us to the risk of violating or being accused of violating economic and trade sanctions laws and regulations. Our failure to comply with these laws and regulations could expose us to reputational harm as well as significant penalties, including criminal fines, imprisonment, civil fines, disgorgement of profits, injunctions and debarment from government contracts, and other measures. Investigations of alleged violations can be expensive and disruptive. Despite our compliance efforts and activities, we cannot assure compliance by our employees or representatives for which we may be held responsible, and any such violation could adversely affect our reputation, business, financial condition and results of operations.

Also, various countries, in addition to the United States, regulate the import and export of certain encryption and other technology, including import and export licensing requirements, and have enacted laws that could limit our ability to operate our platform in those countries. Changes in our platform or future changes in export and import regulations may impede the introduction of our platform in international markets, prevent our

 

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agents with international clients from using our platform globally or, in some cases, prevent the export or import of our platform to certain countries, governments, or persons altogether, and may adversely affect our business, financial condition, and results of operations.

Our business is subject to potential tax liabilities.

We are subject to income tax, indirect tax or other tax claims by tax agencies in jurisdictions in which we conduct business. Significant judgment is required in determining our provision for income taxes. Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are issued or applied. Any changes to tax laws could increase our tax obligations and effective tax rate.

In the ordinary course of our business, there are many transactions and calculations where the ultimate income tax, indirect tax, or other tax determination is uncertain. Although we believe our tax estimates are reasonable, we cannot assure that the final determination of any tax audits and litigation will not be different from that which is reflected in historical tax provisions and accruals. Should additional taxes be assessed as a result of an audit, assessment or litigation, there could be an adverse impact on our cash, tax provisions and net income in the period or periods for which that determination is made.

Risks Related to Intellectual Property

We rely on third-party licensed technology and open-source software for certain aspects of our technology, and the inability to maintain these licenses, or the occurrence of errors in the software we use, could result in increased costs or reduced service levels.

We employ certain third-party software obtained under licenses from other companies in our technology and we anticipate that we will continue to rely on such third-party software and tools in the future. Although we believe that there are commercially reasonable alternatives to the third-party software we currently license, this may not always be the case, or it may be difficult or costly to replace. In addition, any failure to maintain these licenses could result in increased costs or reduced service levels. For example, we use third-party software to integrate our technologies and services for our mortgage and title services. Our reliance on this third-party software may become costly if the licensor increases the price for the license or changes the terms of use, and we cannot find commercially reasonable alternatives. Even if we were to find an alternative, integration of our technology with new third-party software may require substantial investment of our time and resources.

Our technology also incorporates software covered by open-source licenses. The terms of various open-source licenses have not been interpreted by U.S. courts, and if they were interpreted, such licenses could be construed in a manner that imposes unanticipated restrictions on our technology. If portions of our proprietary software are determined to be subject to an open-source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in our use of such software, each of which could reduce or eliminate the value of our technologies and harm our business. In addition to risks related to license requirements, use of open-source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on the origin of the software. Many of the risks associated with use of open-source software cannot be eliminated and, if such risks materialize, could harm our business.

Moreover, we cannot ensure our processes for controlling our use of open-source software will not be effective. If we do not comply with the terms of an open source software license, we could be required to seek licenses from third parties to continue offering our services on terms that are not economically feasible, to re-engineer

 

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our technology to remove or replace the open source software, to discontinue the use of certain technology if re-engineering could not be accomplished on a timely basis, to pay monetary damages, to make generally available the source code for our proprietary technology, or to waive certain intellectual property rights.

Any undetected errors or defects in the third-party software we use could prevent the deployment or impair the functionality of our technology, delay new service offerings, or result in a failure of our website or mobile application, any of which could harm our business, financial condition and results of operations.

Failure to protect intellectual property rights could adversely affect our business.

Failure to protect intellectual property rights could adversely affect our business. Our intellectual property rights, including existing and future trademarks, trade secrets and copyrights, and technology created by our company are important assets of the business. We have taken measures to protect our intellectual property, but these measures might not be sufficient or effective. We may bring lawsuits to protect against the potential infringement of our intellectual property rights and other companies, including our competitors, could make claims against us alleging our infringement of their intellectual property rights. There can be no assurance that we would prevail in such lawsuits. Any significant impairment of our intellectual property rights could harm our business.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our products could be adversely affected.

We are heavily dependent on the maintenance and protection of our intellectual property and, with respect to trade secrets and confidential proprietary information, rely largely on confidentiality procedures and employee nondisclosure agreements to protect our intellectual property. However, these agreements may be inadequate to protect our proprietary information and intellectual property rights. Moreover, those agreements may be breached, and we may not have adequate remedies for any such breach. Our software is not patented and existing copyright laws offer only limited practical protection. As such, we rely on our unpatented proprietary technology, trade secrets, processes and know-how to create our unique platform which provides us with our competitive edge. Although we use reasonable efforts to protect this proprietary information and technology, we cannot guarantee that we have entered into non-disclosure agreements with each party who has developed intellectual property on our behalf or each party that has or may have had access to our confidential information, know-how or trade secrets. Our employees, consultants and other parties may unintentionally or willfully disclose our information or technology to competitors and there can be no assurance that the legal protections and precautions taken by us will be adequate to prevent misappropriation of our technology or that competitors will not independently develop technologies equivalent or superior to ours. Engaging in litigation involving proprietary information or technology is difficult, expensive, distracting to management and time-consuming, and the outcome is unpredictable and varied depending on the jurisdiction.

Moreover, courts inside and outside the United States, in countries in which we operate or intend to operate, are sometimes less willing to protect trade secrets, know-how and other proprietary information. We generally seek to protect this information by confidentiality, non-disclosure and invention assignment agreements. In addition, our trade secrets may be disclosed to or otherwise become known or substantially similar information or inventions may be independently developed by competitors, in which case, we may have no right to prevent such third parties, or those to who they communicate such trade secrets and other confidential proprietary information, from using such trade secrets and information to compete with us, any of which could have an adverse effect on our business, results of operations and financial condition. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Confidentiality agreements with employees and others may not adequately prevent disclosure, misappropriation or reverse engineering of trade secrets and

 

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proprietary information. Accordingly, if, for any of the above reasons, our intellectual property is disclosed or misappropriated, it would harm our ability to protect our confidential intellectual property rights and adversely affect our business, results of operations and financial condition.

Our products and services may infringe the intellectual property rights of others, which may cause us to incur unexpected costs or prevent us from providing our products and services and could adversely affect our business.

We cannot guarantee that our internally developed or acquired systems, technologies and content do not and will not infringe the intellectual property rights of others. In addition, we use content, software and other intellectual property rights from third parties and may be subject to claims of infringement or misappropriation if we have failed to obtain appropriate intellectual property licenses from such parties, or such parties do not possess the necessary intellectual property rights to the products or services they license to our business. We may in the future be subject to claims that we have infringed the copyrights, trademarks, or other intellectual property rights of a third party. Any intellectual property-related infringement or misappropriation claims, whether or not meritorious, could result in costly litigation and divert management resources and attention. For example, responding to any infringement or other enforcement claim, regardless of its validity, could harm our business, results of operations, and financial condition, by, among other things:

 

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Resulting in time-consuming and costly litigation;

 

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Diverting management’s time and attention from developing our business;

 

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Requiring us to pay monetary damages or enter into royalty and licensing agreements that we would not normally find acceptable;

 

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Requiring us to redesign certain components of our software using alternative non-infringing source technology or practices, which could require significant effort and expense;

 

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Disrupting our customer relationships if we are forced to cease offering certain services;

 

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Requiring us to waive certain intellectual property rights associated with our release of open source software, or contributions to third-party open source projects;

 

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Requiring us to disclose our software source code; and

 

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Requiring us to satisfy indemnification obligations.

Accordingly, should we be found liable for infringement or misappropriation, we may be required to enter into licensing agreements, if available on acceptable terms or at all, pay substantial damages, limit or curtail our offerings and technologies or take other action, which could harm our business and results of operations. Moreover, we may need to redesign some of our systems and technologies to avoid future infringement liability. Any of the foregoing could prevent us from competing effectively and could expose our business to significant liabilities, thereby adversely affecting our business.

 

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Risks Related to Indebtedness and Liquidity

Certain provisions of our loan agreements could adversely affect our ability to fund our operations, invest in our business or pursue growth opportunities, react to changes in the economy or our industry, or incur additional borrowings.

Certain provisions of the New Facility entered into on September 27, 2021, including subsequent modifications, could adversely affect our ability to fund our operations, invest in our business or pursue growth opportunities, react to changes in the economy or our industry, or incur additional borrowings. Our leverage could have important consequences, including the following:

 

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It exposes us to the risk of increased interest rates because a portion of our borrowings are at variable rates of interest;

 

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It may limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our competitors that have no or less debt;

 

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It may limit our ability to attract acquisition candidates or to complete future acquisitions;

 

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It may cause us to be more vulnerable to periods of negative or slow growth in the general economy or in our business, or may cause us to be unable to carry out capital spending that is important to our growth; and

 

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It may result in substantial and immediate payments if an event of default were to occur.

The New Facility contains restrictive covenants, including a requirement that we maintain a Total Leverage Ratio, as that term is defined in the credit agreement governing the New Facility, of 3.00 to 1.00. Any failure to meet our obligations under our debt interests may harm our ability to fund our operations.

If we are unable to comply with the New Facility because of the occurrence of certain “events of default” such as failure to comply with the leverage ratio covenant described above, nonpayment of principal or interest, a change of control, material misrepresentations, insolvency, bankruptcy, certain material judgments, or others, the lenders may not be required to lend any additional amounts to us; could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be immediately due and payable; or could require us to apply our available cash to repay these borrowings. If the lenders under our New Facility accelerate the repayment of borrowings, we may not have sufficient assets to repay the New Facility or be able to borrow sufficient funds to refinance such indebtedness. Occurrence of any of the foregoing may harm our ability to operate our business.

Variable rate indebtedness subjects us to interest rate risk, including risks of changes to the Secured Overnight Financing Rate (“SOFR”) and the London Interbank Offered Rate (“LIBOR”), and could cause our debt service obligations to increase significantly.

Variable rate indebtedness subjects us to interest rate risk, including risks of changes to SOFR and LIBOR, and could cause our debt service obligations to increase significantly. At December 31, 2021, $1.9 million of our borrowings under our Mortgage Secured Credit Facility (as defined below) and $16.5 million of our borrowings under our New Facility were at variable rates of interest based on LIBOR, thereby exposing us to interest rate risk. In 2022, we amended our Mortgage Secured Credit Facility and our New Facility to transition to SOFR from LIBOR as the benchmark for determining interest rates on borrowings. At December 31, 2021, our outstanding notes payable balance of $5.3 million for the note issued in connection with the PalmerHouse acquisition was at a variable rate of interest based on LIBOR thereby exposing us to interest rate risk. If interest rates continue to increase, our debt service obligations on the variable rate indebtedness would increase even if the amount borrowed remained the same, and our net income would decrease. Our primary interest rate exposure is interest rate fluctuations, specifically with respect to SOFR and LIBOR, due to its impact on our variable rate borrowings under our aforementioned credit facilities and outstanding notes payable balance.

 

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LIBOR is the subject of national, international and other regulatory guidance and proposals for reform. The Financial Conduct Authority of the United Kingdom has announced that it will no longer require LIBOR submissions, resulting in the possible unavailability or lack of suitability of LIBOR as a benchmark rate. At this time, it is not possible to predict the effect of any changes to LIBOR or any establishment of alternative benchmark rates. The Alternate Reference Rate Committee, convened by the Board of Governors of the Federal Reserve System and the New York Federal Reserve Bank, has endorsed SOFR as its preferred replacement benchmark for U.S. dollar LIBOR. SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. Treasury securities. Markets are developing in response to these new rates. Any new benchmark rate will likely not replicate LIBOR exactly and if future rates based upon a successor rate (or a new method of calculating LIBOR) are higher than LIBOR rates as currently determined, it could result in an increase in the cost of our variable rate indebtedness and may harm our financial condition and results of operations.

If Minute Mortgage is unable to obtain sufficient financing through warehouse credit facilities to fund its origination of mortgage loans, then we may be unable to grow our mortgage origination business.

If Minute Mortgage is unable to obtain sufficient financing through warehouse credit facilities to fund its origination of mortgage loans, then we may be unable to grow our mortgage origination business. Minute Mortgage relies on borrowings from its warehouse credit facilities to fund substantially all of the mortgage loans that it originates. To grow its business, Minute Mortgage depends, in part, on having sufficient borrowing capacity under its current facilities or obtaining additional borrowing capacity under new facilities. If it were unable to receive the necessary capacity, or receive such capacity on acceptable terms, and did not have cash on hand available, then Minute Mortgage may be unable to maintain or increase the amount of mortgage loans that it originates, which will adversely affect its growth.

Risks Related to the Offering and Ownership of our Common Stock

Insiders will exercise significant control over our company and all corporate matters.

Our Chief Executive Officer and his affiliated entities owned 100% of our outstanding capital stock as of December 31, 2021. Upon the completion of this offering, including the sale of our common stock by our Chief Executive Officer and his affiliated entities in this offering, it is expected that he and his affiliated entities will beneficially own                 % of our outstanding capital stock. As a result, this stockholder will be able to exercise significant influence over all matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions, such as (i) making changes to our certificate of incorporation whether to issue additional common stock, including to himself, (ii) employment decisions, including compensation arrangements, and (iii) whether to enter into material transactions with related parties. This concentration of ownership may also have the effect of delaying or preventing a third party from acquiring control of our company which could adversely affect the price of our common stock.

There has been no prior public market for our common stock, the stock price of our common stock may be volatile or may decline regardless of our performance, and you may not be able to resell your shares at or above the initial public offering price.

There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations among the underwriters, the selling stockholder, and us and may vary from the market price of our common stock following this offering. The market prices of the securities of newly public companies have historically been highly volatile. The market price of our common stock may fluctuate significantly in response to numerous factors, many of which are beyond our control, including:

 

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Overall performance of the equity markets and the performance of technology or real estate companies in particular;

 

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•

Variations in our results of operations, cash flows, and other financial metrics and non-financial metrics, and how those results compare to analyst expectations;

 

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Changes in the financial projections we may provide to the public or our failure to meet those projections;

 

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Failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;

 

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Recruitment or departure of key personnel;

 

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Variations in general market, financial market, economic and political conditions in the United States;

 

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Changes in mortgage interest rates;

 

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Variations in the housing market, including seasonal trends and fluctuations;

 

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Negative publicity related to the real or perceived quality of our website and mobile application, as well as the failure to timely launch new products and services that gain market acceptance;

 

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Rumors and market speculation involving us or other companies in our industry;

 

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Announcements by us or our competitors of significant technical innovations, new business models, or changes in pricing;

 

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Acquisitions, strategic partnerships, joint ventures, or capital commitments;

 

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New laws, regulations, or executive orders, or new interpretations of existing laws or regulations applicable to our business;

 

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Changes in MLS or other broker rules and regulations, or new interpretations of rules and regulations applicable to our business;

 

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Lawsuits threatened or filed against us, or unfavorable determinations or settlements in any such suits;

 

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Developments or disputes concerning our intellectual property or our technology, or third-party proprietary rights;

 

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Changes in accounting standards, policies, guidelines, interpretations or principles;

 

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Other events or factors including those resulting from war, incidents of terrorism, or responses to these events;

 

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The expiration of contractual lock-up or market standoff agreements; and

 

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Sales of shares of our common stock by us or our stockholders.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. Stock prices of many companies, and technology companies in particular, have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business, and harm our business.

 

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Our amended and restated bylaws provide that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, stockholders, officers, or other employees to us or our stockholders, (c) any action or proceeding asserting a claim arising pursuant to, or seeking to enforce any right, obligation or remedy under, any provision of the Delaware General Corporation Law (“DGCL”), our amended and restated certificate of incorporation, or our amended and restated bylaws, (d) any action or proceeding as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (e) any action or proceeding asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, another state court in Delaware or, if no state court in Delaware has jurisdiction, the federal district court for the District of Delaware) and any appellate court therefrom, in all cases subject to the court having jurisdiction over the claims at issue and the indispensable parties; provided that the exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Exchange Act.

Section 22 of the Securities Act of 1933, as amended (the “Securities Act”), creates concurrent jurisdiction for federal and state courts over all such Securities Act actions. Accordingly, both state and federal courts have jurisdiction to entertain such claims. To prevent having to litigate claims in multiple jurisdictions and the threat of inconsistent or contrary rulings by different courts, among other considerations, our amended and restated bylaws also provide that the federal district courts of the United States of America will be the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act.

Any person or entity purchasing or otherwise acquiring or holding or owning (or continuing to hold or own) any interest in any of our securities shall be deemed to have notice of and consented to the foregoing bylaw provisions. Although we believe these exclusive forum provisions benefit us by providing increased consistency in the application of Delaware law and federal securities laws in the types of lawsuits to which each applies, the exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum of its choosing for disputes with us or any of our directors, officers, stockholders, or other employees, which may discourage lawsuits with respect to such claims against us and our current and former directors, officers, stockholders, or other employees. Our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder as a result of our exclusive forum provisions. Further, in the event a court finds either exclusive forum provision contained in our amended and restated bylaws to be unenforceable or inapplicable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our results of operations.

Delaware law and provisions in our amended and restated certificate of incorporation and amended and restated bylaws could make a merger, tender offer, or proxy contest difficult, thereby depressing the market price of our common stock.

Our status as a Delaware corporation and the anti-takeover provisions of the DGCL may discourage, delay, or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our amended and restated certificate of incorporation and amended and restated bylaws will contain provisions that may make the acquisition of our company more difficult, including the following:

 

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Any amendments to our amended and restated certificate of incorporation will require the approval of at least a majority of the voting power of the outstanding shares of our common stock;

 

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Our amended and restated bylaws will provide that approval of the holders of at least a majority of the voting power of the outstanding shares of our common stock is required for stockholders to amend or adopt any provision of our bylaws;

 

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•

Our board of directors is classified into three classes of directors with staggered three-year terms and directors are only able to be removed from office for cause;

 

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Our amended and restated certificate of incorporation will not provide for cumulative voting;

 

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Vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders, except as set forth in the section titled “Description of Capital Stock—Anti-Takeover Provisions —Amended and Restated Certificate of Incorporation and Amended and Restated Bylaw Provisions—Board of Directors Vacancies”;

 

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A special meeting of our stockholders may only be called by the chairperson of our board of directors, our Chief Executive Officer, our President, or a majority of our board of directors;

 

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Certain litigation against us can only be brought in Delaware;

 

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Our amended and restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established and shares of which may be issued without further action by our stockholders; and

 

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Advance notice procedures apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders.

These provisions, alone or together, could discourage, delay, or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors of their choosing and to cause us to take other corporate actions they desire, any of which, under certain circumstances, could limit the opportunity for our stockholders to receive a premium for their shares of our common stock and could also affect the price that some investors are willing to pay for our common stock.

Because we do not intend to pay any cash dividends on our shares of common stock in the near future, our stockholders will not be able to receive a return on their shares unless they sell them.

We do not intend to pay cash dividends on our shares of common stock in the near future, and our stockholders will not be able to receive a return on their shares unless they sell them. The declaration, payment and amount of any future dividends will be made at the discretion of our board of directors, and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as our board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.

You will experience immediate and substantial dilution.

The initial public offering price will be substantially higher than the net tangible book value of each outstanding share of common stock immediately after this offering. If you purchase common stock in this offering, you will suffer immediate and substantial dilution. At an assumed initial public offering price of $                with net proceeds to us of $                million, after deducting estimated underwriting discounts and commissions and estimated offering expenses, investors who purchase shares in this offering will have contributed                 % of the total amount of funding we have received to date, but will only hold                 % of the total voting rights. The dilution will be $                per share in the net tangible book value of the common stock from the assumed initial public offering price. In addition, if outstanding options or warrants to purchase shares of our common stock are exercised, there could be further dilution. For more information refer to the section titled “Dilution.”

 

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We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common stock. The failure by our management to apply these funds effectively could result in financial losses that could have an adverse effect on our business and cause the market price of our shares of common stock to decline. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. If we do not invest the net proceeds from this offering in ways that enhance stockholder value, we may fail to achieve expected financial results, which could cause the price of our shares of common stock to decline.

Future sales or issuance of shares of our common stock by existing stockholders could depress the market price of our common stock.

Upon completion of this offering, there will be                shares of our common stock outstanding (or                shares, if the underwriters exercise in full their option to purchase additional shares). The                shares being sold in this offering will be freely tradable immediately after this offering (except for shares purchased by affiliates) and of the                shares outstanding as of                 (assuming no exercise of the underwriters’ option to purchase additional shares),                shares are freely tradable shares under Rule 144 that are not subject to a lock-up,                shares may be sold upon expiration of lock-up agreements 180 days after the date of this offering (subject in some cases to volume limitations). A large portion of these shares are held by a small number of persons. Sales by these stockholders or option holders of a substantial number of shares after this offering could significantly reduce the market price of our common stock. See the section titled “Shares Eligible for Future Sale” for a more detailed description of sales that may occur in the future.

If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the trading price of our common stock and trading volume could decline.

The trading market for our shares of our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business, and, if analysts do not publish research or publish inaccurate or unfavorable research, the trading price of our common stock may decline. Securities and industry analysts do not currently, and may never, publish research on our shares of common stock. If no securities or industry analysts commence coverage of our company, the trading price for our shares of our common stock would likely be negatively impacted. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our securities or publish inaccurate or unfavorable research about our business, the price of our shares of common stock would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our securities could decrease, which might cause the trading price of our shares of common stock and trading volume to decline.

Our common stock could be subject to extreme volatility.

The trading price of our common stock may be subject to extreme volatility and may be affected by a number of factors, including events described in the risk factors set forth in this prospectus, as well as our operating results, financial condition and other events or factors. In addition to the uncertainties relating to future operating performance and the profitability of operations, factors such as variations in interim financial results, illiquidity of our common stock, or various, as yet unpredictable, factors, many of which are beyond our control, may have a negative effect on the market price of our common stock. In recent years, broad stock market indices, in general, and smaller capitalization companies, in particular, have experienced substantial price fluctuations. In a volatile market, we may experience wide fluctuations in the market price of our common stock and wide bid-ask spreads. These fluctuations may have a negative effect on the market price of our common stock. In addition, the securities market has, from time to time, experienced significant price and volume

 

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fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also adversely affect the market price of our common stock.

General Risk Factors

The requirements of being a public company may strain our resources, divert management’s attention, and affect our ability to attract and retain qualified board of director members.

As a public company, we will be subject to the reporting requirements of the Exchange Act, SOX, and other applicable securities rules and regulations. Compliance with these rules and regulations, even as an EGC, will increase our legal and financial compliance costs, make some activities more difficult, time-consuming, or costly, and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly, and current reports with respect to our business and operating results. SOX requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more resources in the future, which will increase our costs and expenses.

In addition, changing laws, regulations, and standards relating to corporate governance and public disclosure create uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations, and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations, and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations, and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, regulatory authorities may initiate legal proceedings against us, and our business may be harmed.

We also expect that being a public company combined with these new rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors also could make it more difficult for us to attract and retain qualified management and members of our board of directors, particularly to serve on our audit committee and compensation and governance committee.

As a result of disclosure of information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If such claims are successful, our business and operating results could be harmed. Even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business, operating results, and financial condition.

Our management team has limited experience managing a public company.

Most members of our management team have limited experience managing a publicly traded company, interacting with public company investors, and complying with the increasingly complex laws pertaining to public companies. Our management team may not successfully or efficiently manage our transition to being a public company that is

 

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subject to significant regulatory oversight and reporting obligations under the federal securities laws and the continuous scrutiny of securities analysts and investors. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day anagement of our business, which could harm our business, results of operations, and financial condition.

Investors’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.

There is an increasing focus from certain investors, employees and other stakeholders concerning corporate responsibility, specifically related to environmental, social and governance factors. Some investors may use these factors to guide their investment strategies and, in some cases, may choose not to invest in us if they believe our policies relating to corporate responsibility are inadequate. Third-party providers of corporate responsibility ratings and reports on companies have increased to meet growing investor demand for measurement of corporate responsibility performance. The criteria by which companies’ corporate responsibility practices are assessed may change, which could result in greater expectations of us and cause us to undertake costly initiatives to satisfy such new criteria. If we elect not to or are unable to satisfy such new criteria, investors may conclude that our policies with respect to corporate responsibility are inadequate. We may face reputational damage in the event that our corporate responsibility procedures or standards do not meet the standards set by various constituencies.

Furthermore, if our competitors’ corporate responsibility performance is perceived to be greater than ours, potential or current investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives and goals regarding environmental, social and governance matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors, employees and other stakeholders or our initiatives are not executed as planned, our reputation and financial results could be adversely affected.

Internet law is evolving, and unfavorable changes to, or failure by us to comply with, these laws and regulations could adversely affect our business, financial condition and results of operations.

We are subject to regulations and laws specifically governing the Internet. The scope and interpretation of the laws that are or may be applicable to our business are often uncertain, subject to change and may be conflicting. If we incur costs or liability as a result of unfavorable changes to these regulations or laws or our failure to comply therewith, the business, financial condition and results of operations of our business could be adversely affected. Any costs incurred to prevent or mitigate this potential liability could also harm our business, financial condition and results of operations.

Changes in accounting standards, subjective assumptions and estimates used by management related to complex accounting matters could have an adverse effect on results of operations.

GAAP in the United States and related accounting pronouncements, implementation guidance and interpretations with regard to a wide range of matters, such as revenue recognition, lease accounting, stock-based compensation, asset impairments, valuation reserves, income taxes and fair value accounting, are highly complex and involve many subjective assumptions, estimates and judgments made by management. Changes in these rules or their interpretations or changes in underlying assumptions, estimates or judgments made by management could change our reported results.

The occurrence of natural or man-made disasters could adversely affect our operations, results of operations and financial condition.

The occurrence of natural disasters, including hurricanes, floods, earthquakes, tsunamis, tornadoes, fires, explosions, pandemic disease, such as the current COVID-19 pandemic, and man-made disasters, including acts of terrorism and military actions, could adversely affect our operations, results of operations or financial condition, even if home values and buyers’ access to financing has not been affected.

 

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Special Note Regarding Forward-Looking Statements

This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include statements about:

 

•

Our future financial performance, including our expectations regarding our revenue, rate of growth, operating expenses including changes in sales and marketing, research and development, and general and administrative expenses (including any components of the foregoing) and our ability to achieve and sustain future profitability;

 

•

Any changes in macroeconomic conditions and in U.S. residential real estate market conditions, including changes in prevailing interest rates or monetary policies;

 

•

Our business plan and our ability to effectively manage our expenses or grow our revenue;

 

•

Anticipated trends, growth rates, and challenges in our business and in the markets in which we operate;

 

•

Our market opportunity;

 

•

Our ability to expand into new domestic and international markets;

 

•

Our ability to successfully develop and market our adjacent services;

 

•

Our ability to attract and retain agents and expand their businesses;

 

•

Beliefs and objectives for future operations;

 

•

The timing and market acceptance of our products and services for HomeSmart agents and clients, including new products and services offered by us or our competitors;

 

•

The effects of seasonal and cyclical trends on our results of operations;

 

•

Our ability to maintain, protect, and enhance our intellectual property;

 

•

The effects of increased competition in our markets and our ability to compete effectively;

 

•

Our ability to stay in compliance with laws and regulations that currently apply or become applicable to our business both in the United States and, if and as applicable, internationally;

 

•

Economic and industry trends, growth forecasts or trend analysis; and

 

•

The effects of the ongoing COVID-19 coronavirus pandemic in the markets in which we operate.

We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus.

You should not rely upon forward-looking statements as predictions of future events. We have based the forward-looking statements contained in this prospectus primarily on our current expectations and projections about future events and trends that we believe may affect our business, financial condition, results of operations and prospects. The outcome of the events described in these forward-looking statements is subject

 

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to risks, uncertainties and other factors, including those described in the section titled “Risk Factors” and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time and it is not possible for us to predict all risks and uncertainties that could have an impact on the forward-looking statements contained in this prospectus. We cannot assure you that the results, events and circumstances reflected in the forward-looking statements will be achieved or occur, and actual results, events or circumstances could differ materially from those described in the forward-looking statements.

Neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Moreover, the forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We undertake no obligation to update any forward-looking statements made in this prospectus to reflect events or circumstances after the date of this prospectus or to reflect new information or the occurrence of unanticipated events, except as required by law. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

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Industry, Market and Other Data

Unless otherwise indicated, estimates and information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations, market position, market opportunity and market size, are based on industry publications and reports generated by third-party providers, other publicly available studies and our internal sources and estimates. This information involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. Although we are responsible for all of the disclosure contained in this prospectus and we believe the information from the industry publications and other third-party sources included in this prospectus is reliable, we have not independently verified the accuracy or completeness of the data contained in such sources. The content of, or accessibility through, the below sources and websites, except to the extent specifically set forth in this prospectus, does not constitute a portion of this prospectus and is not incorporated herein and any websites are an inactive textual reference only.

The sources of certain statistical data, estimates, market and industry data and forecasts contained in this prospectus include:

 

•

National Association of REALTORS, 2020 Profile of Home Buyers and Sellers—November 2020;

 

•

National Association of REALTORS, Historic Membership Report—June 2021;

 

•

National Association of REALTORS, 2021 Member Profile—May 2021;

 

•

RISMedia, 2022 Power Broker Report—April 2022;

 

•

RealTrends, The RealTrends Five Hundred 2020—March 2021;

 

•

RealTrends, October 2020 Newsletter—October 2020;

 

•

Bankrate, Real Estate Commissions Fall to New Lows as Homes Fly Off the Market—March 2021;

 

•

Salesforce, State of the Connected Customer—October 2020;

 

•

Phoenix Business Journal, The Top 5 Residential Real Estate Brokerages in Phoenix—July 2020;

 

•

IBISWorld, Title Insurance in the US—August 2021;

 

•

IBISWorld, Real Estate Sales & Brokerage in the US—April 2021;

 

•

Mortgage Bankers Association, Forecast: Purchase Originations to Increase 8.5% to Record $1.54 Trillion in 2021—October 2021;

 

•

LendingTree, U.S. Mortgage Market Statistics: 2020—February 2021;

 

•

1000Watt, The Complete Real Estate Experience—January 2022; and

 

•

Mortgage Bankers Association, MBA Mortgage Finance Forecast—April 2022.

 

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Use of Proceeds

We estimate that the net proceeds to us from the sale of shares of our common stock in this offering will be approximately $                million, based upon the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, we estimate that the net proceeds to us would be approximately $                million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of common stock by the selling stockholder.

Each $1.00 increase or decrease in the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease the net proceeds that we receive from this offering by approximately $                million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares of our common stock offered by us would increase or decrease the net proceeds that we receive from this offering by approximately $                million, assuming the assumed initial public offering price remains the same and after deducting the estimated underwriting discounts and commissions payable by us.

The principal purposes of this offering are to increase our capitalization and financial flexibility, create a public market for our common stock, facilitate an orderly distribution of shares for the selling stockholder, and enable access to the public equity markets for us and our stockholders.

We intend to use the net proceeds we receive from this offering for general corporate purposes, including working capital, operating expenses and capital expenditures. Additionally, we may use a portion of the net proceeds we receive from this offering to acquire or invest in businesses, products, services or technologies. However, we do not have agreements or commitments for any material acquisitions or investments at this time.

We cannot further specify with certainty the particular uses of the net proceeds that we will receive from this offering. Accordingly, we will have broad discretion in using these proceeds. Pending the use of proceeds from this offering as described above, we may invest the net proceeds that we receive in this offering in short-term, investment grade, interest-bearing instruments.

 

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Dividend Policy

We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant. In connection with the Corporate Reorganization, we issued two notes payable with initial principal balances of $7.0 million and $3.0 million to Matthew Widdows that were treated as dividends to Mr. Widdows and recorded as a net reduction in retained earnings. For more information, see the sections titled “Unaudited Pro Forma Combined Financial Information—Description of the Transaction and Financing” and “Certain Relationships and Related Party Transactions—Notes Receivable and Notes Payable.”

 

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Capitalization

The following table sets forth cash and cash equivalents, as well as our capitalization, as of December 31, 2021 as follows:

 

•

On an actual basis; and

 

•

On a pro forma basis, giving effect to (i) the filing and effectiveness of our amended and restated certificate of incorporation in Delaware that will become effective immediately prior to the completion of this offering and (ii) the sale and issuance by us of                 shares of our common stock in this offering, based upon the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

You should read this table together with our consolidated financial statements and related notes, and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included elsewhere in this prospectus.

 

		As of December 31, 2021
		Actual				Pro forma
		(in thousands, except for share and per share data)
Cash and cash equivalents		$	16,667			$
Long-term debt		$	27,732			$
Stockholders’ equity (deficit):
Preferred stock, par value $0.01 per share; no shares authorized, issued and outstanding, actual;                 shares authorized, no shares issued and outstanding, pro forma.
Common stock, par value $0.01 per share: 100,000,000 shares authorized, 54,478,907 shares issued and outstanding, actual;                 shares authorized,                 shares issued and outstanding, pro forma		$	545
Additional paid-in capital		$	20,012
Retained earnings		($	13,463	)
Total stockholders’ equity (deficit)		$	7,094
Total capitalization		$	34,826			$

The pro forma column in the table above is based on 54,478,907 shares of our common stock outstanding as of December 31, 2021, and excludes the following:

 

•

1,852,631 shares of common stock subject to RSUs outstanding as of December 31, 2021;

 

•

466,960 shares of common stock subject to SARs outstanding as of December 31, 2021 at a weighted average exercise price of $12.29 per share, which right we can elect to satisfy through the issuance of shares or by the payment of a cash settlement equal to the difference between the fair market value of our common stock on the date of exercise and the exercise price, and which our board of directors currently intends to satisfy through the issuance of shares; and

 

•

shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

 

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•

shares of our common stock to be reserved for future issuance under our 2022 Plan, which will become effective prior to the completion of this offering;

 

•

shares of our common stock reserved for future issuance under our 2021 Equity Incentive Plan, which number of shares will be added to the shares of our common stock to be reserved for future issuance under our 2022 Plan upon its effectiveness, at which time we will cease granting awards under our 2021 Equity Incentive Plan; and

 

•

shares of our common stock reserved for future issuance under our ESPP, which will become effective prior to the completion of this offering.

Our 2022 Plan and ESPP provide for annual automatic increases in the number of shares of our common stock reserved thereunder, and our 2022 Plan also provides for increases to the number of shares that may be granted thereunder based on shares under our 2021 Equity Incentive Plan that expire, are tendered to or withheld by us for payment of an exercise price or for satisfying tax withholding obligations or are forfeited or otherwise repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefit and Stock Plans.”

 

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Dilution

If you invest in our common stock in this offering, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of our common stock outstanding. Our historical net tangible book value as of December 31, 2021 was $(7.2) million, or $(0.13) per share. Our pro forma net tangible book value as of December 31, 2021 was $                , or $                per share, based on the total number of shares of our common stock outstanding as of                      , after giving effect to the filing and effectiveness of our amended and restated certificate of incorporation in Delaware that will become effective immediately prior to the completion of this offering.

After giving effect to the sale by us of                 shares of our common stock in this offering at the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of December 31, 2021 would have been $                , or $                 per share. This represents an immediate increase in pro forma net tangible book value of $                 per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $                 per share to investors purchasing shares of our common stock in this offering at the assumed initial public offering price. The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share						$
Historical net tangible book value per share as of December 31, 2021		$	(0.13)
Increase per share attributable to the pro forma adjustment described above
Pro forma net tangible book value per share as of		$
Increase in pro forma net tangible book value per share attributable to new investors purchasing shares of common stock in this offering
Pro forma as adjusted net tangible book value per share immediately after this offering
Dilution in pro forma net tangible book value per share to new investors in this offering						$

The dilution information discussed above is illustrative only and may change based on the actual initial public offering price and other terms of this offering. Each $1.00 increase or decrease in the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $                , and would increase or decrease, as applicable, dilution per share to new investors purchasing shares of common stock in this offering by $                , assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million shares in the number of shares of our common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $                 per share and increase or decrease, as applicable, the dilution to new investors purchasing shares of common stock in this offering by $                 per share, assuming the assumed initial public offering price remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

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If the underwriters’ option to purchase additional shares of our common stock from us is exercised in full, the pro forma as adjusted net tangible book value per share of our common stock, as adjusted to give effect to this offering, would be $                 per share, and the dilution in pro forma net tangible book value per share to new investors purchasing shares of common stock in this offering would be $                 per share.

The following table presents, as of December 31, 2021, the differences between the existing stockholders and the new investors purchasing shares of our common stock in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of our common stock and the average price per share paid or to be paid to us at the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

		Shares purchased								Total consideration								Average price per share
		Number				Percent				Amount				Percentage
Existing stockholders							%			$					%			$
New investors																		$
Totals							100%			$					100%

Each $1.00 increase or decrease in the assumed initial public offering price of $                 per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by new investors and total consideration paid by all stockholders by $                , assuming that the number of shares of our common stock offered by us, as set forth on the cover page of this prospectus, remains the same and before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase or decrease of 1.0 million in the number of shares of our common stock offered by us would increase or decrease the total consideration paid by new investors and total consideration paid by all stockholders by $                , assuming the assumed initial public offering price remains the same and before deducting the estimated underwriting discounts and commissions payable by us.

The foregoing table and preceding paragraph do not reflect any sales by the selling stockholder in this offering. Sales by the selling stockholder in this offering will cause the number of shares held by existing stockholders to be reduced to                  shares or approximately         % of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to                  shares, or approximately         % of the total number of shares of our common stock outstanding after this offering.

Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters’ option to purchase additional shares of our common stock from us. If the underwriters’ option to purchase additional shares of our common stock were exercised in full, our existing stockholders would own         % and our new investors would own         % of the total number of shares of our common stock outstanding upon completion of this offering.

The number of shares of our common stock that will be outstanding after this offering is based on 54,478,907 shares of our common stock outstanding as of December 31, 2021, and excludes the following:

 

•

1,852,631 shares of common stock subject to RSUs outstanding as of December 31, 2021;

 

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•

466,960 shares of common stock subject to SARs outstanding as of December 31, 2021 at a weighted average exercise price of $12.29 per share, which right we can elect to satisfy through the issuance of shares or by the payment of a cash settlement equal to the difference between the fair market value of our common stock on the date of exercise and the exercise price, and which our board of directors currently intends to satisfy through the issuance of shares; and

 

•

shares of our common stock reserved for future issuance under our equity compensation plans, consisting of:

 

•

shares of our common stock to be reserved for future issuance under our 2022 Plan, which will become effective prior to the completion of this offering;

 

•

shares of our common stock reserved for future issuance under our 2021 Equity Incentive Plan, which number of shares will be added to the shares of our common stock to be reserved for future issuance under our 2022 Plan upon its effectiveness, at which time we will cease granting awards under our 2021 Equity Incentive Plan; and

 

•

shares of our common stock reserved for future issuance under our ESPP, which will become effective prior to the completion of this offering.

Our 2022 Plan and ESPP provide for annual automatic increases in the number of shares of our common stock reserved thereunder, and our 2022 Plan also provides for increases to the number of shares that may be granted thereunder based on shares under our 2021 Equity Incentive Plan that expire, are tendered to or withheld by us for payment of an exercise price or for satisfying tax withholding obligations or are forfeited or otherwise repurchased by us, as more fully described in the section titled “Executive Compensation—Employee Benefit and Stock Plans.”

 

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Unaudited Pro Forma Combined Financial Information

Introduction

On October 30, 2021, HomeSmart Holdings, Inc. and HS Brokerage Holdings, LLC entered into a Limited Liability Company Interest Purchase Agreement (the “Acquisition Agreement”) with Ignacio Osorio and Adriana Osorio (the “Sellers”) to acquire (the “Acquisition”) Champions Real Estate Group, LLC, Champions RE Group, LLC, and CREG LLC (collectively “Champions Real Estate Group” or “Champions”).

HomeSmart is providing the following unaudited pro forma combined financial information to aid you in your analysis of the financial aspects of the Acquisition. The following unaudited pro forma combined financial information has been prepared in accordance with Article 11 of Regulation S-X as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses.” HomeSmart has elected not to present management’s adjustments and will only be presenting transaction accounting adjustments in the unaudited pro forma condensed combined financial information.

The unaudited pro forma combined balance sheet as of December 31, 2021 gives effect to the Acquisition as if the Acquisition had been completed on December 31, 2021, and combines the audited combined balance sheet of Champions Real Estate Group as of December 31, 2021 with HomeSmart’s audited consolidated balance sheet as of December 31, 2021.

The unaudited pro forma combined statement of income for the year ended December 31, 2021 gives effect to the Acquisition as if the Acquisition had occurred on January 1, 2021, the first day of HomeSmart’s fiscal year 2021, and combines the historical results of HomeSmart and Champions Real Estate Group.

The historical financial statements of HomeSmart and Champions Real Estate Group have been adjusted in the accompanying unaudited pro forma combined financial information to give effect to pro forma events that are transaction accounting adjustments, which are necessary to account for the Acquisition and the financing of the Acquisition, in accordance with U.S. GAAP. The unaudited pro forma adjustments are based upon available information and certain assumptions that our management believe are reasonable.

The unaudited pro forma combined financial information should be read in conjunction with:

 

•

the accompanying notes to the unaudited combined pro forma financial information;

 

•

the separate audited consolidated financial statements of HomeSmart for the fiscal year ended December 31, 2021 and the related notes thereto included elsewhere in this prospectus; and

 

•

the separate audited combined financial statements of Champions Real Estate Group for the fiscal year ended December 31, 2021 and the related notes thereto included elsewhere in this prospectus.

Description of the acquisition and financing

On January 1, 2022, HomeSmart completed the acquisition of Champions Real Estate Group. The acquisition consideration was $9.6 million, plus or minus a customary working capital adjustment and minus any outstanding debt and transaction expenses. The $9.6 million payable to the Sellers consisted of $7.2 million in cash and a $2.4 million unsecured promissory note, subject to adjustment per the purchase agreement. See Note 2 to the unaudited combined pro forma financial information below. The promissory note bears a 0% interest rate and is payable in full twelve months following the closing of the Acquisition.

 

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HomeSmart had access to the New Facility, for which draws may be used for acquisitions and general corporate purposes. In connection with the Acquisition Agreement, HomeSmart withdrew $7.2 million from this facility on December 30, 2021, which was used to cover the upfront cash payment of the acquisition consideration. The New Facility is secured by the equity and assets of HomeSmart Holdings, Inc. and its subsidiaries. Borrowings under the New Facility bear interest, at the Company’s option, either at a rate equal to (i) SOFR plus an applicable margin or (ii) an alternative base rate as defined in the new secured credit facility agreement.

The Acquisition Agreement provides potential contingent earnout payments to the Sellers, determined based on achievement of certain commission income metrics, at the first and second anniversaries of the closing of the Acquisition provided that the Sellers continue to be employed by HomeSmart at each such payout date.

Customary non-compete and non-solicitation restrictions, all of which are subject to certain exceptions and qualifications, are also included in the Acquisition Agreement.

Accounting for the Acquisition

The Acquisition is being accounted for as a business combination using the acquisition method with HomeSmart as the accounting acquirer in accordance with Accounting Standards Codification (“ASC”) Topic 805, “Business Combinations.” Under this method of accounting, the acquisition consideration will be allocated to Champions Real Estate Group’s assets acquired and liabilities assumed based upon their estimated fair values at the date of completion of the Acquisition. The process of valuing the net assets of Champions Real Estate Group, as well as evaluating accounting policies for conformity, is preliminary. Any differences between the fair value of the consideration transferred and the fair value of the assets acquired and liabilities assumed will be recorded as goodwill. Accordingly, the acquisition consideration allocation and related adjustments reflected in this unaudited pro forma combined financial information are preliminary and subject to revision based on a final determination of fair value.

The unaudited pro forma combined financial information presented is for informational purposes only and is not necessarily indicative of the financial position or results of operations that would have been realized if the Acquisition had been completed on the dates set forth above, nor is it indicative of future results or financial position of the combined company.

 

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Unaudited pro forma combined balance sheet

As of December 31, 2021

 

(In thousands)		HomeSmart historical December 31, 2021				Champions historical December 31, 2021				Acquisition adjustments				(Note 2)				Pro forma combined
Assets
Current Assets
Cash and cash equivalents		$	16,677			$	431			$	(7,163	)			(a	)		$	9,945
Accounts receivable, net			2,321				307				—								2,628
Commissions receivable			2,107				—				—								2,107
Prepaid expenses			1,357				88				(23	)			(b	)			1,422
Due from related parties			77				5				78				(c	)			160
Other current assets			608				—				—								608
Mortgage loans held for sale			2,015				—				—								2,015
Total current assets			25,162				831				(7,108	)							18,885
Property and equipment, net			2,645				—				—								2,645
Goodwill			8,633				—				7,194				(d	)			15,827
Intangibles, net			5,634				—				2,615				(e	)			8,249
Other non-current assets			6,335				13				—								6,348
Total assets		$	48,409			$	844			$	2,701							$	51,954
Liabilities and stockholders’ equity
Current liabilities
Accounts payable		$	2,084			$	3			$	—							$	2,087
Accrued expenses			4,949				420				(6	)			(g	)			5,363
Commissions payable			2,149				1,813				—								3,962
Due to related parties			381				—				—								381
Secured credit facility			1,820				—				—								1,820
Current portion of notes payable			1,290				—				1,315				(f	)			2,605
Total current liabilities			12,673				2,236				1,309								16,218
Long-term notes payable			4,224				—				—								4,224
Long-term related party note payable			7,000				—				—								7,000
Long-term secured credit facility			16,508				—				—								16,508
Other non-current liabilities			910				—				—								910
Total liabilities		$	41,315			$	2,236			$	1,309							$	44,860
Stockholders’ equity
Net parent investment		$	—			$	(1,392	)		$	1,392				(h	)		$	—
Common stock			545				—				—								545
Additional paid-in-capital			20,012				—				—								20,012
Retained earnings			(13,463	)			—				—								(13,463	)
Total stockholder’s equity		$	7,094			$	(1,392	)		$	1,392							$	7,094
Total liabilities and stockholder’s equity		$	48,409			$	844			$	2,701							$	51,954

 

See the accompanying notes to the unaudited pro forma combined financial information

 

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Unaudited pro forma combined statement of operations

For the year ended December 31, 2021

 

(In thousands, except share and per share data)		HomeSmart year ended December 31, 2021				Champions year ended December 31, 2021				Acquisition adjustments				(Note 3)				Pro forma combined
Revenue
Real estate brokerage		$	614,477			$	51,295			$	—							$	665,772
Franchise			7,022				—				—								7,022
Affiliated business services			6,466				—				—								6,466
Total revenue		$	627,965			$	51,295			$	—							$	679,260
Operating expenses
Commission and other agent-related costs		$	586,150			$	48,673			$	—							$	634,823
General and administrative			37,072				1,180				—								38,252
Sales, marketing, and advertising			7,310				101				—								7,411
Depreciation and amortization			2,644				—				543				(a	)			3,187
Total operating expenses		$	633,176			$	49,954			$	543							$	683,673
(Loss) income from operations		$	(5,211	)		$	1,341			$	(543	)						$	(4,413	)
Interest expense			(696	)			—				(205	)			(b,c)				(901	)
Other income (expense), net			812				—				—								812
(Loss) income before income taxes		$	(5,095	)		$	1,341			$	(748	)						$	(4,502	)
Income tax (benefit) expense			(752	)			32				—								(720	)
Net (loss) income		$	(4,343	)		$	1,309			$	(748	)						$	(3,782	)
Net loss per share basic and diluted		$	(0.08	)														$	(0.07	)
Weighted average common shares outstanding, basic and diluted			54,478,907																54,478,907

 

See the accompanying notes to the unaudited pro forma combined financial information

 

71