Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
 

FORM 10-Q
 
 
 
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
or
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38160
REDFIN CORPORATION
(Exact Name of Registrant as Specified in Its Charter)

Delaware
 
74-3064240
(State of Incorporation)
 
(I.R.S. Employer
Identification No.)
1099 Stewart Street, Suite 600
 
 
Seattle, Washington
 
98101
(Address of Principal Executive Offices)
 
(Zip Code)
(206) 576-8333
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐  No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒  No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
(Do not check if a smaller reporting company)
 
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 13(a) of the Exchange Act.   ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒
As of October 31, 2017, there were 81,427,697 shares of the registrant’s common stock outstanding.





Redfin Corporation
Quarterly Report on Form 10-Q
For the Three Months Ended September 30, 2017
TABLE OF CONTENTS

 
 
 
 
Page
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 
 
 
 
 





Table of Contents


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Part II. Item 1A. “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations.



Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Condensed Financial Statements (unaudited)

Redfin Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts, unaudited)
 
December 31,
 
September 30,
 
2016
 
2017
 
 
 
 
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
64,030

 
$
212,436

Restricted cash
3,815

 
10,101

Short-term investments
1,749

 
1,258

Prepaid expenses
4,388

 
4,472

Accrued revenue, net of allowance for doubtful accounts of $150 and $147 at December 31, 2016 and September 30, 2017, respectively
10,625

 
13,336

Other current assets
8,781

 
5,623

Loans held for sale

 
726

Total current assets
93,388

 
247,952

Property and equipment, net
19,226

 
21,600

Intangible assets, net
3,782

 
3,416

Goodwill
9,186

 
9,186

Deferred offering costs
720

 

Other assets
7,175

 
6,931

Total assets:
$
133,477

 
$
289,085

Liabilities, redeemable convertible preferred stock and stockholders' equity/(deficit):
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
5,385

 
$
3,343

Accrued liabilities
22,253

 
30,202

Other payables
3,793

 
9,858

Loan facility

 
705

Current portion of deferred rent
1,512

 
1,104

Total current liabilities
32,943

 
45,212

Deferred rent, net of current portion
8,852

 
10,365

Total liabilities
41,795

 
55,577

Commitments and contingencies (Note 10)

 

Redeemable convertible preferred stock—par value $0.001 per share; As of December 31, 2016: 166,266,114 shares authorized; 55,422,002 issued and outstanding; and aggregate liquidation preference of $167,488. As of September 30, 2017: no shares authorized, issued, and outstanding.
655,416

 

Stockholders’ equity/(deficit):
 
 
 
Common stock—par value $0.001 per share; 290,081,638 and 500,000,000 shares authorized, respectively; 14,687,024 and 81,385,310 shares issued and outstanding, respectively
15

 
81

Preferred stock—par value $0.001 per share; As of December 31, 2016: no shares authorized, issued and outstanding. As of September 30, 2017: 10,000,000 shares authorized and no shares issued and outstanding.

 

Additional paid-in capital

 
360,631

Accumulated deficit
(563,749
)
 
(127,204
)
Total stockholders’ equity/(deficit)
(563,734
)
 
233,508

Total liabilities, redeemable convertible preferred stock and stockholders’ equity/(deficit):
$
133,477

 
$
289,085


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

1

Table of Contents


Redfin Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts, unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Revenue
$
81,064

 
$
109,479

 
$
200,414

 
$
274,282

Cost of revenue
50,147

 
70,166

 
138,955

 
191,633

Gross profit
30,917

 
39,313

 
61,459

 
82,649

Operating expenses:
 
 
 
 
 
 
 
Technology and development
9,781

 
11,483

 
25,739

 
31,245

Marketing
5,436

 
5,588

 
23,133

 
26,179

General and administrative
10,037

 
11,995

 
29,948

 
38,828

Total operating expenses
25,254

 
29,066

 
78,820

 
96,252

Income (loss) from operations
5,663

 
10,247

 
(17,361
)
 
(13,603
)
Interest income and other income, net:
 
 
 
 
 
 
 
Interest income
37

 
311

 
133

 
387

Other income, net

 

 
37

 
13

Total interest income and other income, net
37

 
311

 
170

 
400

Net income (loss)
$
5,700

 
$
10,558

 
$
(17,191
)
 
$
(13,203
)
Accretion of redeemable convertible preferred stock
(3,050
)
 
(40,224
)
 
56,819

 
(175,915
)
Undistributed earnings attributable to participating securities
(2,105
)
 

 
(31,483
)
 

Net income (loss) attributable to common stock—basic
$
545

 
$
(29,666
)
 
$
8,145

 
$
(189,118
)
Net income (loss) attributable to common stock—diluted
$
545

 
$
(29,666
)
 
$
(17,191
)
 
$
(189,118
)
Net income (loss) per share attributable to common stock—basic
$
0.04

 
$
(0.50
)
 
$
0.57

 
$
(6.37
)
Net income (loss) per share attributable to common stock—diluted
$
0.03

 
$
(0.50
)
 
$
(0.25
)
 
$
(6.37
)
Weighted average shares used to compute net income (loss) per share attributable to common stock—basic
14,441,246

 
58,868,903

 
14,339,820

 
29,678,082

Weighted average shares used to compute net income (loss) per share attributable to common stock—diluted
17,855,205

 
58,868,903

 
69,761,822

 
29,678,082


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

2

Table of Contents

Redfin Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
 
Nine Months Ended September 30,
 
2016
 
2017
 
 
 
 
Operating activities
 
Net income (loss)
$
(17,191
)
 
$
(13,203
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
4,532

 
5,326

Stock-based compensation
5,890

 
8,028

Change in assets and liabilities:
 
 
 
Restricted cash
(3,371
)
 
(6,286
)
Prepaid expenses
2,755

 
(84
)
Accrued revenue
(5,423
)
 
(2,712
)
Other current assets
(1,838
)
 
3,157

Other long-term assets
(5,953
)
 
244

Accounts payable
1,858

 
1,227

Accrued expenses
7,086

 
8,513

Other payables
3,362

 
6,065

Deferred lease liability
1,770

 
1,001

Origination of loans held for sale

 
(5,755
)
Proceeds from sale of loans originated as held for sale

 
5,030

Net cash provided by (used in) operating activities
(6,523
)
 
10,551

Investing activities
 
 
 
Maturities and sales of short-term investments
1,744

 
1,484

Purchases of short-term investments
(1,744
)
 
(993
)
Purchases of property and equipment
(5,116
)
 
(10,499
)
Net cash used in investing activities
(5,116
)
 
(10,008
)
Financing activities
 
 
 
Proceeds from exercise of stock options
1,069

 
2,519

Payment of initial public offering costs

 
(3,449
)
Proceeds from initial public offering, net of underwriting discounts

 
148,088

Borrowings from warehouse credit facilities

 
5,603

Repayments of warehouse credit facilities

 
(4,898
)
Net cash provided by financing activities
1,069

 
147,863

Net change in cash and cash equivalents
(10,570
)
 
148,406

Cash and cash equivalents:
 
 
 
Beginning of period
85,597

 
64,030

End of period
$
75,027

 
$
212,436

Supplemental disclosure of non-cash investing and financing activities
 
 
 
Accretion of redeemable convertible preferred stock
$
56,819

 
$
(175,915
)
Stock-based compensation capitalized in property and equipment
$
(57
)
 
$
(194
)
Initial public offering cost accruals
$

 
$
(200
)
Leasehold improvements paid directly by lessor
$

 
$
(104
)

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


3

Table of Contents

Redfin Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity/(Deficit)
(in thousands, except for shares)

 
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders' Deficit
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balance, January 1, 2016
55,422,002

 
$
599,915

 
 
14,059,601

 
$
14

 
$

 
$
(495,727
)
 
$
(495,713
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercise of stock options

 

 
 
627,423

 
1

 
1,494

 

 
1,495

Stock-based compensation

 

 
 

 

 
8,512

 

 
8,512

Accretion of redeemable convertible preferred stock

 
55,501

 
 

 

 
(10,006
)
 
(45,496
)
 
(55,502
)
Net income (loss)

 

 
 

 

 

 
(22,526
)
 
(22,526
)
Balance, December 31, 2016
55,422,002

 
$
655,416

 
 
14,687,024

 
$
15

 
$

 
$
(563,749
)
 
$
(563,734
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative stock-based compensation adjustment (see Note 1)

 

 
 

 

 
522

 
(522
)
 

Proceeds from initial public offering, net of underwriters' discounts of $11,146

 

 
 
10,615,650

 
10

 
148,078

 

 
148,088

Initial public offering costs

 

 
 

 

 
(3,799
)
 

 
(3,799
)
Exercise of stock options

 

 
 
660,634

 
1

 
2,518

 

 
2,519

Stock-based compensation

 

 
 

 

 
8,222

 

 
8,222

Accretion of redeemable convertible preferred stock

 
175,915

 
 

 

 
(8,690
)
 
(167,225
)
 
(175,915
)
Conversion of redeemable convertible preferred stock to common stock
(55,422,002
)
 
(831,331
)
 
 
55,422,002

 
55

 
213,780

 
617,495

 
831,330

Net income (loss)

 

 
 

 

 

 
(13,203
)
 
(13,203
)
Balance, September 30, 2017

 
$

 
 
81,385,310

 
$
81

 
$
360,631

 
$
(127,204
)
 
$
233,508



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


4

Table of Contents

Notes to Condensed Consolidated Financial Statements
(in thousands, except for shares and per share amounts, unaudited)


Note 1: Description of Business and Summary of Significant Accounting Policies:

Description of Business—Redfin Corporation (“Redfin” or the “Company”) was incorporated in October 2002 and is headquartered in Seattle, Washington. The Company operates an online real estate marketplace and provides real estate services, including assisting individuals to purchase or sell their residential property. The Company’s wholly owned subsidiaries also provide title and settlement services and originate mortgages. The Company has operations located in multiple states nationwide.

Initial Public OfferingOn August 2, 2017, the Company completed an initial public offering, or IPO, whereby 10,615,650 shares of common stock were sold at a price of $15.00 per share, which included 1,384,650 shares pursuant to the underwriters' option to purchase additional shares. The Company received net proceeds of $144,289 after deducting the underwriting discount, and offering expenses directly attributable to the IPO. Upon the closing of the IPO, all shares of the outstanding redeemable convertible preferred stock automatically converted into 55,422,002 shares of common stock on a one-for-one basis.

Initial Public Offering Costs—Aggregate offering expenses of $3,799, consisting of legal, accounting and other fees and costs relating to the IPO, were reclassified to additional paid-in capital as a reduction of the proceeds upon the closing of the IPO on August 2, 2017.

Basis of Presentation—The condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and disclosures normally included in consolidated financial statements presented in accordance with GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2016 included in our final prospectus dated July 28, 2017, filed with the SEC on July 28, 2017 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended ("Prospectus"). The Company had no components of other comprehensive income (loss) during any of the years presented, as such, a consolidated statement of comprehensive income (loss) is not presented. All amounts are presented in thousands, except share and per share data.

The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of September 30, 2017, our results of operations for the three and nine month periods ended September 30, 2016 and 2017, and our cash flows for the nine month periods ended September 30, 2016 and 2017. The results of the three and nine month periods ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any interim period or for any other future year.

Principles of Consolidation—The unaudited condensed consolidated interim financial statements include the accounts of Redfin and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated.

Certain Significant Risks and Business Uncertainties—The Company is subject to the risks and challenges associated with companies at a similar stage of development. These include dependence on key individuals, successful development and marketing of its offerings, and competition with larger companies with greater financial, technical, and marketing resources.

The Company operates in the online real estate marketplace and, accordingly, can be affected by a variety of factors. For example, management of the Company believes that any of the following factors

5


could have a significant negative effect on the Company’s future financial position, results of operations, and cash flows: unanticipated fluctuations in operating results due to seasonality and cyclicality in the real estate industry, changes in home sale prices and transaction volumes, the Company’s ability to increase market share, competition and U.S. economic conditions.

Reverse Stock Split—On July 8, 2017, the Company’s board of directors approved an amendment to the Company's certificate of incorporation to effect a reverse split of shares of the issued and outstanding common stock and redeemable convertible preferred stock at a 3-to-1 ratio. The reverse stock split was approved by the Company’s stockholders and effected on July 10, 2017. The par value and shares authorized of the common stock and the par value and shares authorized of the redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock and redeemable convertible preferred stock, dividend rates, conversion rates, options to purchase common stock, exercise prices, and the related per-share amounts contained in these consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.

Use of Estimates—The preparation of the unaudited condensed consolidated interim financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the respective periods. Management’s more significant estimates include, but are not limited to, valuation of deferred income taxes, stock-based compensation, fair value of common stock and redeemable convertible preferred stock, capitalization of website development costs, recoverability of intangible assets with finite lives, and the fair value of reporting units for purposes of evaluating goodwill for impairment. Management bases its estimates on historical experience, and on various other market-specific relevant assumptions that management believes to be reasonable, under the circumstances. The amounts ultimately realized from the affected assets or ultimately recognized as liabilities will depend on, among other factors, general business conditions and could differ materially in the near term from the carrying amounts reflected in the consolidated financial statements.

Significant Accounting Policies—There have been no material changes to our significant accounting policies and estimates during the nine months ended September 30, 2017, from the significant accounting policies described in the Prospectus.

Other Current Assets—In April 2017, the Company received $8,470 from the landlord of the Company's new corporate headquarters for reimbursable leasehold improvement costs. The Company had previously recorded a receivable for this amount. The receipt of reimbursable leasehold improvements is classified as an inflow of cash in the operating section in the Company's condensed consolidated statement of cash flows for the nine months ended September 30, 2017. Additionally, in January 2017, RDFN Ventures, Inc. (“Redfin Now”), a wholly owned subsidiary of the Company, began purchasing properties with the intent of resale. Direct property acquisition and improvement costs are capitalized and tracked directly with each specific property. These are stated at cost unless the utility of the properties is no longer as great as their cost, in which case it is written down to “market”. As of December 31, 2016 and September 30, 2017 there were $0 and $5,399 respectively, in home inventories included in other current assets. Of the $5,399 in home inventories at September 30, 2017, $2,658 were listed for sale and $2,741 were in process and being made ready for sale. As of September 30, 2017, all properties were carried at cost.
    
Recently Adopted Accounting Pronouncements—In January 2017, the Financial Accounting Standard Board (“FASB”) issued guidance simplifying the test for goodwill impairment. Step 2 from the goodwill impairment test is no longer required, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning after December 15, 2019, and early adoption is permitted. This guidance must be applied on a prospective basis. The Company adopted this guidance for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company performs its goodwill assessment annually on October

6


1 of each year or as events merit. The Company does not expect the adoption of this guidance to impact the Company’s financial position, results of operations or cash flows.

In March 2016, the FASB issued guidance on several aspects of the accounting for share-based payment transactions, including the income tax consequences, impact of forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company adopted this guidance on January 1, 2017 using the modified retrospective approach through a cumulative-effect adjustment of $552 to beginning accumulated deficit, and the Company elected to account for forfeitures as they occur beginning on January 1, 2017. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows.

In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. This standard requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has prospectively adopted this guidance as of January 1, 2016. The adoption of this guidance had no effect on the Company’s financial position.

Recently Issued Accounting Pronouncements—In November 2016, the FASB issued guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance requires a retrospective transition method to each period presented. The Company plans to adopt this guidance on October 1, 2017, using the early permitted period. Upon adoption, the Company will reclassify restricted cash from operating activities to the change in cash, cash equivalents and restricted cash. Additionally, other payables, related to cash held in escrow on behalf of customers, will be reclassified from operating activities to financing activities. In the Company’s capacity as fiduciary, the cash receipt is a function of providing the customer with a service (title). Therefore, the escrow funds payable are akin to a repayment of debt within financing activities, whereby the Company in it’s role as fiduciary is temporarily holding cash in its restricted accounts on behalf of it’s customers and subsequently releases the cash to settle the customers contractual obligation. These reclassifications will maintain an accurate reflection of the Company's cash flows from operating activities.

In August 2016, the FASB issued guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. This new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, which means that it will be effective for the Company in its fiscal year beginning January 1, 2018. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The adoption of this standard is not expected to have a material impact on the Company’s statement of cash flows.

In February 2016, the FASB issued guidance on leases. This standard requires the recognition of a right-of-use asset and lease liability on the balance sheet for all leases. This standard also requires more detailed disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and early adoption is permitted. The Company expects to adopt this guidance on January 1, 2019. The Company is currently evaluating the effect of the adoption of this guidance, and believes that it will have a significant effect on its financial position.


7


In May 2014, the FASB issued guidance on revenue recognition. This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company will adopt this guidance on January 1, 2018, using the modified retrospective adoption methodology. Both real estate and other revenue contain single performance obligations and the Company believes the timing of the satisfaction of the performance obligations, triggering the recognition of revenue, will not differ from the Company's current timing for recognizing revenue. The assessment of the policy changes and quantitative and qualitative impacts is substantially complete and as the Company believes the amounts and timing of real estate and other revenue will not change, the Company does not expect to recognize a cumulative adjustment to retained earnings upon adoption.


Note 2: Fair Value of Financial Instruments

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accrued revenue, restricted cash, accounts payable, certain accrued liabilities, and redeemable convertible preferred stock. The fair value of the Company’s financial instruments approximates their recorded values due to their short period to maturity. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:

Level I—Unadjusted quoted prices in active markets for identical assets or liabilities.

Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level III—Unobservable inputs that are supported by little or no market activity, requiring the Company to develop its own assumptions.

The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The Company’s financial instruments consist of Level I and Level II assets and liabilities. Level I assets include highly liquid money market funds that are included in cash and cash equivalents and Level II assets include certificates of deposit that are included as short-term investments, interest rate lock commitments ("IRLCs") and forward sales commitments, included in other current assets and other current liabilities. The certificates of deposit are measured by observable market data for substantially the full term of the assets or liabilities.

Interest rate lock commitments and forward sales commitments are measured by observable marketplace prices. The Company’s redeemable convertible preferred stock was categorized as Level III. Redeemable convertible preferred stock was valued at each reporting date, through March 31, 2017, based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments. For further description of the valuation methodology of the redeemable convertible preferred stock, please see Note 2 to the Company's consolidated financial statements in the Prospectus.


8

Table of Contents

Changes in the fair value of redeemable convertible preferred stock were recognized as accretion expense (income) and included as an adjustment to net loss to arrive at net income (loss) attributable to common stock on the condensed consolidated statements of operations. Summary of changes in fair value are reflected in the condensed consolidated balance sheets, condensed consolidated statements of changes in redeemable convertible preferred stock and stockholders' deficit, and Note 6. The Company used the value of the common stock at the IPO price of $15.00 per share to determine the accretion amount for the three months ended September 30, 2017.

Significant unobservable inputs used in the determination of fair value of the Company’s redeemable convertible preferred stock, when outstanding, included the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Valuation methodology:
 
 
 
 
 
 
 
Income approach (private company)
15.0%
 
N/A
 
15.0%
 
12.5%
Market approach (private company)
15.0%
 
N/A
 
15.0%
 
12.5%
PWERM (IPO)
52.5%
 
N/A
 
52.5%
 
60.0%
PWERM (M&A)
17.5%
 
N/A
 
17.5%
 
15.0%
IPO revenue multiple
3.25x-3.5x
 
N/A
 
3.0x-4.5x
 
2.8x-3.0x
Forecasted revenue growth rate
28.0%-40.0%
 
N/A
 
28.0%-40.9%
 
31.1%-40.0%
Discount rate
20.0%-25.0%
 
N/A
 
20.0%-25.0%
 
20.0%

A summary of assets, liabilities, and mezzanine equity at December 31, 2016 and September 30, 2017, related to our financial instruments, measured at fair value on a recurring basis, is set forth below:
 
 
 
Fair Value
Financial Instrument
Fair Value Hierarchy
 
December 31,
 
September 30,
 
 
 
 
2016
 
2017
 
 
 
 
 
 
Money market funds (included in cash and cash equivalents)
Level I
 
46,357

 
191,738

Certificates of deposit (included in short-term investments)
Level II
 
1,749

 
1,258

Interest rate lock commitments
Level II
 

 
6

Forward loan commitments
Level II
 

 
(2
)
Redeemable convertible preferred stock (mezzanine equity)
Level III
 
(655,416
)
 



Note 3: Property and Equipment:

A summary of property and equipment at December 31, 2016 and September 30, 2017 is as follows:


9


 
 
 
December 31,
 
September 30,
 
Useful Lives
 
2016
 
2017
 
(years)
 
 
 
 
Leasehold improvements
Shorter of lease term or economic life
 
$4,911
 
$15,369
Website and software development costs
1-3
 
10,114
 
13,301
Computer and office equipment
3
 
2,846
 
2,862
Software
3
 
1,367
 
1,235
Furniture
7
 
2,406
 
2,862
Construction in progress
 
 
10,856
 
 
 
 
32,500
 
35,629
Accumulated depreciation and amortization
 
 
(13,274)
 
(14,029)
Property and equipment, net
 
 
$19,226
 
$21,600

Depreciation and amortization expense for property and equipment amounted to $1,475 and $1,665 for the three months ended September 30, 2016 and 2017, respectively, and $4,166 and $4,960 for the nine months ended September 30, 2016 and 2017, respectively.


Note 4: Acquired Intangible Assets:

The following table presents details of the Company's intangible assets subject to amortization as of the dates presented:
 
 
 
As of December 31, 2016
 
As of September 30, 2017
 
Useful
Live
(years)
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Trade Names
10
 
$
1,040

 
$
(234
)
 
$
806

 
$
1,040

 
$
(312
)
 
$
728

Developed technology
10
 
2,980

 
(670
)
 
2,310

 
2,980

 
(894
)
 
2,086

Customer relationships
10
 
860

 
(194
)
 
666

 
860

 
(258
)
 
602

 
 
 
$
4,880

 
$
(1,098
)
 
$
3,782

 
$
4,880

 
$
(1,464
)
 
$
3,416


Acquired intangible assets are amortized using the straight-line method over their estimated useful life, which approximates the expected use of these assets. Amortization expense amounted to $122 for the three months ended September 30, 2016 and 2017, and $366 for the nine months ended September 30, 2016 and 2017. Amortization expense of $2,440 will be recognized over the next five years, or $488 per year.


Note 5: Operating Segments:

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to make operating decisions, allocate resources and in assessing performance. The Company has five operating segments and one reportable segment, real estate. Real estate revenue is derived from commissions and fees charged on real estate transactions closed by us or partner agents. Other revenue consists of fees charged for title and settlement services, mortgage banking operations, marketing services provided to homebuilders by the Company’s builder services group, Walk Score licensing and advertising fees, homes sold through Redfin Now, and other services. The Company’s CODM is its Chief Executive Officer. The CODM evaluates the performance of the Company’s operating segments based on revenue and gross profit. The Company does not analyze discrete segment balance sheet information related to

10


long-term assets, all of which are located in the United States. All other financial information is presented on a consolidated basis.

Information on each of the reportable and other segments and reconciliation to consolidated net income (loss) is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Real estate
 
 
 
 
 
 
 
Revenue
$
79,198

 
$
103,864

 
$
195,203

 
$
262,894

Cost of revenue
47,966

 
64,258

 
132,990

 
178,850

Gross profit
$
31,232

 
$
39,606

 
$
62,213

 
$
84,044

Other
 
 
 
 
 
 
 
Revenue
$
1,866

 
$
5,615

 
$
5,211

 
$
11,388

Cost of revenue
2,181

 
5,908

 
5,965

 
12,783

Gross profit
$
(315
)
 
$
(293
)
 
$
(754
)
 
$
(1,395
)
Consolidated
 
 
 
 
 
 
 
Revenue
$
81,064

 
$
109,479

 
$
200,414

 
$
274,282

Cost of revenue
50,147

 
70,166

 
138,955

 
191,633

Gross profit
$
30,917

 
$
39,313

 
$
61,459

 
$
82,649

Operating expenses
25,254

 
29,066

 
78,820

 
96,252

Net income (loss)
$
5,700

 
$
10,558

 
$
(17,191
)
 
$
(13,203
)

Real estate revenue consisted of the following:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Real estate revenue
 
Brokerage revenue
$
74,052

 
$
97,787

 
$
183,440

 
$
247,327

Partner revenue
5,146

 
6,077

 
11,763

 
15,567

Total real estate revenue
$
79,198

 
$
103,864

 
$
195,203

 
$
262,894



Note 6: Redeemable Convertible Preferred Stock and Stockholders’ Equity/(Deficit):

Redeemable Convertible Preferred Stock—The Company's redeemable convertible preferred stock automatically converted into common stock at a rate of one-for-one on the closing of the Company's IPO on August 2, 2017. As such, no shares of redeemable convertible preferred stock were authorized, issued and outstanding as of September 30, 2017. As of December 31, 2016 the Company had outstanding redeemable convertible preferred stock as follows:


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As of December 31, 2016
 
Shares Authorized
 
Shares Issued and Outstanding
 
Aggregate Liquidation Preference
 
Proceeds, Net of Issuance Costs
Series A-1
4,378,284
 
1,459,427
 
$
500,000

 
$
462,000

Series A-2
109,552
 
36,517
 
11,000

 
11,000

Series A-3
9,099,610
 
3,033,202
 
259,000

 
241,000

Series B
36,338,577
 
12,112,853
 
7,998,000

 
7,952,000

Series C
33,388,982
 
11,129,656
 
12,000,000

 
11,950,000

Series D
28,574,005
 
9,524,665
 
10,269,000

 
10,201,000

Series E
12,041,148
 
4,013,712
 
14,924,000

 
14,841,000

Series F
20,808,580
 
6,936,186
 
50,536,000

 
50,453,000

Series G
21,527,376
 
7,175,784
 
70,991,000

 
68,062,000

Total
166,266,114
 
55,422,002
 
$
167,488,000

 
$
164,173,000



Please see Note 6 to the Company's consolidated financial statements in the Prospectus for a description of the terms of the redeemable convertible preferred stock.

Accretion Income/(Expense)—Accretion represents the (increase) or decrease in the redemption value of the Company’s redeemable convertible preferred stock. For the nine months ended September 30, 2016, the fair value of the redeemable convertible preferred stock declined, resulting in accretion income. The recognized accretion related to the increase or decrease in the redemption value of the redeemable convertible preferred stock was reclassed upon the successful completion of the IPO, which occurred during the period ended September 30, 2017.

The following table presents the accretion income/(expense) of the redeemable convertible preferred stock to its redemption value recorded within the consolidated statements of changes in redeemable convertible preferred stock and stockholders’ equity/(deficit) during the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Series A-1
$
(88
)
 
$
(1,119
)
 
$
1,448

 
$
(4,904
)
Series A-2
(2
)
 
(28
)
 
36

 
(123
)
Series A-3
(182
)
 
(2,349
)
 
3,010

 
(10,192
)
Series B
(1,090
)
 
(9,284
)
 
12,021

 
(40,336
)
Series C
(668
)
 
(8,530
)
 
11,039

 
(37,062
)
Series D
(571
)
 
(7,300
)
 
9,447

 
(31,717
)
Series E
(241
)
 
(2,948
)
 
4,102

 
(12,884
)
Series F
(208
)
 
(4,541
)
 
7,084

 
(20,184
)
Series G

 
(4,125
)
 
8,632

 
(18,513
)
Total
$
(3,050
)
 
$
(40,224
)
 
$
56,819

 
$
(175,915
)


Common Stock—At December 31, 2016 and September 30, 2017, the Company was authorized to issue 290,081,638 and 500,000,000 shares, respectively, of common stock with a par value of $0.001 per share.

The Company has reserved shares of common stock, on an as-converted basis, for future issuance as follows:


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Table of Contents

 
December 31,
 
September 30,
 
2016
 
2017
Redeemable convertible preferred stock outstanding
55,422,002

 

Stock options issued and outstanding
13,291,684

 
13,298,339

Shares available for future equity grants
4,941,504

 
7,974,192

Total
73,655,190

 
21,272,531


Preferred StockAs of September 30, 2017, the Company had authorized 10,000,000 shares of preferred stock, par value $0.001, of which no shares were outstanding.


Note 7: Stock-based Compensation:

2017 Employee Stock Purchase Plan—The Company’s 2017 Employee Stock Purchase Plan (“2017 ESPP”) became effective on July 27, 2017 and enables eligible employees to purchase shares of the Company’s common stock at a discount. Purchases will be accomplished through participation in discrete offering periods.  The Company initially reserved 1,600,000 shares of common stock for issuance under the 2017 ESPP. The number of shares reserved for issuance under the 2017 ESPP will increase automatically on January 1 of each calendar year beginning after the first offering date and continuing through the first ten calendar years by the number of shares equal to the lesser of 1% of the total outstanding shares of the Company’s common stock as of the immediately preceding December 31 or an amount determined by the board of directors. The 2017 ESPP will not become effective until such time as the board of directors or Compensation Committee determines in the future, and as of September 30, 2017, the initial offering period had not commenced.

2004 Equity Incentive PlanThe Company granted options under its 2004 equity incentive plan, as amended, ("2004 Plan"), until July 26, 2017, when the plan was terminated in connection with the Company’s IPO. Accordingly, no shares are available for future issuance under this plan. The 2004 Plan continues to govern outstanding equity awards granted thereunder.

2017 Equity Incentive Plan—The Company's 2017 Equity Incentive Plan ("2017 EIP") became effective on July 26, 2017, and provides for the issuance of incentive and nonqualified common stock options and restricted stock units to employees, directors, officers, and consultants of the Company. The 2017 EIP provides automatic annual increases in the number of shares available for issuance on the first day of each fiscal year for a period of 10 years beginning in 2018. The term of each option grant shall be no more than 10 years. As of September 30, 2017 the Company had not issued any options to purchase common stock or restricted stock units under the 2017 EIP.

The grant-date fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The inputs used below are subjective and generally require significant analysis and judgment to develop. The Company has not declared or paid any cash dividends and does not currently expect to do so in the future. The risk-free interest rate used in the Black-Scholes-Merton option-pricing model is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. Expected volatility is based on an average volatility of stock prices for a group of real estate and technology industry peers. The Company uses the “simplified method” to calculate expected life due to the lack of historical exercise data, which assumes a ratable rate of exercise over the contractual life to estimate the expected term for employee options. The expected term of options represents the period that the stock-based awards are expected to be outstanding for the remaining unexercised shares. The Company accounts for forfeitures as they occur. The Company did not issue any stock options during the three months ended September 30, 2017. The range of assumptions for the three and nine months ended September 30, 2016 and 2017, are provided in the following table:

13

Table of Contents

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Expected life
7 years
 
N/A
 
7 years
 
7 years
Volatility
38.88%-38.90%
 
N/A
 
38.88%-41.36%
 
37.88%-40.97%
Risk-free interest rate
1.39%-1.41%
 
N/A
 
1.39%-1.66%
 
1.96%-2.26%
Dividend yield
—%
 
N/A
 
—%
 
—%
Weighted-average grant date fair value
3.43
 
N/A
 
3.75
 
4.86
The following table presents information regarding options granted, exercised, forfeited, or cancelled for the periods presented:
 

Number Of Options
 
Weighted- Average Exercise Price
 
Weighted-Average Remaining Contractual Life (years)
 

Aggregate Intrinsic Value
Outstanding at December 31, 2016
13,291,684
 
$
5.85

 
7.74
 
$
61,774

Options granted
1,137,046
 
10.78

 
 
 
 
Options exercised
(660,634)
 
3.81

 
 
 
14,058

Options forfeited or canceled
(469,757)
 
7.87

 
 
 
 
Outstanding at September 30, 2017
13,298,339
 
6.30

 
7.27
 
249,825

Options exercisable at September 30, 2017
8,151,136
 
$
4.69

 
6.34
 
$
166,304


The following table presents detail of stock-based compensation amounts included in the Company’s condensed consolidated statements of operations for the periods indicated below:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Cost of revenue
$
546

 
$
715

 
$
1,589

 
$
2,129

Technology and development
555

 
819

 
1,653

 
2,301

Marketing
114

 
121

 
336

 
362

General and administrative
940

 
1,054

 
2,312

 
3,236

Total stock-based compensation
$
2,155

 
$
2,709

 
$
5,890

 
$
8,028


There was $20,977 of total unrecognized stock-based compensation related to unvested stock option arrangements granted under the 2004 Plan as of September 30, 2017.


Note 8: Net Income (Loss) per Share Attributable to Common Stock:

Net income (loss) per share attributable to common stock is computed by dividing the net income (loss) attributable to common stock by the weighted-average number of common shares outstanding. The Company has outstanding stock options and redeemable convertible preferred stock, which are included in the calculation of diluted net income (loss) attributable to common stock per share whenever doing so would be dilutive.

The Company calculates basic and diluted net income (loss) per share attributable to common stock in conformity with the two-class method required for companies with participating securities. The Company considers all series of redeemable convertible preferred stock to be participating securities. Under the two-class method, net loss attributable to common stock is not allocated to the redeemable convertible preferred stock as the holders of redeemable convertible preferred stock do not have a contractual obligation to share in losses.

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Diluted net income (loss) per share attributable to common stock is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, redeemable convertible preferred stock are considered anti-dilutive securities for all periods ended September 30, 2017 and for the three months ended September 30, 2016. For the nine month period ended September 30, 2016 the inclusion of the Company's redeemable convertible preferred stock was dilutive. For the nine month period ended September 30, 2016 the fair value of the redeemable convertible preferred stock declined, resulting in accretion income. The if-converted method of calculating earnings per share resulted in undistributed earnings attributable to participating securities, and conversion of redeemable convertible preferred stock occurring at the beginning of the period. The undistributed earnings attributable to participating securities do not represent a distribution to existing stockholders' paid out of offering proceeds. Options were excluded in the calculation of weighted average shares used to compute diluted income (loss) for all periods presented except the three month period ended September 30, 2016.

The following table sets forth the calculation of basic and diluted net income (loss) per share attributable to common stock during the periods presented:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
5,700

 
$
10,558

 
$
(17,191
)
 
$
(13,203
)
Accretion of redeemable convertible preferred stock
(3,050
)
 
(40,224
)
 
56,819

 
(175,915
)
Undistributed earnings attributable to participating securities
(2,105
)
 

 
(31,483
)
 

Net income (loss) attributable to common stock—basic
545

 
(29,666
)
 
8,145

 
(189,118
)
Net income (loss) attributable to common stock—diluted
545

 
(29,666
)
 
(17,191
)
(1)
(189,118
)
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted average shares used to compute net income (loss) per share attributable to common stock—basic
14,441,246

 
58,868,903

 
14,339,820

 
29,678,082

Weighted average shares used to compute net income (loss) per share attributable to common stock—diluted
17,855,205

 
58,868,903

 
69,761,822

 
29,678,082

Net income (loss) per share attributable to common stock—basic
$
0.04

 
$
(0.50
)
 
$
0.57

 
$
(6.37
)
Net income (loss) per share attributable to common stock—diluted
$
0.03

 
$
(0.50
)
 
$
(0.25
)
 
$
(6.37
)
 
 
 
 
 
 
 
 
(1) A reconciliation of net income (loss) attributable to common stock—basic to net income (loss) attributable to common stock—diluted is as follows:
 
 
 
 
 
 
 
Net income (loss) attributable to common stock—basic
 
 
 
 
$
8,145

 
 
Add-back: Accretion due to application of if-converted
 
 
 
 
(56,819
)
 
 
Add-back: Undistributed earnings attributable to participating securities due to application of if-converted
 
 
 
 
31,483

 
 
Net income (loss) attributable to common stock—diluted
 
 
 
 
$
(17,191
)
 
 

The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net income (loss) per share attributable to common stock for the periods presented because their effect would have been anti-dilutive. For the three and nine months ended September 30, 2017 the redeemable convertible preferred stock were anti-dilutive, but converted to common stock on a one-for-one basis on August 2, 2017 upon the successful completion of the IPO, and as such were included in the weighted average shares outstanding for the period they were outstanding as shares of common stock.

15

Table of Contents

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
Redeemable convertible preferred stock
55,422,002

 
55,422,002

 

 
55,422,002

Options outstanding
4,117,639

 
13,298,339

 
12,679,454

 
13,298,339

Total
59,539,641

 
68,720,341

 
12,679,454

 
68,720,341



Note 9: Income Taxes:

The Company’s effective tax rate for the three and nine-month periods ended September 30, 2016 and 2017 was 0% as a result of the Company recording a full valuation allowance against the deferred tax assets.

In determining the realizability of the net U.S. federal and state deferred tax assets, the Company considers numerous factors including historical profitability, estimated future taxable income, prudent and feasible tax planning strategies and the industry in which it operates. Management reassesses the realization of the deferred tax assets each reporting period, which resulted in a valuation allowance against the full amount of the Company’s U.S. deferred tax assets for the three- and nine-month periods ended September 30, 2016 and 2017. To the extent that the financial results of the U.S. operations improve in the future and the deferred tax assets become realizable, the Company will reduce the valuation allowance through earnings.
    
Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in the Company's ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses before they expire. A Section 382 limitation study performed as of March 31, 2017 determined there was an ownership change in 2006 and $1,538 of the 2006 net operating loss is unavailable.
Net operating loss carryforwards are available to offset federal taxable income and begin to expire in 2025. As of December 31, 2016 the Company has accumulated approximately $84,973 of federal tax losses.

The Company’s material income tax jurisdiction is the United States (federal). As a result of net operating loss carryforwards, the Company is subject to audit for tax years 2005 and forward for federal purposes. There are tax years which remain subject to examination in various other jurisdictions that are not material to the Company’s financial statements.
    


Note 10: Commitments and Contingencies:

Legal Proceedings—Third-party licensed sales associates filed three lawsuits against the Company in 2013 and 2014. Two of the actions, which are pled as “class actions,” were removed to and are now pending in the Northern District of California. One of these cases also includes representative claims under California’s Private Attorney General Act, Labor Code section 2698 et. seq (“PAGA”). The third action is pending in the Los Angeles County Superior Court and asserts representative claims under PAGA. All three complaints alleged that the Company had misclassified current and former third-party licensed sales associates in California as independent contractors and generally seek compensation for unpaid wages, overtime, and failure to provide meal and rest periods, as well as reimbursement of business expenses.

In June 2017, the Company entered into a definitive agreement to settle the lawsuits. The Company has recorded an accrual for $1,800 as of December 31, 2016 and September 30, 2017. The settlement agreement does not contain any admission of liability, wrongdoing, or responsibility by any of

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the parties. The proposed settlement class contemplated by the agreement includes all current and former third party licensed sales associates engaged by the Company in California from January 16, 2009, through April 29, 2017. This settlement agreement is subject to court approval.

As with all class action and representative litigation, these cases are inherently complex and subject to many uncertainties. In the event the settlement is not approved, the actions may continue and a class may be certified. If that happens, there can be no assurance the plaintiffs will not seek substantial damage awards, penalties, attorneys’ fees, or other remedies. The Company believes it has complied with all applicable laws and regulations and that it properly classified the third-party licensed sales associates as independent contractors.

In addition, from time to time, the Company is involved in litigation, claims and other proceedings arising in the ordinary course of business. Such litigation and other proceedings may include, but are not limited to, actions relating to employment law, intellectual property, the Real Estate Settlement Procedures Act of 1974, the Fair Housing Act of 1968, or other consumer protection statute claims, commercial or contractual arrangements, brokerage- or real estate related-disputes, ordinary- course brokerage disputes like the failure to disclose property defects, and vicarious liability based upon conduct of individuals or entities outside of the Company’s control, including partner agents and third-party contractor agents. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and could require significant management time and resources.

Facility Leases and Other Commitments—The Company leases its office space under noncancelable operating leases with terms ranging from one to 11 years. Generally, the leases require a fixed minimum rent with contractual minimum rent increases over the lease term, and certain leases include escalation provisions. Rent expense totaled $1,798 and $1,705 for the three months ended September 30, 2016 and 2017, respectively, and $4,022 and $6,030 for the nine months ended September 30, 2016 and 2017, respectively. Other commitments primarily relate to network infrastructure for the Company’s data operations and commitments for the Company’s annual employee meeting. Also included are homes that the Company is under contract to purchase through Redfin Now but that have not closed. Future minimum payments due under these agreements as of December 31, 2016 and September 30, 2017 are as follows:
 
Facility Leases
 
Other Commitments
 
December 31,
 
September 30,
 
December 31,
 
September 30,
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
2017
$
4,803

 
$
1,793

 
$
2,123

 
$
2,504

2018
6,227

 
7,592

 
848

 
642

2019
6,652

 
8,102

 

 

2020
5,563

 
7,183

 

 

2021 and thereafter
32,262

 
35,193

 

 

Total minimum lease payments
$
55,507

 
$
59,863

 
$
2,971

 
$
3,146


Mortgage Warehouse and Master Repurchase AgreementsIn December 2016, Redfin Mortgage entered into a Mortgage Warehouse Agreement with Texas Capital Bank, National Association (“Texas Capital”) and in June 2017 Redfin Mortgage entered into a Master Repurchase Agreement with Western Alliance Bank. Pursuant to the Mortgage Warehouse Agreement and Master Repurchase Agreement, Texas Capital and Western Alliance Bank both agree to fund loans originated by Redfin Mortgage, in its discretion, up to $10,000 each in the aggregate and to take a security interest in such loans. The per annum interest rate payable to Texas Capital is a fixed rate equal to the rate of interest accruing on the outstanding principal balance of the loan, minus 1.5%, or 3.0%, whichever is higher. The

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per annum interest rate payable to Western Alliance Bank is a fixed rate equal to the LIBOR rate plus 3.00%, or 3.75%, whichever is higher. For each loan in which Texas Capital elects to purchase a participation interest, it will acquire an undivided 97% participation interest, by paying as the purchase price an amount equal to the participation interest multiplied by the principal balance of the loan. For each loan in which Western Alliance Bank elects to purchase, it will acquire an undivided 98% participation interest, by paying as the purchase price an amount equal to the participation interest multiplied by the principal balance of the loan. If a loan is not sold to a correspondent lender, Texas Capital and Western Alliance Bank's participation interests in the loans are to be repurchased in whole or in part by Redfin Mortgage. The Company has guaranteed Redfin Mortgage’s obligations under the Mortgage Warehouse and Master Repurchase Agreements.

The Mortgage Warehouse Agreement and Master Repurchase Agreements require each of the Company and Redfin Mortgage to maintain certain financial covenants and to provide periodic financial and compliance reports. Redfin Mortgage failed to satisfy certain financial covenants under both agreements as of September 30, 2017, but has not received a notice of default related to such failure from either Texas Capital or Western Alliance Bank. As of December 31, 2016 and September 30, 2017, there were $0 and $598, respectively, outstanding under the Mortgage Warehouse Agreement and $107 drawn as of September 30, 2017 on the Master Repurchase Agreement.

Note 11: Accrued Liabilities:

The following table presents the detail of accrued liabilities as of the dates presented:
 
December 31,
 
September 30,
 
2016
 
2017
Accrued compensation and benefits
$
16,659

 
$
22,380

Legal fees and settlements
2,795

 
2,205

Miscellaneous accrued liabilities
2,799

 
5,617

Total accrued liabilities:
$
22,253

 
$
30,202



Note 12: Retirement Plan:

The Company adopted a 401(k) profit sharing plan effective January 2005. The plan covers eligible employees as of their hire date. The 401(k) component of the plan allows employees to elect to defer from 1% to 100% of their eligible compensation up to the federal limit per year. Company- matching and profit-sharing contributions are discretionary and are determined annually by Company management and approved by the board of directors. No matching or profit-sharing contributions were declared for the three months ended September 30, 2016 and 2017 or for the nine months ended September 30, 2016 and 2017.


ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements, the accompanying notes, other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on July 28, 2017. The following discussion contains forward-looking statements that involve risks and uncertainties such as our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements below. The following discussion also contains information using industry publications that generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied on therein. We are not aware of any misstatements regarding the industry, survey or research data provided herein, our estimates involve risks and uncertainties and are subject to change based upon various factors. Factors that could cause or contribute to those differences in our actual results and factors that may affect industry, survey or research data include, but are not limited to, those discussed below and those discussed elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections “Special Note Regarding Forward-Looking Statements” above and Part II, Item 1A. “Risk Factors” below.
In the below discussion, we use the term basis points to refer to units of one‑hundredth of one percent.
Overview
Redfin is a technology-powered, residential real estate brokerage. We represent people buying and selling homes in over 80 markets throughout the United States. Our mission is to redefine real estate in the consumer’s favor. In a commission-driven industry, we put the customer first. We do this by pairing our own agents with our own technology to create a service that is faster, better, and costs less.
On August 2, 2017, we completed our initial public offering, or IPO, in which we issued and sold 10,615,650 shares of our common stock (including 1,384,650 shares pursuant to the underwriters' option to purchase additional shares) at a public offering price of $15.00 per share. The aggregate gross proceeds were approximately $159.2 million. We received approximately $144.3 million in net proceeds after deducting approximately $11.1 million of underwriting discounts and commissions and approximately $3.8 million in estimated offering costs. Upon the closing of the IPO, all of the outstanding shares of our redeemable convertible preferred stock automatically converted into 55,422,002 shares of common stock on a one-for-one basis. Subsequent to the closing of the IPO, there are no shares of preferred stock outstanding.
Key Business Metrics
In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, develop financial forecasts, and make strategic decisions.



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Three Months Ended
 
Sep. 30, 2015
 
Dec. 31, 2015
 
Mar. 31, 2016
 
Jun. 30, 2016
 
Sep. 30, 2016
 
Dec. 31, 2016
 
Mar. 31, 2017
 
Jun. 30, 2017
 
Sep. 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Monthly average visitors (in thousands)
13,060

 
11,142

 
13,987

 
17,021

 
17,795

 
16,058

 
20,162

 
24,400

 
24,518

Real estate transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brokerage
5,653

 
4,510

 
4,005

 
7,497

 
7,934

 
6,432

 
5,692

 
10,221

 
10,527

Partner
2,718

 
2,273

 
1,936

 
2,602

 
2,663

 
2,281

 
2,041

 
2,874

 
3,101

Total
8,371

 
6,783

 
5,941

 
10,099

 
10,597

 
8,713

 
7,733

 
13,095

 
13,628

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate revenue per real estate transaction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brokerage
$
9,343

 
$
9,242

 
$
9,485

 
$
9,524

 
$
9,333

 
$
9,428

 
$
9,570

 
$
9,301

 
$
9,289

Partner
1,191

 
1,177

 
1,224

 
1,633

 
1,932

 
1,991

 
1,911

 
1,945

 
1,960

Aggregate
$
6,696

 
$
6,539

 
$
6,793

 
$
7,491

 
$
7,474

 
$
7,481

 
$
7,548

 
$
7,687

 
$
7,621

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate home value of real estate transactions (in millions)
3,837

 
2,984

 
2,599

 
4,684

 
4,898

 
4,018

 
3,470

 
6,119

 
6,341

U.S. market share by value
0.46
%
 
0.46
%
 
0.48
%
 
0.53
%
 
0.57
%
 
0.56
%
 
0.58
%
 
0.64
%
 
0.71
%
Revenue from top-10 Redfin markets as a percentage of real
estate revenue
76
%
 
73
%
 
71
%
 
74
%
 
72
%
 
71
%
 
68
%
 
69
%
 
69
%
Average number of lead agents
621

 
667

 
743

 
756

 
756

 
796

 
935

 
1,010

 
1,028


Monthly Average Visitors
The number of, and growth in, visitors to our website and mobile application are important leading indicators of our business activity because these channels are the primary ways we meet customers. For a particular period, monthly average visitors refers to the average of the number of unique visitors to our website and mobile application for each of the months in that period. Monthly average visitors are influenced by market conditions that affect interest in buying or selling homes, the level and success of our marketing programs, and seasonality. We believe we can continue to increase monthly visitors, which helps our growth.
Given the lengthy process to buy or sell a home, a visitor during one month may not convert to a revenue-generating customer until many months later, if at all.
When we refer to "monthly average visitors" for a particular period, we are referring to the average number of unique visitors to our website and our mobile application for each of the months in that period, as measured by Google Analytics, a product that provides digital marketing intelligence. Visitors are tracked by Google Analytics using cookies, with a unique cookie being assigned to each browser or mobile application on a device. For any given month, we count all of the unique cookies that visited our website or either our iOS or Android mobile application during that month; each such unique cookie is a unique visitor. If a person accesses our mobile application using different devices within a given month each such mobile device is counted as a separate visitor for that month. If the same person accesses our website using an anonymous browser, or clears or resets cookies on his or her device, each access with a new cookie is counted as a new unique visitor for that month.
Real Estate Transactions
Increasing the number of real estate transactions in which we or our partner agents represent homebuyers and home sellers is critical to increasing our revenue and, in turn, to achieving profitability. Real estate transactions are influenced by the pricing and quality of our services as well as market

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conditions that affect home sales, such as local inventory levels and mortgage interest rates. Real estate transactions are also affected by seasonality and macroeconomic factors. We include a single transaction twice when we or our partner agents serve both the homebuyer and the home seller of a transaction.
Real Estate Revenue per Real Estate Transaction
Real estate revenue per real estate transaction, together with the number of real estate transactions, is a factor in evaluating business growth and determining pricing. Changes in revenue per real estate transaction can be affected by our pricing, the mix of transactions for homebuyers and home sellers, changes in the value of homes in the markets we serve, the geographic mix of our transactions, and the transactions we refer to partner agents. We generally generate more real estate revenue per brokerage transaction from representing homebuyers than home sellers.
We calculate real estate revenue per real estate transaction by dividing brokerage, partner, or aggregate revenue, as applicable, by the corresponding number of real estate transactions in any period.
Aggregate Home Value of Real Estate Transactions
The aggregate home value of real estate transactions completed by our lead agents and of the real estate transactions we refer to partner agents is an important indicator of the health of our business because our revenue is largely based on a percentage of each home’s sale price. This metric is affected by changes in home values in the markets we serve and by changes in the number of customers who use our services as well as seasonality and macroeconomic factors. We include the value of a single transaction twice when we or our partner agents serve both the homebuyer and home seller of a transaction.
U.S. Market Share by Value
Increasing our U.S. market share by value is critical to our ability to grow our business and achieve profitability over the long term. We believe there is a significant opportunity to increase our share in the markets we currently serve.
We calculate the aggregate value of U.S. home sales by multiplying the total number of U.S. home sales by the mean sale price of these sales, each as reported by the National Association of Realtors. We calculate our market share by aggregating the home value of real estate transactions conducted by our lead agents or our partner agents. Then, in order to account for both the sell- and buy-side components of each transaction, we divide that value by two-times the estimated aggregate value of U.S. home sales.
Revenue from Top-10 Markets as a Percentage of Real Estate Revenue
Our top-10 markets by real estate revenue are the metropolitan areas of Boston, Chicago, Los Angeles, Maryland, Orange County, Portland, San Diego, San Francisco, Seattle, and Virginia. We plan to continue to diversify our growth and to increase our market share in our newer markets. We expect our revenue from top-10 markets to decline as a percentage of our real estate revenue over time.
Average Number of Lead Agents
The average number of lead agents, in combination with our other key metrics such as the number of brokerage transactions, is a basis for calculating agent productivity and is one indicator of the potential future growth of our business. We systematically evaluate traffic to our website and mobile application and customer activity to anticipate changes in customer demand, helping determine when and where to hire lead agents.
We calculate the average number of lead agents by taking the average of the number of lead agents at the end of each month included in the period.

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Table of Contents

Components of Our Results of Operations
Revenue
We generate revenue primarily from commissions and fees charged on real estate transactions closed by us or partner agents.
Real Estate Revenue
Brokerage Revenue. Brokerage revenue consists of commissions earned on real estate transactions closed by our lead agents. We recognize commission-based revenue on the closing of a transaction, less the amount of any commission refund or any closing-cost reduction, commission discount, or transaction-fee adjustment. Brokerage revenue is affected by the number of real estate transactions we close, the mix of brokerage transactions, home-sale prices, commission rates, and the amount we give to customers.
Partner Revenue. Partner revenue consists of fees partner agents pay us when they close referred transactions, less the amount of any payments we make to customers. We recognize these fees as revenue on the closing of a transaction. Partner revenue is affected by the number of partner transactions closed, home-sale prices, commission rates, and the amount we give to customers.
Other Revenue
Other revenue consists of fees charged for title and settlement services, mortgage banking operations, marketing services provided to home builders by our builder services group, licensing and analytics fees from our Walk Score service, homes sold by Redfin Now, and other services. Revenue is recognized when the service is provided. Redfin Now is our experimental new service where we buy homes directly from homeowners and resell them to homebuyers. Revenue earned from homes previously purchased by Redfin Now is recorded at closing on a gross basis, representing the sales price of the home.
Cost of Revenue and Gross Margin
Cost of revenue consists primarily of personnel costs (including base pay and benefits), stock- based compensation, transaction bonuses, home-touring and field expenses, listing expenses, business expenses, facilities expenses, and, for Redfin Now, the cost of homes including the purchase price and capitalized improvements.
Gross profit is revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has and will continue to be affected by a number of factors, including real estate revenue per real estate transaction and the productivity of our lead agents and support staff.
Operating Expenses
Technology and Development
Technology and development expenses relate primarily to developing new software used by our customers and internal teams, making enhancements to our existing software, and maintaining and improving our website and mobile application. These expenses consist primarily of personnel costs, stock-based compensation, data license expenses, software costs, and equipment and infrastructure costs, such as for data centers and hosted services. Technology and development expenses also include amortization of capitalized internal-use software and website and mobile application development costs.
Marketing

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Marketing expenses consist primarily of media costs for online and traditional advertising, as well as personnel costs and stock-based compensation.
General and Administrative
General and administrative expenses consist primarily of personnel costs, stock-based compensation, facilities costs and related expenses for our executive, finance, human resources and legal organizations, and fees for professional services. Professional services are principally comprised of external legal, audit, and tax services.
Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
 
(in thousands)
Revenue
$
81,064

 
$
109,479

 
$
200,414

 
$
274,282

Cost of revenue(1)
50,147

 
70,166

 
138,955

 
191,633

Gross profit
30,917

 
39,313

 
61,459

 
82,649

Operating expenses:
 
 
 
 
 
 
 
Technology and development(1)
9,781

 
11,483

 
25,739

 
31,245

Marketing(1)
5,436

 
5,588

 
23,133

 
26,179

General and administrative(1)
10,037

 
11,995

 
29,948

 
38,828

Total operating expenses
25,254

 
29,066

 
78,820

 
96,252

Income (loss) from operations
5,663

 
10,247

 
(17,361
)
 
(13,603
)
Total interest income and other income, net
37

 
311

 
170

 
400

Net income (loss)
$
5,700

 
$
10,558

 
$
(17,191
)
 
$
(13,203
)
(1) Includes stock-based compensation as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
 
(in thousands)
Cost of revenue
$
546

 
$
715

 
$
1,589

 
$
2,129

Technology and development
555

 
819

 
1,653

 
2,301

Marketing
114

 
121

 
336

 
362

General and administrative
940

 
1,054

 
2,312

 
3,236

Total
$
2,155

 
$
2,709

 
$
5,890

 
$
8,028



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Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
 
(as a percentage of revenue)
Revenue
100.0
%
 
100.0
%
 
100.0
 %
 
100.0
 %
Cost of revenue(1)
61.9

 
64.1

 
69.3

 
69.9

Gross profit
38.1

 
35.9

 
30.7

 
30.1

Operating expenses:
 
 
 
 
 
 
 
Technology and development(1) 
12.1

 
10.5

 
12.8

 
11.4

Marketing(1)
6.7

 
5.1

 
11.5

 
9.5

General and administrative(1) 
12.4

 
11.0

 
14.9

 
14.2

Total operating expenses
31.2

 
26.6

 
39.2

 
35.1

Income (loss) from operations
6.9

 
9.3

 
(8.5
)
 
(5.0
)
Total interest income and other income, net

 
0.3

 
0.1

 
0.1

Net income (loss)
6.9
%
 
9.6
%
 
(8.4
)%
 
(4.9
)%
(1) Includes stock-based compensation as follows:

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2017
 
2016
 
2017
 
 
 
 
 
 
 
 
 
(as a percentage of revenue)
Cost of revenue
0.7
%
 
0.7
%
 
0.8
%
 
0.8
%
Technology and development
0.7

 
0.7

 
0.8

 
0.8

Marketing
0.1

 
0.1

 
0.2

 
0.1

General and administrative
1.2

 
1.0

 
1.2

 
1.2

Total
2.7
%
 
2.5
%
 
3.0
%
 
2.9
%

Comparison of the Three Months Ended September 30, 2016 and 2017
Revenue
 
 
Three Months Ended September 30,
 
Change
 
 
2016
 
2017
 
Dollars
 
Percentage
 
 
 
 
 
 
 
 
 
 
 
(in thousands, except percentages)
Real estate revenue:
 
 
 
 
 
 
 
 
Brokerage revenue
 
$
74,052

 
$
97,787

 
$
23,735

 
32
%
Partner revenue
 
5,146

 
6,077

 
931

 
18

Total real estate revenue
 
79,198

 
103,864

 
24,666

 
31

Other revenue
 
1,866

 
5,615

 
3,749

 
201

Revenue
 
$
81,064

 
$
109,479

 
$
28,415

 
35

Percentage of revenue
 
 
 
 
 
 
 
 
Real estate revenue:
 
 
 
 
 
 
 
 
Brokerage