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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020

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 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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value per share
RDFN
The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
 
 
 
Yes
 No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
 
 
 
Yes
 No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer  
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 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

The registrant had 98,481,863 shares of common stock outstanding as of April 30, 2020.




Redfin Corporation

Quarterly Report on Form 10-Q
For the Quarter Ended March 31, 2020

Table of Contents




As used in this quarterly report, the terms "Redfin," "we," "us," and "our" refer to Redfin Corporation and its subsidiaries taken as a whole, unless otherwise noted or unless the context indicates otherwise.

Note Regarding Forward-Looking Statements

This quarterly report contains forward-looking statements. All statements contained in this report other than statements of historical fact, including statements regarding COVID-19's anticipated impacts on our business, 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 Item 1A of our annual report for the year ended December 31, 2019, as supplemented by Part II, Item 1A 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.

Note Regarding Industry and Market Data

This quarterly report 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.

i


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Redfin Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share amounts, unaudited)
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
213,940

 
$
234,679

Restricted cash
16,772

 
12,769

Short-term investments
75,049

 
70,029

Accounts receivable, net
21,821

 
19,223

Inventory
70,649

 
74,590

Loans held for sale
44,321

 
21,985

Prepaid expenses
9,555

 
14,822

Other current assets
5,243

 
3,496

Total current assets
457,350

 
451,593

Property and equipment, net
40,496

 
39,577

Right-of-use assets, net
49,972

 
52,004

Long-term investments
26,711

 
30,978

Goodwill and intangibles, net
11,382

 
11,504

Other non-current assets
8,923

 
10,557

Total assets
$
594,834

 
$
596,213

Liabilities and stockholders' equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
2,909

 
$
2,122

Accrued liabilities
58,456

 
38,022

Other payables
11,717

 
7,884

Warehouse credit facilities
42,586

 
21,302

Secured revolving credit facility
8,901

 
4,444

Current lease liabilities
11,533

 
11,408

Total current liabilities
136,102

 
85,182

Non-current lease liabilities
57,254

 
59,869

Convertible senior notes, net
121,292

 
119,716

Total liabilities
314,648

 
264,767

Commitments and contingencies (Note 7)

 

Stockholders’ equity
 
 
 
Common stock—par value $0.001 per share; 500,000,000 shares authorized; 93,957,774 and 93,001,597 shares issued and outstanding, respectively
94

 
93

Additional paid-in capital
591,421

 
583,097

Accumulated other comprehensive income
575

 
42

Accumulated deficit
(311,904
)
 
(251,786
)
Total stockholders’ equity
280,186

 
331,446

Total liabilities and stockholders’ equity
$
594,834

 
$
596,213


See Notes to the consolidated financial statements.

1


Redfin Corporation and Subsidiaries
Consolidated Statements of Comprehensive Loss
(in thousands, except share and per share amounts, unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Revenue
 
 
 
Service
$
111,478

 
$
88,768

Product
79,517

 
21,373

Total revenue
190,995

 
110,141

Cost of revenue
 
 
 
Service
98,368

 
84,395

Product
79,748

 
22,993

Total cost of revenue
178,116

 
107,388

Gross profit
12,879

 
2,753

Operating expenses
 
 
 
Technology and development
20,274

 
15,556

Marketing
25,708

 
33,201

General and administrative
24,327

 
21,448

Total operating expenses
70,309

 
70,205

Loss from operations
(57,430
)
 
(67,452
)
Interest income
1,103

 
2,316

Interest expense
(2,444
)
 
(2,136
)
Other income (expense), net
(1,346
)
 
92

Net loss
$
(60,117
)
 
$
(67,180
)
Net loss per share attributable to common stock—basic and diluted
$
(0.64
)
 
$
(0.74
)
Weighted average shares of common stock—basic and diluted
93,442,706

 
90,610,416

 
 
 
 
Other comprehensive income
 
 
 
Net loss
$
(60,117
)
 
$
(67,180
)
Foreign currency translation adjustments
(25
)
 
1

Unrealized gain on available-for-sale securities
559

 

Total comprehensive loss
$
(59,583
)
 
$
(67,179
)

See Notes to the consolidated financial statements.


2


Redfin Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands, unaudited)
 
Three Months Ended March 31,
 
2020
 
2019
Operating Activities
 
 
 
Net loss
$
(60,117
)
 
$
(67,180
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
3,307

 
1,637

Stock-based compensation
7,211

 
6,406

Amortization of debt discount and issuance costs
1,730

 
1,507

Non-cash lease expense
2,254

 
1,216

Impairment costs
1,420

 

Other
(989
)
 

Change in assets and liabilities:
 
 
 
Accounts receivable, net
(2,598
)
 
(890
)
Inventory
3,941

 
(15,612
)
Prepaid expenses and other assets
3,409

 
1,441

Accounts payable
514

 
14,848

Accrued liabilities and other payables
20,626

 
21,764

Lease liabilities
(2,693
)
 
(1,459
)
Origination of loans held for sale
(132,697
)
 
(49,850
)
Proceeds from sale of loans originated as held for sale
111,233

 
39,015

Net cash used in operating activities
(43,449
)
 
(47,157
)
Investing activities
 
 
 
Purchases of property and equipment
(3,406
)
 
(3,151
)
Purchases of investments
(33,267
)
 

Sales of investments
31,608

 

Maturities of investments
1,597

 

Net cash used in investing activities
(3,468
)
 
(3,151
)
Financing activities
 
 
 
Proceeds from the issuance of shares resulting from employee equity plans
4,103

 
3,732

Tax payments related to net share settlements on restricted stock units
(3,307
)
 
(818
)
Borrowings from warehouse credit facilities
131,310

 
48,557

Repayments to warehouse credit facilities
(110,025
)
 
(38,097
)
Borrowings from secured revolving credit facility
11,854

 

Repayments to secured revolving credit facility
(7,398
)
 

Other payables—deposits held in escrow
3,684

 
3,968

Principal payments for finance lease obligations
(15
)
 

Net cash provided by financing activities
30,206

 
17,342

Effect of exchange rate changes on cash and cash equivalents
(25
)
 

Net change in cash, cash equivalents, and restricted cash
(16,736
)
 
(32,966
)
Cash, cash equivalents, and restricted cash:
 
 
 
Beginning of period
247,448

 
439,055

End of period
$
230,712

 
$
406,089

Supplemental disclosure of cash flow information
 
 
 
Cash paid for interest
1,582

 
1,202

Non-cash transactions
 
 
 
Stock-based compensation capitalized in property and equipment
504

 
270

Property and equipment additions in accounts payable and accrued liabilities
451

 
1,370

Leasehold improvements paid directly by lessor

 
1,963


See Notes to the consolidated financial statements.


3


Redfin Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(in thousands, except share amounts, unaudited)

 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Income
 
Total Stockholders' Equity
 
Shares
 
Amount
 
 
 
 
Balance, December 31, 2018
90,151,341

 
$
90

 
$
542,829

 
$
(170,981
)
 
$

 
$
371,938

Issuance of common stock pursuant to exercise of stock options
679,495

 
1

 
3,731

 

 

 
3,732

Issuance of common stock pursuant to settlement of restricted stock units
139,889

 

 

 

 

 

Common stock surrendered for employees' tax liability upon settlement of restricted stock units
(44,476
)
 

 
(818
)
 

 

 
(818
)
Stock-based compensation

 

 
6,676

 

 

 
6,676

Other comprehensive income
 
 
 
 
 
 
 
 
1

 
1

Net loss

 

 

 
(67,180
)
 

 
(67,180
)
Balance, March 31, 2019
90,926,249

 
$
91

 
$
552,418

 
$
(238,160
)
 
$
1

 
$
314,349

 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2019
93,001,597

 
$
93

 
$
583,097

 
$
(251,786
)
 
$
42

 
$
331,446

Issuance of common stock pursuant to exercise of stock options
738,398

 
1

 
3,915

 

 

 
3,916

Issuance of common stock pursuant to settlement of restricted stock units
320,440

 

 

 

 

 

Common stock surrendered for employees' tax liability upon settlement of restricted stock units
(102,661
)
 

 
(3,307
)
 

 

 
(3,307
)
Stock-based compensation

 

 
7,715

 

 
 
 
7,715

Other comprehensive income

 

 

 

 
533

 
533

Net loss

 

 

 
(60,117
)
 

 
(60,117
)
Balance, March 31, 2020
93,957,774

 
$
94

 
$
591,420

 
$
(311,903
)
 
$
575

 
$
280,186


See Notes to the consolidated financial statements.

4


Index to Notes to Consolidated Financial Statements


5



Redfin Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(in thousands, except share and per share amounts, unaudited)

Note 1: Summary of Accounting Policies

Basis of Presentation—The consolidated financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

The financial information as of December 31, 2019 that is included in this quarterly report is derived from the audited consolidated financial statements and notes for the year ended December 31, 2019 included in Item 8 in our annual report for the year ended December 31, 2019. Such financial information should be read in conjunction with the notes and management’s discussion and analysis of the consolidated financial statements included in our annual report.

The unaudited 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 March 31, 2020, the statements of comprehensive loss and stockholders' equity for the three months ended March 31, 2020 and 2019, and the statement of cash flows for the three months ended March 31, 2020 and 2019. The results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any interim period or for any other future year.

Principles of Consolidation—The unaudited consolidated interim financial statements include the accounts of Redfin and its wholly owned subsidiaries, including those entities in which we have a variable interest and of which we are the primary beneficiary. Intercompany transactions and balances have been eliminated.

COVID-19 Risks, Impacts and Uncertainties—We are subject to the risks arising from COVID-19's social and economic impacts on the residential real estate industry. Our management believes that these social and economic impacts, which include but are not limited to the following, could have a significant negative impact on our future financial position, results of operations, and cash flows: (i) restrictions on in-person activities associated with residential real estate transactions arising from shelter-in-place, or similar isolation orders; (ii) decline in consumers' desire for in-person interactions and physical home tours; and (iii) deteriorating economic conditions, such as increased unemployment rates, recessionary conditions, lower yields on individuals' investment portfolios, and more stringent mortgage financing conditions. In addition, we have considered the impacts and uncertainties of COVID-19 in our use of estimates in preparation of our consolidated financial statements. These estimates include, but are not limited to, likelihood of achieving performance conditions under performance-based equity awards, net realizable value of inventory, and the fair value of reporting units and goodwill for impairment.

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. We evaluate our estimates on an ongoing basis. In January 2020 we adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), which modifies the measurement of credit losses on financial instruments. As part of the adoption we estimated the current expected credit losses for certain classes of relevant assets. The amounts realized from the affected assets will depend on, among other factors, general business conditions, including the impacts from COVID-19, and could differ in the near term from carrying amounts reflected in the consolidated financial statements. Further description of the impact of this pronouncement is included in Recently Adopted Accounting Pronouncements.

Accounts Receivable and Allowance for Credit Losses—We have two material classes of receivables: (i) real estate services receivables and (ii) receivables from the sale of homes. Accounts receivable related to these classes represent closed transactions for which cash has not yet been received.

6



We establish an allowance for expected credit losses based on historical experience of collectibility, current external economic conditions that may affect collectibility, and current or expected changes to the regulatory environment in which we operate our real estate services business. As the majority of our transactions are processed through escrow, collectibility is not a significant risk, and we have determined the nature of our receivables to have similar credit quality indicators. We evaluate for changes in credit quality indicators on an annual basis or in the event of a material economic event or material change in the regulatory environment in which we operate, with the most recent assessment being performed in March 2020.

Investments—We have two types of investments: (i) available-for-sale investments that are available to support our operational needs, which are reported on the balance sheets as short-term and long-term investments, and (ii) long-term equity investments accounted for under the cost method, which are reported in other non-current assets.

Available-for-sale

Our short-term and long-term investments consist primarily of U.S. treasury securities and other federal or local government issued securities, all of which are classified as available-for-sale. Available-for-sale debt securities are recorded at fair value, and unrealized holding gains and losses are recorded as a component of accumulated other comprehensive income. Available-for-sale securities with maturities of one year or less and those identified by management at the time of purchase to be used to fund operations within one year are classified as short-term. All other available-for-sale securities are classified as long-term. We evaluate our available-for-sale securities, both ones classified as cash equivalents and as investments, for expected credit losses on a quarterly basis. An expected credit loss reserve is charged against the fair value of an available-for-sale debt security when it is identified, with a credit loss charged against net earnings. We review factors to determine whether an expected credit loss exists based on credit quality indicators, such as the extent to which the fair value as of the reporting date is less than the amortized cost basis, present value of cash flows expected to be collected, the financial condition and prospects of the issuer, adverse conditions specifically related to the security and any changes to the credit rating of the security by a rating agency. Realized gains and losses are accounted for using the specific identification method. Purchases and sales are recorded on a trade date basis.

Cost Method Investments

In December 2018, we purchased an equity interest in a privately held company for approximately $2,000, which is classified as long-term. The investment is an equity security without a readily determinable fair value that is accounted for at cost minus any impairment, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. We perform a qualitative assessment considering impairment indicators to evaluate whether the investment is impaired as of the end of each reporting period. See Note 3 for information on our assessment.

Advertising and Advertising Production Costs—We expense advertising costs as they are incurred and production costs as of the first date the advertisement takes place. Advertising costs totaled $22,529 and $30,234 for the three months ended March 31, 2020 and 2019, respectively, and are included in marketing expenses. Advertising production costs totaled $174 and $48 for the three months ended March 31, 2020 and 2019, respectively, and are included in marketing expenses.

Recently Adopted Accounting PronouncementsIn January 2020, we adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), using a modified-retrospective approach. The adoption of this guidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The pronouncement, along with the related subsequent pronouncements that include clarifications, modifies the measurement of credit losses on financial instruments. This guidance requires the use of an expected loss impairment model for instruments measured at amortized cost based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. The adoption of this pronouncement did not have a material impact on our consolidated

7



financial statements. See specific accounting policies for accounts receivable and available-for-sale debt securities previously discussed in this Note 1, and see Note 2 and Note 3 for additional impacts from the adoption.

Recently Issued Accounting PronouncementsRecent accounting pronouncements issued by the Financial Accounting Standards Board (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not have, or are not expected to have, a material impact on our present or future consolidated financial statements.

Note 2: Segment Reporting and Revenue

In operation of the business, our management, including our chief operating decision maker, who is also our chief executive officer, evaluates the performance of our operating segments based on revenue and gross profit. We do 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. We have five operating segments and two reportable segments, real estate services and properties.

We generate revenue primarily from commissions and fees charged on real estate services transactions closed by our lead agents or partner agents, and from the sale of homes. Our key revenue components are brokerage revenue, partner revenue, properties revenue, and other revenue.

Information on each of the reportable and other segments and reconciliation to consolidated net loss is as follows:
 
Three Months Ended March 31,
 
2020
 
2019
Real estate services
 
 
 
Brokerage revenue
$
102,351

 
$
81,314

Partner revenue
6,285

 
4,576

Total real estate services revenue
108,636

 
85,890

Cost of revenue
93,562

 
80,784

Gross profit
15,074

 
5,106

Properties
 
 
 
Revenue
79,098

 
21,373

Cost of revenue
79,299

 
22,993

Gross profit
(201
)
 
(1,620
)
Other
 
 
 
Revenue
4,250

 
3,047

Cost of revenue
6,244

 
3,780

Gross profit
(1,994
)
 
(733
)
Intercompany eliminations
 
 
 
Revenue
(989
)
 
(169
)
Cost of revenue
(989
)
 
$
(169
)
Gross profit

 

Consolidated
 
 
 
Revenue
190,995

 
110,141

Cost of revenue
178,116

 
107,388

Gross profit
12,879

 
2,753

Operating expenses
70,309

 
70,205

Interest income
1,103

 
2,316

Interest expense
(2,444
)
 
(2,136
)
Other income (expense), net
(1,346
)
 
92

Net loss
$
(60,117
)
 
$
(67,180
)


Revenue earned but not received is recorded as accounts receivable on our consolidated balance sheets, net of an allowance for expected credit losses. Accounts receivable consists primarily of

8



commission revenue and proceeds from the sale of homes in-transit through the escrow process, and therefore it is not estimated. Based on the regulated environment in which we operate and the nature of our receivables, we do not expect material credit losses, and write-offs were immaterial in the periods presented.

Note 3: Financial Instruments

Derivatives

Our primary market exposure is to interest rate risk, specifically U.S. treasury and mortgage interest rates, due to their impact on mortgage-related assets and commitments. We use forward sales commitments on whole loans and mortgage-backed securities to manage and reduce this risk. We do not have any derivative instruments designated as hedging instruments.

Interest Rate Lock Commitments—Interest rate lock commitments ("IRLCs") represent an agreement to extend credit to a mortgage loan applicant. We commit (subject to loan approval) to fund the loan at the specified rate, regardless of changes in market interest rates between the commitment date and the funding date. Outstanding IRLCs are subject to interest rate risk and related price risk during the period from the date of commitment through the loan funding date or expiration date. Loan commitments generally range between 30 and 90 days and the borrower is not obligated to obtain the loan. Therefore, IRLCs are subject to fallout risk, which occurs when approved borrowers choose not to close on the underlying loans. We review our commitment-to-closing ratio (pull-through rate) as part of an estimate of the number of mortgage loans that will fund according to the IRLCs.

Forward Sales Commitments—We are exposed to interest rate and price risk on loans held for sale from the funding date until the date the loan is sold. Forward sales commitments on whole loans and mortgage-backed securities are used to fix the forward sales price that will be realized at the sale of each loan.
Notional Amounts
 
March 31, 2020
 
December 31, 2019
Interest rate lock commitments
 
$
73,382

 
$
37,453

Forward sales commitments
 
66,448

 
39,447



The locations and amounts of gains (losses) recognized in income related to our derivatives are as follows:
 
 
 
 
March 31,
Instrument
 
Classification
 
2020
 
2019
Interest rate lock commitments
 
Service revenue
 
$
1,195

 
$
446

Forward sales commitments
 
Service revenue
 
(1,571
)
 
(244
)


Fair Value of Financial Instruments

A summary of assets and liabilities related to our financial instruments, measured at fair value on a recurring basis and as reflected in our consolidated balance sheets, is set forth below:

9



 
Balance at March 31, 2020
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
194,530

 
$
194,530

 
$

 
$

Short-term investments
 
 
 
 
 
 
 
U.S. treasury securities
75,049

 
75,049

 

 

Loans held for sale
44,321

 

 
44,321

 

Prepaid expenses and other current assets
 
 
 
 
 
 
 
Interest rate lock commitments
1,825

 

 

 
1,825

Forward sales commitments
200

 

 
200

 

Total prepaid expenses and other current assets
2,025

 

 
200

 
1,825

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities
24,717

 
24,717

 

 

Agency bonds
1,994

 
1,994

 

 

Total long-term investments
26,711

 
26,711

 

 

Total assets
$
342,636

 
$
296,290

 
$
44,521

 
$
1,825

Liabilities
 
 
 
 
 
 
 
Accrued liabilities
 
 
 
 
 
 
 
Interest rate lock commitments
$
200

 
$

 
$

 
$
200

Forward sales commitments
1,816

 

 
1,816

 

Total liabilities
$
2,016

 
$

 
$
1,816

 
$
200


 
Balance at December 31, 2019
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
Assets
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Money market funds
$
221,442

 
$
221,442

 
$

 
$

Short-term investments
 
 
 
 
 
 
 
U.S. treasury securities
70,029

 
70,029

 

 

Loans held for sale
21,985

 

 
21,985

 

Prepaid expenses and other current assets
 
 
 
 
 
 
 
Interest rate lock commitments
496

 

 

 
496

Forward sales commitments
4

 

 
4

 

Total prepaid expenses and other current assets
500

 

 
4

 
496

Long-term investments
 
 
 
 
 
 
 
U.S. treasury securities
30,978

 
30,978

 

 

Total assets
$
344,934

 
$
322,449

 
$
21,989

 
$
496

Liabilities
 
 
 
 
 
 
 
Accrued liabilities
 
 
 
 
 
 
 
Interest rate lock commitments
$
58

 
$

 
$

 
$
58

Forward sales commitments
57

 

 
57

 

Total liabilities
$
115

 
$

 
$
57

 
$
58


The significant unobservable input used in the fair value measurement of IRLCs is the pull-through rate. Significant changes in the input could result in a significant change in fair value measurement.


10



The following is a quantitative summary of key unobservable inputs used in the valuation of IRLCs:
Key Inputs
 
Valuation Technique
 
March 31, 2020
 
December 31, 2019
Weighted-average pull-through rate
 
Market pricing
 
75.1%
 
78.2%


The following is a summary of changes in the fair value of IRLCs for the period ended March 31, 2020:
Balance, net—December 31, 2019
 
$
430

Issuances of interest rate lock commitments
 
3,318

Settlements of interest rate lock commitments
 
(2,494
)
Net gain recognized in earnings
 
371

Balance, net—March 31, 2020
 
$
1,625

 
 
 
Changes in fair value recognized during the period relating to assets still held at March 31, 2020
 
$
1,195



There were no transfers into or out of Level 3 financial instruments during the period.

See Note 14 for the carrying amount and estimated fair value of our convertible senior notes.

Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property and equipment, goodwill and other intangible assets, cost method investments, and other assets. These assets are measured at fair value if determined to be impaired. During the period ended March 31, 2020, we determined that the fair value of our cost method investment in a privately-held company was less than the carrying value of $2,000 based on a variety of impairment indicators including the historical performance and future prospects of the company; therefore, we recognized a non-cash impairment charge of $1,420 related to this investment. The impairment charge is included in Impairment costs within our consolidated statement of cash flows and is included in Other income (expense), net within our consolidated statements of operations. We did not record any other significant nonrecurring fair value measurements after initial recognition for the period ended March 31, 2020.

The following table summarizes the cost or amortized cost, gross unrealized gains and losses, and estimated fair market value of our cash, money market funds, restricted cash, and available-for-sale investments.
 
March 31, 2020
 
Fair Value Hierarchy
 
Cost or Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
Short-term Investments
 
Long-term Investments
Cash
N/A
 
$
18,831

 
$

 
$

 
$
18,831

 
$

 
$

Money markets funds
Level 1
 
194,530

 

 

 
194,530

 

 

Restricted cash
N/A
 
16,772

 

 

 
16,772

 

 

U.S. treasury securities
Level 1
 
99,192

 
574

 

 
99,766

 
75,049

 
24,717

Agency bonds
Level 1
 
2,000

 

 
(6
)
 
1,994

 

 
1,994

Total
 
 
$
331,325

 
$
574

 
$
(6
)
 
$
331,893

 
$
75,049

 
$
26,711


 
December 31, 2019
 
Fair Value Hierarchy
 
Cost or Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
Short-term Investments
 
Long-term Investments
Cash
N/A
 
$
13,237

 
$

 
$

 
$
13,237

 
$

 
$

Money markets funds
Level 1
 
221,442

 

 

 
221,442

 

 

Restricted cash
N/A
 
12,769

 

 

 
12,769

 

 

U.S. treasury securities
Level 1
 
100,998

 
31

 
(22
)
 
101,007

 
70,029

 
30,978

Total
 
 
$
348,446

 
$
31

 
$
(22
)
 
$
348,455

 
$
70,029

 
$
30,978



11




As of March 31, 2020 and December 31, 2019, the aggregate fair value of available-for-sale debt securities in an unrealized loss position totaled $2,094 and $46,550, with aggregate unrealized losses of $6 and $22, respectively. We have evaluated our portfolio of available-for-sale debt securities based on credit quality indicators for expected credit losses and do not believe there are any expected credit losses. Our portfolio consists of U.S. treasury securities, all with high quality credit ratings issued by various credit agencies.

As of March 31, 2020 and December 31, 2019, we had accrued interest of $164 and $183, respectively, on our available-for-sale investments, of which we have recorded no expected credit losses. Accrued interest receivable is presented within other current assets in our consolidated balance sheets.

Note 4: Inventory
The following is a summary of inventory as of the dates presented:
 
March 31, 2020
 
December 31, 2019
Homes for sale
$
47,887

 
$
36,982

Homes not available for sale
3,667

 
3,163

Homes under improvement
19,095

 
34,445

Inventory
$
70,649

 
$
74,590



Inventory costs include direct home acquisition costs and any capitalized improvements, net of lower of cost or net realizable value write-downs applied on a specific home basis. As of March 31, 2020 and December 31, 2019, lower of cost or net realizable value write-downs were $818 and $143, respectively.

The following is the inventory activity for the three months ended March 31, 2020:
Inventory as of January 1, 2020
$
74,590

Purchases and capitalized improvements to inventory
68,384

Relief of inventory to cost of revenue
(71,650
)
Lower of cost or net realizable value write-downs, net
(675
)
Inventory as of March 31, 2020
$
70,649



Note 5: Property and Equipment

The following is a summary of property and equipment as of the dates presented:
 
Useful Lives (Years)
 
March 31, 2020
 
December 31, 2019
Leasehold improvements
Shorter of lease term or economic life
 
$
28,178

 
$
28,141

Website and software development costs
2-3
 
30,141

 
27,602

Computer and office equipment
3
 
5,627

 
4,846

Software
3
 
1,126

 
595

Furniture
7
 
7,083

 
6,965

Construction in progress
N/A
 
428

 
475

Property and equipment, gross
 
 
72,583

 
68,624

Accumulated depreciation and amortization
 
 
(32,087
)
 
(29,047
)
Property and equipment, net
 
 
$
40,496

 
$
39,577



Depreciation and amortization expense for property and equipment amounted to $3,186 and $1,515 for the three months ended March 31, 2020 and 2019, respectively. We capitalized software development costs, including stock-based compensation, of $2,677 and $1,911 during the three months ended March 31, 2020 and 2019, respectively.

12




Note 6: Leases

The following are the components of lease activity as of the dates presented:
 
 
 
 
Three Months Ended March 31,
Lease Cost
 
Classification
 
2020
 
2019
Operating lease cost:
 
 
 
 
 
 
Operating lease cost(1)
 
Cost of revenue
 
$
2,138

 
$
1,693

Operating lease cost(1)
 
Operating expenses
 
1,094

 
855

Total operating lease cost
 
 
 
$
3,232

 
$
2,548

 
 
 
 
 
 
 
Finance lease cost:
 
 
 
 
 
 
Amortization of right-of-use assets
 
Cost of revenue
 
$
17

 
$

Interest on lease liabilities
 
Cost of revenue
 
3

 

Total finance lease cost
 
 
 
$
20

 
$


(1) Includes lease expense with initial terms of twelve months or less of $226 and $821 for the three months ended March 31, 2020 and March 31, 2019, respectively.
Maturity of Lease Liabilities
Operating Leases
 
Finance Leases
2020, excluding the three months ended March 31, 2020
11,461

 
45

2021
14,289

 
60

2022
13,589

 
60

2023
12,612

 
46

2024
10,931

 

Thereafter
16,915

 

Total lease payments
$
79,797

 
$
211

Less: Interest and other(1)
11,203

 
18

Present value of lease liabilities
$
68,594

 
$
193



(1) Interest and other consists of interest expense related to capitalized right of use operating lease liabilities of $9,402, interest expense related to capitalized right of use financing lease liabilities of $18, commitments related to operating leases that have not yet commenced, and operating leases with initial terms of twelve months or less.

There were no leases entered into during the three months ended March 31, 2020 that provided a readily determinable implicit rate; therefore, we used our estimated incremental borrowing rate for each type of lease to discount the lease payments based on information available at lease commencement. Additionally, we evaluated the performance of existing leases in relation to our leasing strategy and have determined that most renewal options would not be reasonably certain to be exercised.
Lease Term and Discount Rate
 
March 31, 2020
 
December 31, 2019
Weighted average remaining operating lease term (years)
 
5.9

 
6.1

Weighted average remaining finance lease term (years)
 
3.5

 
3.8

Weighted average discount rate for operating leases
 
4.4
%
 
4.4
%
Weighted average discount rate for finance leases
 
5.4
%
 
5.4
%



13



 
 
Three Months Ended March 31,
Supplemental Cash Flow Information
 
2020
 
2019
Cash paid for amounts included in the measurement of lease liabilities
 
 
 
 
Operating cash flows from operating leases
 
$
3,464

 
$
1,975

Operating cash flows from finance leases
 
3

 

Financing cash flows from finance leases
 
12

 

Right of use assets obtained in exchange for lease liabilities
 
 
 
 
Operating leases
 
$
223

 
$
33,953

Finance leases
 

 



Note 7: Commitments and Contingencies

Legal ProceedingsOn August 28, 2019, one of our former independent contractor licensed sales associates filed a complaint against us in the Superior Court of California, County of San Francisco alleging that we misclassified her as an independent contractor instead of an employee. Given the preliminary stage of this case and the claims and issues presented, we cannot estimate a range of reasonably possible losses.

In addition to the matter discussed above, from time to time, we are involved in litigation, claims, and other proceedings arising in the ordinary course of our business. Except for the matter discussed above, we do not believe that any of the pending litigation, claims, and other proceedings are material to our business.

Leases and Other Commitments—We lease office space under noncancelable operating leases with terms ranging from one to 11 years and vehicles under noncancelable finance leases with terms of four years. Generally, the operating leases require a fixed minimum rent with contractual minimum rent increases over the lease term. Other commitments relate to homes that are under contract to purchase through our properties business but that have not closed, and network infrastructure for our data operations.

The following are future minimum payments due under these agreements as of March 31, 2020:
 
Leases
 
Other Commitments
2020, excluding the three months ended March 31, 2020
$
11,506

 
$
8,716

2021
14,349

 
4,780

2022
13,649

 
5,439

2023
12,658

 

2024 and thereafter
27,846

 

Total future minimum payments
$
80,008

 
$