Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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 specific in its charter)
 

 
Delaware
 
74-3064240
 
 
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
1099 Stewart Street, Suite 600
Seattle, WA
 
98101
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
(206) 576-8333
 
 
(Registrant's telephone number, including area code)
 
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
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.
þ Yes
¨ No
 
 
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
þ 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 þ
 
Smaller reporting company ¨
Emerging growth company þ
 
 

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. þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes
þ No
As of November 1, 2018, there were 89,526,072 shares of the registrant's common stock outstanding.




Redfin Corporation
Quarterly Report on Form 10-Q
For the Three Months Ended September 30, 2018
TABLE OF CONTENTS

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








SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, our 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 I. Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017 and Part II. Item 1A. “Risk Factors” of this report. 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 report may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, you should not rely on forward-looking statements as predictions of future events. 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 report or to conform these statements to actual results or revised expectations.





PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Redfin Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts, unaudited)
 
September 30, 2018
 
December 31, 2017
Assets:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
448,968

 
$
208,342

Restricted cash
11,968

 
4,316

Prepaid expenses
5,933

 
8,613

Accrued revenue, net
13,254

 
13,334

Inventory
25,161

 
3,382

Loans held for sale
5,921

 
1,891

Other current assets
989

 
328

Total current assets
512,194

 
240,206

Property and equipment, net
23,361

 
22,318

Intangible assets, net
2,928

 
3,294

Goodwill
9,186

 
9,186

Other assets
7,248

 
6,951

Total assets
554,917

 
281,955

Liabilities and stockholders' equity:
 
 
 
Current liabilities:
 
 
 
Accounts payable
2,601

 
1,901

Accrued liabilities
37,532

 
26,605

Other payables
12,167

 
4,068

Loan facility
5,790

 
2,016

Current portion of deferred rent
1,691

 
1,267

Total current liabilities
59,781

 
35,857

Deferred rent, net of current portion
10,258

 
10,668

Convertible senior notes, net
112,130

 

Total liabilities
182,169

 
46,525

Commitments and contingencies (Note 11)

 

Stockholders’ equity:
 
 
 
Common stock—par value $0.001 per share; 500,000,000 shares authorized; 89,234,819 and 81,468,891 shares issued and outstanding, respectively
89

 
81

Preferred stock—par value $0.001 per share; 10,000,000 shares authorized and no shares issued and outstanding

 

Additional paid-in capital
531,418

 
364,352

Accumulated deficit
(158,759
)
 
(129,003
)
Total stockholders’ equity
372,748

 
235,430

Total liabilities and stockholders’ equity
$
554,917

 
$
281,955


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

1




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,
 
2018
 
2017
 
2018
 
2017
Revenue
$
140,255

 
$
109,479

 
$
362,791

 
$
274,282

Cost of revenue
97,950

 
70,166

 
269,576

 
191,633

Gross profit
42,305

 
39,313

 
93,215

 
82,649

Operating expenses:
 
 
 
 
 
 
 
Technology and development
14,310

 
11,483

 
40,105

 
31,245

Marketing
8,236

 
5,588

 
36,006

 
26,179

General and administrative
16,470

 
11,995

 
48,532

 
38,828

Total operating expenses
39,016

 
29,066

 
124,643

 
96,252

Income (loss) from operations
3,289

 
10,247

 
(31,428
)
 
(13,603
)
Interest income
1,775

 
311

 
3,082

 
387

Interest expense
(1,610
)
 

 
(1,610
)
 

Other income, net
21

 

 
200

 
13

Net income (loss)
$
3,475

 
$
10,558

 
$
(29,756
)
 
$
(13,203
)
Accretion of redeemable convertible preferred stock
$

 
$
(40,224
)
 
$

 
$
(175,915
)
Net income (loss) attributable to common stock - basic and diluted
$
3,475

 
$
(29,666
)
 
$
(29,756
)
 
$
(189,118
)
 
 
 
 
 
 
 
 
Net income (loss) per share attributable to common stock - basic
$
0.04

 
$
(0.50
)
 
$
(0.35
)
 
$
(6.37
)
Net income (loss) per share attributable to common stock - diluted
$
0.04

 
$
(0.50
)
 
$
(0.35
)
 
$
(6.37
)
 
 
 
 
 
 
 
 
Weighted average shares - basic
87,743,223

 
58,868,903

 
84,327,266

 
29,678,082

Weighted average shares - diluted
94,642,463

 
58,868,903

 
84,327,266

 
29,678,082


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

2



Redfin Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
 
Nine Months Ended
September 30,
 
2018
 
2017
Operating activities:
 
 
 
Net loss
$
(29,756
)
 
$
(13,203
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
6,123

 
5,326

Stock-based compensation
14,472

 
8,028

Amortization of debt discount and issuance costs
1,128

 

Change in assets and liabilities:
 
 
 
Prepaid expenses
2,680

 
(84
)
Accrued revenue
80

 
(2,712
)
Inventory
(21,779
)
 
(5,399
)
Other current assets
(576
)
 
8,556

Other long-term assets
(296
)
 
244

Accounts payable
702

 
1,228

Accrued liabilities
10,943

 
8,513

Deferred lease liability
(913
)
 
1,001

Accrued expenses
414

 

Origination of loans held for sale
(56,157
)
 
(5,755
)
Proceeds from sale of loans originated as held for sale
52,127

 
5,030

Net cash provided by (used in) operating activities
(20,808
)
 
10,773

Investing activities:
 
 
 
Maturities and sales of short-term investments

 
1,484

Purchases of short-term investments

 
(993
)
Purchases of property and equipment
(5,528
)
 
(10,499
)
Net cash used in investing activities
(5,528
)
 
(10,008
)
Financing activities:
 
 
 
Proceeds from issuance of convertible senior notes, net
138,953

 

Proceeds from follow-on offering, net
107,593

 

Proceeds from issuance of common stock
17,314

 
2,519

Tax payment related to net share settlements on restricted stock units
(705
)
 

Proceeds from initial public offering, net of underwriting discounts

 
148,088

Payment of initial public offering costs

 
(3,449
)
Borrowings from warehouse credit facilities
54,806

 
5,603

Repayments of warehouse credit facilities
(51,031
)
 
(4,898
)
Other payables - customer escrow deposits related to title services
7,684

 
6,065

Net cash provided by financing activities
274,614

 
153,928

Net change in cash, cash equivalents, and restricted cash
248,278

 
154,693

Cash, cash equivalents, and restricted cash:
 
 
 
Beginning of period
212,658

 
67,845

End of period
$
460,936

 
$
222,538

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

 
$
(175,915
)
Stock-based compensation capitalized in property and equipment
$
(363
)
 
$
(194
)
Initial public offering cost accruals
$

 
$
(200
)
Property and equipment additions in accounts payable and accrued expenses
$
(25
)
 
$

Leasehold improvements paid directly by lessor
$
(926
)
 
$
(104
)
Cash in transit for exercised stock options
$
(85
)
 
$


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

3



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

 
Redeemable Convertible
Preferred Stock
 
 
Common Stock
 
Additional
Paid-in Capital
 
Accumulated Deficit
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
 
Balance, January 1, 2017
55,422,002

 
$
655,416

 
 
14,687,024

 
$
15

 
$

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

 

 
 

 

 
522

 
(522
)
 

Proceeds from initial public offering, net of underwriters' discounts

 

 
 
10,615,650

 
10

 
148,078

 

 
148,088

Initial public offering costs

 

 
 

 

 
(3,708
)
 

 
(3,708
)
Exercise of stock options

 

 
 
744,215

 
1

 
3,000

 

 
3,001

Stock-based compensation

 

 
 

 

 
11,369

 

 
11,369

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

 
213,781

 
617,495

 
831,331

Net loss

 

 
 

 

 

 
(15,002
)
 
(15,002
)
Balance, December 31, 2017

 
$

 
 
81,468,891

 
$
81

 
$
364,352

 
$
(129,003
)
 
$
235,430

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock pursuant to employee stock purchase program

 

 
 
187,076

 

 
3,672

 

 
3,672

Exercise of stock options

 

 
 
2,653,008

 
3

 
13,725

 

 
13,728

Issuance of common stock pursuant to restricted stock units

 

 
 
127,746

 

 

 

 

Restricted stock surrendered for employees' tax liability

 

 
 
(38,238
)
 

 
(705
)
 

 
(705
)
Issuance of common stock related to follow-on offering, net

 

 
 
4,836,336

 
5

 
107,588

 

 
107,593

Equity component of convertible senior notes, net

 

 
 

 

 
27,951

 

 
27,951

Stock-based compensation

 

 
 

 

 
14,835

 

 
14,835

Net loss

 

 
 

 

 

 
(29,756
)
 
(29,756
)
Balance, September 30, 2018

 
$

 
 
89,234,819

 
$
89

 
$
531,418

 
$
(158,759
)
 
$
372,748



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


4



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 BusinessRedfin 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 in the purchase or sale of their residential property. The Company also provides title and settlement services, originates and sells mortgages, and buys and sells residential properties via wholly owned subsidiaries. The Company has operations located in multiple states nationwide.

Initial Public OfferingOn August 2, 2017, the Company completed an initial public offering (the "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 approximately $144,380 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 CostsCosts, including legal, accounting and other fees and costs relating to the IPO, were accounted for as a reduction in additional paid-in capital. Aggregate offering expenses totaled $3,708.
Follow-on OfferingsOn July 23, 2018, the Company completed follow-on public offerings of 4,836,336 shares of common stock (including 630,826 shares pursuant to the underwriters’ option to purchase additional shares) and $143,750 aggregate principal amount of 1.75% Convertible Senior Notes due 2023 (the "Notes") (including $18,750 principal amount of Notes sold pursuant to the underwriters’ option to purchase additional Notes). The public offering price for our common stock offering was $23.50 per share. The Company received net proceeds of approximately $107,593 from the common stock offering and $138,953 from the Notes offering, in each case after deducting the underwriting discounts and issuance costs directly attributable to each offering.

Follow-on Offerings CostsCosts include legal, accounting and other fees and costs relating to both the common stock offering and the Notes offering. Aggregate issuance costs totaled $862.

Basis of PresentationThe consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The Company had no components of other comprehensive income (loss) during any of the periods 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 the Company's financial position as of September 30, 2018, the Company's results of operations for the three and nine months ended September 30, 2018 and 2017, and the Company's cash flows for the nine months ended September 30, 2018 and 2017. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 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 UncertaintiesThe Company is subject to the risks and challenges associated with companies at a similar stage of development. These include dependence on

5


key individuals, successful development and marketing of its offerings, and competition with larger companies with greater financial, technical, and marketing resources. Further, to achieve substantially higher revenue in order to become profitable, the Company may require additional funds that may not be available or may not be on terms that are acceptable to the Company.

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 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. Since inception through September 30, 2018, the Company has incurred losses from operations and accumulated a deficit of $158,759, during which it has been dependent on equity financing to fund operations.

Use of EstimatesThe preparation of consolidated 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. The Company’s more significant estimates include, but are not limited to, valuation of deferred income taxes, stock-based compensation, net realizable value of inventory, prior to its conversion on August 2, 2017 the fair value of common stock and redeemable convertible preferred stock, capitalization of website development costs, recoverability of intangible assets with finite lives, fair value of reporting units for purposes of evaluating goodwill for impairment, and the fair value of the convertible feature related to the Notes (see Note 15). 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 the Company's significant accounting policies during the nine months ended September 30, 2018, from the significant accounting policies included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, except as noted below.
    
Recently Adopted Accounting PronouncementsIn May 2014, the Financial Accounting Standards Board ("FASB") issued a new Accounting Standard Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606). 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 adopted ASU 2014-09 and its related amendments (collectively known as ASC 606) effective on January 1, 2018, using the modified retrospective adoption methodology. Real estate services, properties 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, did not differ from the Company's timing for recognizing revenue prior to adopting this pronouncement. Further description of the impact of this pronouncement is included in Note 2: Revenue from Contracts with Customers.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This guidance impacts the classification of certain cash receipts and cash payments in the statement of cash flows. The new standard made eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The Company adopted the new standard on a retrospective basis on January 1, 2018. The adoption of this standard had no impact on the Company’s statement of cash flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This guidance impacts 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 early adopted this guidance on

6


October 1, 2017. Upon adoption, the following balances were reclassified: restricted cash to the reconciliation of change in cash, cash equivalents and restricted cash, and other payables related to cash held in escrow on behalf of customers 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, a financing activity, whereby the Company in its role as fiduciary is temporarily holding cash in its restricted accounts on behalf of its customers and subsequently releases the cash to settle the customers' contractual obligation. This reclassification will maintain an accurate reflection of the Company's cash flows from operating and financing activities. The reconciliation of amounts previously reported to the revised amounts upon adoption are as follows:
Nine Months Ended September 30, 2017
 
Previously reported
 
Adjustments
 
As revised
Cash provided by operating activities
 
$
10,551

 
$
222

 
$
10,773

Cash provided by financing activities
 
$
147,863

 
$
6,065

 
$
153,928

Net change in cash, cash equivalents, and restricted cash (1)
 
$
148,406

 
$
6,287

 
$
154,693

(1) Previously titled: net change in cash and cash equivalents
 
 
 
 
 
 

Recently Issued Accounting PronouncementsIn February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). 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. 

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) providing an optional alternative transition method to the modified retrospective approach whereby under this optional transition method an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. In addition, this ASU provides a practical expedient, by class of underlying asset, to not separate non-lease components from the associated lease and instead account for the lease as a single component if both the timing and pattern of transfer of the non-lease component(s) are the same, and if the lease would be classified as an operating lease. These amendments have the same effective date as ASU 2016-02. Early adoption is permitted for both ASU 2016-02 and 2018-11.

The Company plans to elect the optional transition method on the adoption date of January 1, 2019. The Company is in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, including implementing changes to its systems, processes, and internal controls. It is believed the most significant change will relate to the recognition of right-of-use assets and lease liabilities on the Company’s balance sheet for real estate leases that are currently accounted for as operating leases, as well as the accompanying disclosures. The Company is unable to estimate the impact at this time but believes it will be material.
 
In August 2018, the Securities and Exchange Commission (the "SEC") adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule became effective on November 5, 2018, but the staff of the SEC provided relief on the effective date of the rule with respect to the analysis of stockholders' equity until the Company's Form 10-Q for its fiscal quarter ending March 31, 2019. The Company is in the process of evaluating the impact of the final rule on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosures on fair value measurements by removing the requirement to disclose the amount

7


and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarily focused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Company has not yet completed its assessment of the impact of the new standard on the Company’s Consolidated Financial Statements.

In August 2018, the FASB issued authoritative guidance under ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to be capitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancellable term of the cloud computing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise is controlled by the service provider. The ASU is effective in the first quarter of fiscal 2021. The Company is currently in the process of evaluating the impact of the final rule on its consolidated financial statements.

Note 2: Revenue from Contracts with Customers
    
Revenue RecognitionThe Company applies the provisions of ASC 606-10, Revenue from Contracts with Customers ("ASC 606"), and all related appropriate guidance. The Company recognizes revenue under the core principle to depict the transfer of control to the Company’s customers in an amount reflecting the consideration the Company expects to be entitled. In order to achieve that core principle, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

    The Company’s revenue primarily consists of commissions and fees charged on each real estate services transaction completed by the Company or its partner agents. The Company’s key revenue components are brokerage revenue, partner revenue, property sales revenue, and other revenue. Revenue earned but not received is recorded as accrued revenue on the accompanying consolidated balance sheets, net of an allowance for doubtful accounts. The Company does not separately disclose the amounts of product and service revenue.

Cost of Revenue—Cost of revenue consists primarily of personnel costs (including base pay, benefits, and stock-based compensation), transaction bonuses, home-touring and field expenses, listing expenses, property costs related to our properties segment, office and occupancy expenses, and depreciation and amortization related to fixed assets and acquired intangible assets. Property costs related to our properties segment include the property purchase price, capitalized improvements, selling expenses directly attributable to the transaction, and property maintenance expenses.
    
Nature and Disaggregation of Revenue
    
Real Estate Services
        
Brokerage Revenue—The Company recognizes commission-based brokerage revenue upon closing of a real estate services transaction, net of any commission refund or any closing-cost reduction. Brokerage revenue includes the Company's offer and listing services, representing homebuyers and home sellers. The transaction price is calculated by taking the agreed upon commission rate and applying that to the home's selling price. Brokerage revenue contains a single performance obligation that is satisfied upon the closing of a real estate services transaction, at which point the entire transaction price is earned. The Company is not entitled to any commission until the performance obligation is satisfied and is not owed any commission for unsuccessful transactions, even if services have been provided.
        
Partner Revenue—Partner revenue consists of fees earned by referring customers to partner agents. Partner revenue is earned and recognized when partner agents close referred transactions,

8


net of any refunds provided to customers. The transaction price is a fixed percentage of the partner agent's commission. The partner agent directly remits the referral fee revenue to the Company. The Company is not entitled to any referral fee revenue until the related referred real estate services transaction closes, at which point the entire transaction price is earned and recognized as revenue.    

Properties

Properties Revenue—Properties revenue consists of revenue earned when the Company sells homes that it previously bought directly from homeowners. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home. The Company does not offer warranties for sold homes, and there are no continuing performance obligations following the transaction close date.
    
Other
            
Other Revenue—Substantially all fees and revenue from other services are recognized when the service is provided. Other services revenue includes fees earned from mortgage banking services, title settlement services, Walk Score data services, and advertising. Mortgage banking services are not subject to the guidance in ASC 606 as the scope of the standard does not apply to revenue on contracts accounted for under Transfers and Servicing (Topic 860) but are included in other services revenue to reconcile total revenue presented on the condensed consolidated statements of operations to the disaggregation of revenue table below.
    
The Company's revenue from contracts with customers for the various revenue categories is as follows:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Real estate services
 
 
 
 
 
 
 
Brokerage revenue
$
118,809

 
$
97,787

 
$
312,306

 
$
247,327

Partner revenue
7,456

 
6,077

 
19,741

 
15,567

Total real estate services revenue
126,265

 
103,864

 
332,047

 
262,894

 
 
 
 
 
 
 
 
Properties revenue
11,350

 
3,364

 
23,388

 
5,345

 
 
 
 
 
 
 
 
Other revenue
2,640

 
2,251

 
7,356

 
6,043

 
 
 
 
 
 
 
 
Total revenue
$
140,255

 
$
109,479

 
$
362,791

 
$
274,282

    
Other ConsiderationsThe Company’s contracts with customers do not contain significant estimates or judgment. For both the real estate services and properties businesses, the Company's contracts with customers contain a single performance obligation that is recognized upon a transaction closing. The Company has utilized the practical expedient in ASC 606 and elected not to capitalize contract costs for contracts with customers with durations less than one year. The Company does not have significant remaining performance obligations or contract balances.
    
Accrued Revenue and Allowance for Doubtful AccountsThe Company establishes an allowance for doubtful accounts after reviewing historical experience, age of accounts receivable balances and any other known conditions that may affect collectability. The majority of the Company’s transactions are processed through escrow and collectability is not a significant risk. Accrued revenue related to real estate services and properties transactions represents closed transactions for which the cash has not yet been received. Properties had no balances in these accounts as of September 30, 2018. The following table presents the activity in the allowance for doubtful accounts for the period presented:

9


 
 
Nine Months Ended September 30, 2018
Allowance for doubtful accounts:
 
 
Balance, December 31, 2017
 
$
160

Charges
 
(28
)
Write-offs
 
25

Balance, September 30, 2018
 
$
157

 
 
 
Accrued revenue as of September 30, 2018:
 
 
Accrued revenue
 
$
13,411

Less: Allowance for doubtful accounts
 
157

Accrued revenue, net
 
$
13,254


Note 3: Fair Value of Financial Instruments

The Company accounts for certain assets and liabilities at fair value. 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 1—Unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs other than quoted prices included within Level 1 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 3—Unobservable inputs that are supported by little or no market activity, requiring the Company to develop its own assumptions. The Company's interest rate lock commitments are measured at fair value on a recurring basis. The Company estimates the fair value of an interest rate lock commitment based on quoted investor prices, net of origination costs and fees and the probability that the mortgage loan will be purchased within the terms of the interest rate lock commitment.

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 1, Level 2 and Level 3 assets and (liabilities). Level 1 assets include highly liquid money market funds, Level 2 assets and (liabilities) include forward sales commitments, and Level 3 assets and (liabilities) include interest rate lock commitments. As of September 30, 2018, forward sales commitments and interest rate lock commitments were broken out between Other asset and Other payables, as well as interest rate lock commitments were reclassified to Level 3.

A summary of assets and (liabilities) at September 30, 2018 and December 31, 2017, related to the Company's financial instruments, measured at fair value on a recurring basis, is set forth below:
 
 
 
 
Fair Value
Financial Instrument
 
Balance sheet location
 
September 30, 2018
 
December 31, 2017
Money market funds
 
Cash and cash equivalents
Level 1
$
440,216

 
$
177,235

Forward sales commitments
 
Other current assets
Level 2
71

 
9

Forward sales commitments
 
Accrued liabilities
Level 2
(6
)
 
(2
)
Interest rate lock commitments
 
Other current assets
Level 3
120

 
29

Interest rate lock commitments
 
Accrued liabilities
Level 3
(25
)
 
(4
)


10


The changes in the Level 3 financial instruments that are measured at fair value on a recurring basis were immaterial during the periods presented.

See Note 15 for the carrying amount and estimated fair value of the Notes.

Note 4: Property and Equipment

A summary of property and equipment at September 30, 2018 and December 31, 2017 is as follows:
 
Useful Lives (Years)
 
September 30, 2018
 
December 31, 2017
Leasehold improvements
Shorter of lease term or economic life
 
$
17,610

 
$
16,039

Website and software development costs
1-3
 
18,153

 
14,501

Computer and office equipment
3
 
2,678

 
2,192

Software
3
 
594

 
685

Furniture
7
 
3,636

 
3,039

Property and equipment, gross
 
 
42,671

 
36,456

Accumulated depreciation and amortization
 
 
(19,310
)
 
(14,138
)
Property and equipment, net
 
 
$
23,361

 
$
22,318


Depreciation and amortization expense for property and equipment amounted to $2,099 and $1,665 for the three months ended September 30, 2018 and 2017, respectively, and $5,757 and $4,960 for the nine months ended September 30, 2018 and 2017, respectively.

Note 5: Acquired Intangible Assets

The following table presents details of the Company's intangible assets subject to amortization as of the dates presented:
 
 
 
As of September 30, 2018
 
As of December 31, 2017
 
Useful
Live
(years)
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
Trade names
10
 
$
1,040

 
$
(416
)
 
$
624

 
$
1,040

 
$
(338
)
 
$
702

Developed technology
10
 
2,980

 
(1,192
)
 
1,788

 
2,980

 
(968
)
 
2,012

Customer relationships
10
 
860

 
(344
)
 
516

 
860

 
(280
)
 
580

 
 
 
$
4,880

 
$
(1,952
)
 
$
2,928

 
$
4,880

 
$
(1,586
)
 
$
3,294


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 and $366 for the three and nine months ended September 30, 2018 and 2017, respectively. Amortization expense of $2,440 will be recognized over the next five years, or $488 per year.

Note 6: Segment Reporting

In its operation of the business, the Company's management, including its chief operating decision maker, who is also the Chief Executive Officer, 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 long-term assets, all of which are located in the United States. All other financial information is presented on a consolidated basis. The Company has five operating segments and two reportable segments, real estate services and properties.

The Company's reportable segments and other segments are described below:

Real estate services


11


Real estate services revenue is derived from commissions and fees charged on real estate services transactions closed by the Company or its partner agents.

Properties

Properties was a new reportable segment as of June 30, 2018. Prior to June 30, 2018, the properties segment results were included as part of the Company's other segment. Properties revenue is earned when the Company sells homes that it previously bought directly from homeowners.

Other

Other services revenue includes fees earned from mortgage banking services, title settlement services, Walk Score data services, and advertising. Included in other are all operating segments and revenue not otherwise included in reportable operating segments.

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,
 
2018
 
2017
 
2018
 
2017
Real estate services
 
 
 
 
 
 
 
Revenue
$
126,265

 
$
103,864

 
$
332,047

 
$
262,894

Cost of revenue
83,274

 
64,258

 
236,775

 
178,850

Gross profit
$
42,991

 
$
39,606

 
$
95,272

 
$
84,044

Properties
 
 
 
 
 
 
 
Revenue
$
11,350

 
$
3,364

 
$
23,388

 
$
5,345

Cost of revenue
11,656

 
3,326

 
24,086

 
5,361

Gross profit
$
(306
)
 
$
38

 
$
(698
)
 
$
(16
)
Other
 
 
 
 
 
 
 
Revenue
$
2,640

 
$
2,251

 
$
7,356

 
$
6,043

Cost of revenue
3,020

 
2,582

 
8,715

 
7,422

Gross profit
$
(380
)
 
$
(331
)
 
$
(1,359
)
 
$
(1,379
)
Consolidated
 
 
 
 
 
 
 
Revenue
$
140,255

 
$
109,479

 
$
362,791

 
$
274,282

Cost of revenue
97,950

 
70,166

 
269,576

 
191,633

Gross profit
$
42,305

 
$
39,313

 
$
93,215

 
$
82,649

Operating expenses
39,016

 
29,066

 
124,643

 
96,252

      Interest income
1,775

 
311

 
3,082

 
387

      Interest expense
(1,610
)
 

 
(1,610
)
 

      Other income, net
21

 

 
200

 
13

Net income (loss)
$
3,475

 
$
10,558

 
$
(29,756
)
 
$
(13,203
)

Note 7: Redeemable Convertible Preferred Stock and Stockholders’ Equity

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. Therefore, no shares of redeemable convertible preferred stock were authorized, issued and outstanding as of September 30, 2018.

Please see Note 6 to the Company's consolidated financial statements in its Annual Report on Form 10-K for the fiscal year ended December 31, 2017 for a description of the terms of the redeemable convertible preferred stock.

Accretion Expense—Accretion represents the increase in the redemption value of the Company’s redeemable convertible preferred stock. The recognized accretion expense related to the increase in the redemption value of the redeemable convertible preferred stock was reclassed upon the successful completion of the IPO, which occurred during 2017.

12



The following table presents the accretion 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 during the three and nine months ended September 30, 2017:
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
Series A-1
$
(1,119
)
 
$
(4,904
)
Series A-2
(28
)
 
(123
)
Series A-3
(2,349
)
 
(10,192
)
Series B
(9,284
)
 
(40,336
)
Series C
(8,530
)
 
(37,062
)
Series D
(7,300
)
 
(31,717
)
Series E
(2,948
)
 
(12,884
)
Series F
(4,541
)
 
(20,184
)
Series G
(4,125
)
 
(18,513
)
Total
$
(40,224
)
 
$
(175,915
)


Common Stock—At September 30, 2018 and December 31, 2017, the Company was authorized to issue 500,000,000 shares 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:
 
September 30, 2018
 
December 31, 2017
Equity Incentive Plans:
 
 
 
Stock options issued and outstanding
10,150,522

 
13,180,950

Restricted stock units outstanding
2,081,173

 
981,276

Shares available for future equity grants
6,214,739

 
7,026,071

Total
18,446,434

 
21,188,297

 
 
 
 
2017 Employee Stock Purchase Plan:
 
 
 
Shares issued under employee stock purchase plan
187,076

 

Shares available for future purchases under employee stock purchase plan
2,227,612

 
1,600,000

Total
2,414,688

 
1,600,000


Preferred StockAs of September 30, 2018 and December 31, 2017, the Company had authorized 10,000,000 shares of preferred stock, par value $0.001, of which no shares were issued and outstanding.


13


Note 8: 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 are accomplished through participation in discrete offering periods which last 6 months each, and begin every January 1 and July 1. 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 January 1, 2028 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. On February 22, 2018, the board of directors determined to increase to the number of shares reserved for issuance under the 2017 ESPP by 814,688 shares. On each purchase date, participating employees purchase the Company’s common stock at a price per share equal to 85% of the lesser of (1) the fair market value of the Company’s common stock on the first trading day of the offering period, and (2) the fair market value of the Company’s common stock on the purchase date.

During the three months ended September 30, 2018, no shares of common stock were purchased under the 2017 ESPP. The fair value of common shares to be issued under the 2017 ESPP were calculated using the Black-Scholes-Merton option-pricing model with the following assumptions:
 
For the Offering Period beginning July 1, 2018
Expected life
0.5 years
Volatility
39.25%
Risk-free interest rate
2.14%
Dividend yield
—%
Weighted-average grant date fair value
$5.94
    
2017 Equity Incentive PlanThe 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 Company initially reserved 7,898,159 shares of common stock for issuance under the 2017 EIP. The number of shares reserved for issuance under the 2017 EIP will increase automatically on January 1 of each calendar year beginning on January 1, 2018 and continuing through January 1, 2028, by the number of shares equal to the lesser of 5% 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. On December 22, 2017, the board of directors determined that there would be no increase to the number of shares reserved for issuance under the 2017 EIP on January 1, 2018. The term of each restricted stock unit under the plan shall be no more than 10 years and generally vest over a four-year period. The term of each option grant shall be no more than 10 years and generally vest over a four-year period.

Amended and Restated 2004 Equity Incentive Plan-The Company granted options under its Amended and Restated 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.

Options to Purchase Common Stock—The Company did not issue any options to purchase common stock during the three and nine months ended September 30, 2018 and the three months ended September 30, 2017. The fair value of the options issued under the Amended and Restated 2004 Equity Incentive Plan for the nine months ended September 30, 2017 were calculated using the Black-Scholes-Merton option-pricing model with the following assumptions:    

14


 
Nine Months Ended September 30, 2017
Expected life
7 years
Volatility
37.88%-40.97%
Risk-free interest rate
1.96%-2.26%
Dividend yield
—%
Weighted-average grant date fair value
4.86

The following table presents information regarding options granted, exercised, forfeited, or canceled for the periods presented:
 

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

Aggregate Intrinsic Value
Outstanding at December 31, 2017
13,180,950
 
$
6.30

 
7.02
 
$
329,786

Options granted

 

 
 
 
 
Options exercised
(2,653,008)
 
5.17

 
 
 
 
Options forfeited
(367,541)
 
9.45

 
 
 
 
Options canceled
(9,879)
 
8.26

 
 
 
 
Outstanding at September 30, 2018
10,150,522
 
6.48

 
6.27
 
124,054

Options exercisable at September 30, 2018
7,750,226
 
$
5.67

 
5.79
 
$
100,976


The grant date fair value of options to purchase common stock is recorded as stock-based compensation over the vesting period. As of September 30, 2018, there was $10,221 of total unrecognized compensation cost related to options to purchase common stock, which is expected to be recognized over a weighted-average period of 1.71 years.

Restricted Stock Units—The following table summarizes activity for restricted stock units for the nine months ended September 30, 2018:
 
Restricted Stock Units
 
Weighted Average Grant-Date Fair Value
Unvested outstanding at December 31, 2017
981,276

 
$
22.78

Granted
1,400,212

 
21.17

Vested
(127,746
)
 
22.57

Forfeited or canceled
(172,569
)
 
21.86

Unvested outstanding at September 30, 2018
2,081,173

 
$
21.79


The grant date fair value of restricted stock units is recorded as stock-based compensation over the vesting period. As of September 30, 2018, there was $41,148 of total unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted-average period of 3.28 years.

During the three months ended September 30, 2018, the Company granted 8,913 restricted stock units subject to performance conditions at 100% of the target level. As of September 30, 2018, there were outstanding 143,890 restricted stock units subject to performance conditions (the "2018 Performance RSUs") at 100% of the target level. Depending on the Company's achievement of the performance conditions, the actual amount of shares of common stock issuable upon vesting of the 2018 Performance RSUs will range from 0% to 200% of the target amount of restricted stock units. For each recipient of the 2018 Performance RSUs, the award will vest, subject to the recipient continuing to provide service to the Company, upon the Company's board of directors, or its compensation committee, certifying that the Company achieved certain financial targets for the three-year period from January 1, 2018 to December 31, 2020. Share-based compensation expense for 2018 Performance RSUs will be recognized when it is probable that the performance conditions will be achieved. As of September 30, 2018, $379 of share-based

15


compensation expense was recognized for the 2018 Performance RSUs.
    
Compensation Cost—The following table presents detail of stock-based compensation, net of the amount capitalized in internally developed software, 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,
 
2018
 
2017
 
2018
 
2017
Cost of revenue
$
1,370

 
$
715

 
$
4,061

 
$
2,129

Technology and development
2,135

 
819

 
5,334

 
2,301

Marketing
155

 
121

 
431

 
362

General and administrative
1,838

 
1,054

 
4,646

 
3,236

Total stock-based compensation
$
5,498

 
$
2,709

 
$
14,472

 
$
8,028


Note 9: 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, restricted stock units, employee stock purchase plan shares, Notes, and previously had redeemable convertible preferred stock, which are considered 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 income (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. Upon the conversion of the redeemable convertible preferred stock to common stock on the date of the IPO, or August 2, 2017, the Company only had one class of participating security, common stock. 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.

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,
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
3,475

 
$
10,558

 
$
(29,756
)
 
$
(13,203
)
Accretion of preferred stock

 
(40,224
)
 

 
(175,915
)
Net income (loss) attributable to common stock - basic and diluted
$
3,475

 
$
(29,666
)
 
$
(29,756
)
 
$
(189,118
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
87,743,223

 
58,868,903

 
84,327,266

 
29,678,082

Dilutive shares from stock plans
6,899,240

 

 

 

Diluted
94,642,463

 
58,868,903

 
84,327,266

 
29,678,082

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

 
$
(0.50
)
 
$
(0.35
)
 
$
(6.37
)
Net income (loss) per share attributable to common stock - diluted
$
0.04

 
$
(0.50
)
 
$
(0.35
)
 
$
(6.37
)

The following outstanding shares of common stock equivalents as of September 30, 2018 and 2017 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:

16


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Redeemable convertible preferred stock

 
55,422,002

 

 
55,422,002

Options to purchase common stock

 
13,298,339

 
10,150,522

 
13,298,339

Restricted stock units
238,668

 

 
2,081,173

 

Total
238,668

 
68,720,341

 
12,231,695

 
68,720,341

    
The Company considered the impact of the Notes on its diluted net income per share for the three months ended September 30, 2018 based on the treasury stock method as the Company has the ability, and intends, to settle any conversions of the Notes solely in cash. The treasury stock method requires that the dilutive effect of common stock issuable upon conversion of the Notes be computed in the periods in which it reports net income. For the three months ended September 30, 2018, there was no dilutive effect from the Notes.


Note 10: Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act incorporates broad and complex changes to the U.S. tax code. The main provision of the Tax Act that is applicable to the Company is the reduction of a maximum federal tax rate of 35% to a flat tax rate of 21%, effective January 1, 2018. The Company incorporated the change in federal tax rates in its annual tax provision for the period ended December 31, 2017. The net impact to the Company’s tax expense was $0. As of December 31, 2017, the Company completed and recorded the adjustments necessary under Staff Accounting Bulletin No. 118 related to the Tax Act.

The Company’s effective tax rate for the three and nine months ended September 30, 2018 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 ended September 30, 2018 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, 2017 the Company has accumulated approximately $87,071 of federal tax losses, and approximately $4,231 (tax effected) of state 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.

17



Note 11: Commitments and Contingencies
    
Legal ProceedingsFrom time to time the Company is involved in litigation, claims and other proceedings arising in the ordinary course of business. This litigation and other proceedings may include, but are not limited to, actions relating to employment law, independent contractor misclassification, intellectual property, commercial or contractual claims, brokerage or real estate disputes, claims related to the Real Estate Settlement Procedures Act of 1974, the Fair Housing Act of 1968, or other consumer protection statutes, claims related to real or perceived conflicts of interest or failure to satisfy duties to our customers, real estate disputes like the failure to disclose property defects, commission disputes, 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 $2,015 and $1,705 for the three months ended September 30, 2018 and 2017, respectively, and $5,859 and $6,030 for the nine months ended September 30, 2018 and 2017, respectively. Other commitments relate to homes that the Company is under contract to purchase through RedfinNow but that have not closed, and network infrastructure for the Company’s data operations. Future minimum payments due under these agreements as of September 30, 2018 are as follows:
 
September 30, 2018
 
Facility Leases
 
Other Commitments
2018
$
2,256

 
$
4,556

2019
9,940

 
2,386

2020
9,668

 
218

2021
9,040

 
83

2022 and thereafter
34,922

 
0

Total minimum lease payments
$
65,826

 
$
7,243


Mortgage Warehouse and Master Repurchase AgreementsIn December 2016, Redfin Mortgage, LLC ("Redfin Mortgage") entered into a Mortgage Warehouse Agreement with Texas Capital Bank, National Association (“Texas Capital”), which was amended and restated in December 2017. In June 2017, Redfin Mortgage entered into a Master Repurchase Agreement, which was amended in September 2018, with Western Alliance Bank. Pursuant to each of the Mortgage Warehouse Agreement and Master Repurchase Agreement, Texas Capital and Western Alliance Bank, respectively, agree to fund loans originated by Redfin Mortgage, in its discretion, up to $10,000 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 0.5%, or 3.0%, whichever is higher. The per annum interest rate payable to Western Alliance Bank is a fixed rate equal to the LIBOR rate plus 2.75%, or 3.50%, 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 Agreement each requires Redfin

18


Mortgage to maintain certain financial covenants and to provide periodic financial and compliance reports. Redfin Mortgage failed to satisfy certain financial covenants contained in each of the Mortgage Warehouse Agreement and Master Repurchase Agreement as of September 30, 2018, but neither Texas Capital nor Western Alliance Bank, respectively, has enforced its remedies under the agreement. As of September 30, 2018 there was $5,791 outstanding under the Mortgage Warehouse Agreement and $0 outstanding on the Master Repurchase Agreement. As of December 31, 2017 there was $833 outstanding under the Mortgage Warehouse Agreement and $1,184 outstanding on the Master Repurchase Agreement. The Mortgage Warehouse Agreement expires on March 22, 2019 and the Master Repurchase Agreement expires on June 15, 2019.

Note 12: Accrued Liabilities

The following table presents the detail of accrued liabilities as of the dates presented:
 
September 30, 2018
 
December 31, 2017
Accrued compensation and benefits
$
29,370

 
$
19,543

Legal fees and settlements
270

 
2,230

Miscellaneous accrued liabilities
7,892

 
4,832

Total accrued liabilities:
$
37,532

 
$
26,605


Note 13: Other Payables

Other payables consists primarily of customer deposits for cash held in escrow on behalf of real estate buyers using the Company's title and settlement services. Since the Company does not have rights to the cash the customer deposits are recorded as a liability with a corresponding asset in the same amount recorded within restricted cash. The following table presents the detail of other payables as of the dates presented:
 
September 30, 2018
 
December 31, 2017
Customer deposits
$
11,773

 
$
4,068

Miscellaneous payables
394

 

Total other payables:
$
12,167

 
$
4,068


Note 14: 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 and nine months ended September 30, 2018 and 2017.

Note 15: Convertible Senior Notes

On July 23, 2018, the Company issued $143,750 aggregate principal amount of Notes, from which it received $138,953 in net proceeds after deducting the underwriting discount and other issuance costs.
The Notes are senior, unsecured obligations of Redfin, and bear interest at a fixed rate of 1.75% per year, payable semi-annually in arrears on January 15 and July 15. The Notes mature on July 15, 2023, unless earlier repurchased, redeemed or converted. Prior to April 15, 2023, the Notes are convertible at the option of holders during certain periods, upon satisfaction of certain conditions. Thereafter, the Notes are convertible at any time until the close of business on the second scheduled trading day immediately preceding the maturity date. Redfin may redeem for cash all or any portion of the notes, at its option, on or after July 20, 2021, upon satisfaction of certain conditions at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest. Redfin will settle conversions of the Notes by paying or delivering, as the case may be, cash, shares of its common stock, or

19


a combination of cash and shares of its common stock, at its election. The Company has the ability, and intends, to settle any conversions solely in cash.

Holders of the Notes have the right to require Redfin to repurchase for cash all or a portion of their Notes at 100% of their principal amount, plus any accrued and unpaid interest, upon the occurrence of a fundamental change (as defined in the indenture relating to the Notes). Redfin is required to increase the conversion rate for holders who convert their notes in connection with certain fundamental changes occurring prior to the maturity date or following Redfin’s issuance of a notice of redemption.

The initial conversion rate of the Notes is 32.7332 shares of common stock per $1,000 principal amount of Notes, equivalent to an initial conversion price of approximately $30.55 per share of common stock. The initial conversion price represents a premium of approximately 30% to the $23.50 per share public offering price for the common stock offering.

In accounting for the issuance of the Notes, the value was allocated to liability and equity components. The carrying amount of the liability component was determined by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was calculated by deducting the fair value of the liability component from the principal amount of the Notes as a whole. The difference between the principal amount of the Notes and the liability component (the debt discount) is amortized to interest expense in the condensed consolidated statements of operations using the effective interest method over the term of the Notes. The equity component of the Notes is included in additional paid-in capital in the condensed consolidated balance sheets and is not remeasured as long as it continues to meet the conditions for equity classification.

The Company incurred total debt issuance costs of $4,797, of which approximately $3,832 was allocated to the Notes and approximately $965 was allocated to additional paid-in capital.

The Notes consisted of the following:
 
As of September 30, 2018
Liability:
 
Principal
$
143,750

  Less: debt discount, net of amortization
(27,919
)
  Less: debt issuance costs, net of amortization
(3,701
)
    Net carrying amount of the Notes
$
112,130

 
 
Stockholders' equity:
 
Allocated value of the conversion feature
$
28,916

  Less: debt issuance costs
(965
)
    Additional paid-in capital
$
27,951


The following table sets forth total interest expense recognized related to the Notes for the period presented:

20


 
Three Months Ended September 30, 2018
Amortization of debt discount
$
997

Amortization of debt issuance costs
131

  Total amortization of debt issuance costs and accretion of equity portion
1,128

Contractual interest expense
482

  Total interest expense related to the Notes
$
1,610

 
 
Effective interest rate of the liability component

7.10
%

The total estimated fair value of the Notes as of September 30, 2018 was approximately $129,195 based on the closing trading price of the Notes on last day of trading for the period. The fair value has been classified as Level 2 within the fair value hierarchy given the limited trading activity of the Notes.


21



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements, the accompanying notes, other information included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. In particular, the disclosure contained in Part I, Item 1A. "Risk Factors" in our Annual Report, as updated by Part II, Item 1A. "Risk Factors" in this Quarterly Report, may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capital resources.
The following discussion contains forward-looking statements, such as statements regarding our future operating results and financial position, our business strategy and plans, our market growth and trends, and our objectives for future operations. Please see "Special Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements. 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. While we are not aware of any misstatements regarding the information from these industry publications, we have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied on therein.
When we use the term "basis points" in the following discussion, we refer to units of one‑hundredth of one percent.
Prior to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2018, we had one reportable segment ("real estate") that reflected revenue derived from commissions and fees charged on real estate services transactions closed by us or partner agents representing customers in buying and selling homes. Beginning with our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2018, we recognized a new reportable segment ("properties") that reflects revenue from when we sell homes that we previously bought directly from homeowners. Concurrent with our recognition of the new "properties" segment, we changed the name of our "real estate" segment to "real estate services." Prior to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2018, we included the results from our "properties" segment as part of our "other" segment.
Overview
Redfin is the 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.
In the first quarter of 2017, we began testing an experimental new service called RedfinNow, where we buy homes directly from homeowners and resell them to homebuyers. In July 2018, we expanded our RedfinNow service from an experiment to an ongoing customer offering. For the three months ended September 30, 2018, we limited ourselves to no more than $35.0 million in RedfinNow capital at any point in time, including inventory and properties that we are committed to purchase, which is up from our $25.0 million limit in our prior quarter. RedfinNow is included in our properties segment.
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. 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.

22



On July 23, 2018, we completed follow-on public offerings of 4,836,336 shares of our common stock (including 630,826 shares pursuant to the underwriters’ option to purchase additional shares) and $143,750,000 aggregate principal amount of our 1.75% Convertible Senior Notes due 2023, or convertible senior notes (including $18,750,000 principal amount of convertible senior notes sold pursuant to the underwriters’ option to purchase additional notes). The public offering price for our common stock offering was $23.50 per share.
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.


 
Three Months Ended
 
Sep. 30, 2018
 
Jun. 30, 2018
 
Mar. 31, 2018
 
Dec. 31, 2017
 
Sep. 30, 2017
 
Jun. 30, 2017
 
Mar. 31, 2017
 
Dec. 31, 2016
 
Sep. 30, 2016
Monthly average visitors (in thousands)
29,236

 
28,777

 
25,820

 
21,377

 
24,518

 
24,400

 
20,162

 
16,058

 
17,795

Real estate services transactions:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brokerage
12,876

 
12,971

 
7,285

 
8,598

 
10,527

 
10,221

 
5,692

 
6,432

 
7,934

Partner
3,333

 
3,289

 
2,237

 
2,739

 
3,101

 
2,874

 
2,041

 
2,281

 
2,663

Total
16,209

 
16,260

 
9,522

 
11,337

 
13,628

 
13,095

 
7,733

 
8,713

 
10,597

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate services revenue per transaction:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Brokerage
$
9,227

 
$
9,510

 
$
9,628

 
$
9,659

 
$
9,289

 
$
9,301

 
$
9,570

 
$
9,428

 
$
9,333

Partner
2,237

 
2,281

 
2,137

 
2,056

 
1,960

 
1,945

 
1,911

 
1,991

 
1,932

Aggregate
$
7,790

 
$
8,048

 
$
7,869

 
$
7,822

 
$
7,621

 
$
7,687

 
$
7,548

 
$
7,481

 
$
7,474

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Aggregate home value of real estate services transactions (in millions)
$
7,653

 
$
7,910

 
$
4,424

 
$
5,350

 
$
6,341

 
$
6,119

 
$
3,470

 
$
4,018

 
$
4,898

U.S. market share by value
0.85
%
 
0.83
%
 
0.73
%
 
0.71
%
 
0.71
%
 
0.64
%
 
0.58
%
 
0.56
%
 
0.57
%
Revenue from top-10 Redfin markets as a percentage of real estate services revenue
66
%
 
68
%
 
66
%
 
69
%
 
69
%
 
69
%
 
68
%
 
71
%
 
72
%
Average number of lead agents
1,397

 
1,415

 
1,327

 
1,118

 
1,028

 
1,010

 
935

 
796

 
756



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

23



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 Services Transactions
Increasing the number of real estate services 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 services transaction volume is influenced by the pricing and quality of our services as well as market conditions that affect home sales, such as local inventory levels and mortgage interest rates. Real estate services transaction volume is 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 home.

Real Estate Services Revenue per Transaction
Real estate services revenue per transaction, together with the number of real estate services transactions, is a factor in evaluating business growth and determining pricing. Changes in real estate services revenue per transaction can be affected by our pricing, the mix of transactions from 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 calculate real estate services revenue per transaction by dividing brokerage, partner, or aggregate revenue, as applicable, by the corresponding number of real estate services transactions in any period.

Aggregate Home Value of Real Estate Services Transactions
The aggregate home value of real estate services transactions completed by our lead agents and of the real estate services 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 chiefly by the number of customers we serve, but also by changes in home values in the markets we serve. 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, or NAR. We calculate our market share by aggregating the home value of real estate services 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 Services Revenue
Our top-10 markets by real estate services revenue are the metropolitan areas of Boston, Chicago, Denver (including Boulder and Colorado Springs), Los Angeles (including Santa Barbara), Maryland, Northern Virginia, Portland (including Bend), San Diego, San Francisco, and Seattle. We expect our revenue from top-10 markets to decline as a percentage of our real estate services revenue over time.

Average Number of Lead Agents

24



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.
Components of Our Results of Operations

Revenue
We generate revenue primarily from commissions and fees charged on real estate services transactions closed by our lead agents or partner agents.
Real Estate Services Revenue
Brokerage RevenueBrokerage revenue consists of commissions earned on real estate services 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 services transactions we close, the mix of brokerage transactions, home-sale prices, commission rates, and the amount we give to customers.
From time to time, we may change the commission rates charged homebuyers and home sellers. Price increases for one are generally offset by decreases for the other, and while the mix of transactions may change, real estate services revenue per transaction remains relatively consistent.
Partner RevenuePartner 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.
In December 2017, we stopped giving any portion of our referral fee to the customer.
Properties Revenue
Properties revenue is earned when we sell homes that we previously bought directly from homeowners. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home. RedfinNow is our primary properties offering.
Other Revenue
Other services revenue includes fees earned from mortgage banking services, title settlement services, Walk Score data services, and advertising.

Cost of Revenue and Gross Margin
Cost of revenue consists primarily of personnel costs (including base pay, benefits, and stock-based compensation), transaction bonuses, home-touring and field expenses, listing expenses, property costs related to our properties segment, office and occupancy expenses, and depreciation and amortization related to fixed assets and acquired intangible assets. Property costs related to our properties segment include the property purchase price, capitalized improvements, selling expenses directly attributable to the transaction, and property maintenance expenses.

25



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, but the most important are real estate services revenue per transaction, agent and support-staff productivity, personnel costs and transaction bonuses, and, for properties, the cost of homes.

Operating Expenses
Technology and Development
Our primary technology and development expenses are building software for our customers, lead agents, and support staff to work together on a transaction, and building a website and mobile application to meet customers looking to move. These expenses consist primarily of personnel costs including 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
Marketing expenses consist primarily of media costs for online and offline advertising, as well as personnel costs including stock-based compensation. We expect to increase offline advertising media costs by approximately $27 million to $47 million in 2019, compared to 2018.
General and Administrative
General and administrative expenses consist primarily of personnel costs including stock-based compensation, facilities costs and related expenses for our executive, finance, human resources, and legal organizations, depreciation related to our fixed assets, and fees for outside services. Outside services are principally comprised of external legal, audit, and tax services.
Interest Income
Interest income consists primarily of interest earned on our cash and cash equivalents.
Interest Expense
Interest expense consists of interest payable on our convertible senior notes. Interest is payable on the notes at the rate of 1.75% semiannually in arrears on January 15 and July 15, commencing on January 15, 2019. Interest expense also includes the amortization of debt discount and issuance costs related to the notes.
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.


26



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Revenue
$
140,255

 
$
109,479

 
$
362,791

 
$
274,282

Cost of revenue(1)
97,950

 
70,166

 
269,576

 
191,633

Gross profit
42,305

 
39,313

 
93,215

 
82,649

Operating expenses:
 
 
 
 
 
 
 
Technology and development(1)
14,310

 
11,483

 
40,105

 
31,245

Marketing(1)
8,236

 
5,588

 
36,006

 
26,179

General and administrative(1)
16,470

 
11,995

 
48,532

 
38,828

Total operating expenses
39,016

 
29,066

 
124,643

 
96,252

Income (loss) from operations
3,289

 
10,247

 
(31,428
)
 
(13,603
)
Interest income
1,775

 
311

 
3,082

 
387

Interest expense
(1,610
)
 

 
(1,610
)
 

Other income, net
21

 

 
200

 
13

Net income (loss)
$
3,475

 
$
10,558

 
$
(29,756
)
 
$
(13,203
)
(1) Includes stock-based compensation as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(in thousands)
Stock-based compensation:
 
 
 
 
 
 
 
Cost of revenue
$
1,370

 
$
715

 
$
4,061

 
$
2,129

Technology and development
2,135

 
819

 
5,334

 
2,301

Marketing
155

 
121

 
431

 
362

General and administrative
1,838

 
1,054

 
4,646

 
3,236

Total
$
5,498

 
$
2,709

 
$
14,472

 
$
8,028


 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(as a percentage of revenue)
Revenue
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
 %
Cost of revenue(1)
69.8

 
64.1

 
74.3

 
69.9

Gross profit
30.2

 
35.9

 
25.7

 
30.1

Operating expenses:
 
 
 
 
 
 
 
Technology and development(1) 
10.2

 
10.5

 
11.1

 
11.4

Marketing(1)
5.9

 
5.1

 
9.9

 
9.5

General and administrative(1) 
11.7

 
11.0

 
13.4

 
14.2

Total operating expenses
27.8

 
26.6

 
34.4

 
35.1

Income (loss) from operations
2.4

 
9.3

 
(8.7
)
 
(5.0
)
Interest income
1.3

 
0.3

 
0.8

 
0.1

Interest expense
(1.1
)
 
0.0

 
(0.4
)
 
0.0

Other income, net
0.0

 
0.0

 
0.1

 
0.0

Net income (loss)
2.6
 %
 
9.6
%
 
(8.2
)%
 
(4.9
)%

27



(1) Includes stock-based compensation as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(as a percentage of revenue)
Stock-based compensation:
 
 </