rdfn-20200930

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 September 30, 2020


☐			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

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

☐

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

☐

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

☒

The registrant had 102,344,011 shares of common stock outstanding as of October 29, 2020.

Redfin Corporation

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2020

Table of Contents



PART I		Page
Item 1.	Financial Statements (unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Comprehensive Income (Loss)	2
	Consolidated Statements of Cash Flows	3
	Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Equity	4
	Index to Notes to Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41

PART II
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 6.	Exhibits	53

	Signatures

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. However, when referencing (i) the 2023 notes and the 2025 notes, the terms “we,” “us,” and “our” refer only to Redfin Corporation and not to Redfin Corporation and its subsidiaries taken as a whole, (ii) the secured revolving credit facility with Goldman Sachs, the terms "we," "us," and "our" refer only to RedfinNow Borrower LLC, and (iii) each warehouse credit facility, the terms "we," "us"," and "our" refer only to Redfin Mortgage, LLC.

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,” "hope," “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.

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

Redfin Corporation and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share and per share amounts, unaudited)


	September 30, 2020		December 31, 2019
Assets
Current assets
Cash and cash equivalents	$	371,573	$	234,679
Restricted cash	16,393		12,769
Short-term investments	129,809		70,029
Accounts receivable, net	41,085		19,223
Inventory	24,993		74,590
Loans held for sale	41,921		21,985
Prepaid expenses	7,698		14,822
Other current assets	5,189		3,496
Total current assets	638,661		451,593
Property and equipment, net	42,210		39,577
Right-of-use assets, net	45,392		52,004
Long-term investments	17,072		30,978
Goodwill and intangibles, net	11,138		11,504
Other non-current assets	8,776		10,557
Total assets	$	763,249	$	596,213
Liabilities, mezzanine equity and stockholders' equity
Current liabilities
Accounts payable	$	3,375	$	2,122
Accrued liabilities	57,517		38,022
Other payables	10,550		7,884
Warehouse credit facilities	40,308		21,302
Secured revolving credit facility	14,923		4,444
Convertible senior notes, net	124,495		—
Current lease liabilities	11,682		11,408
Total current liabilities	262,850		85,182
Non-current lease liabilities and deposits	51,597		59,869
Convertible senior notes, net	—		119,716
Non-current payroll tax liabilities	8,711		—
Total liabilities	323,158		264,767
Commitments and contingencies (Note 7)
Series A convertible preferred stock—par value $0.001 per share; 10,000,000 shares authorized; 40,000 and no shares issued and outstanding, respectively	39,812		—
Stockholders’ equity

Common stock—par value $0.001 per share; 500,000,000 shares authorized; 100,241,416 and 93,001,597 shares issued and outstanding, respectively	100		93
Additional paid-in capital	684,219		583,097
Accumulated other comprehensive income	308		42
Accumulated deficit	(284,348)		(251,786)
Total stockholders’ equity	400,279		331,446
Total liabilities, mezzanine equity and stockholders’ equity	$	763,249	$	596,213

See Notes to the consolidated financial statements.

Table of Contents

Redfin Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except share and per share amounts, unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenue
Service	$	217,280	$	158,519	$	469,893	$	405,160
Product	19,636		80,164		171,683		141,445
Total revenue	236,916		238,683		641,576		546,605
Cost of revenue
Service	122,583		104,397		314,842		297,320
Product	21,261		80,909		174,744		144,807
Total cost of revenue	143,844		185,306		489,586		442,127
Gross profit	93,072		53,377		151,990		104,478
Operating expenses
Technology and development	22,452		18,801		60,687		50,421
Marketing	12,421		8,361		47,611		68,611
General and administrative(1)	21,190		18,779		68,539		57,881
Total operating expenses	56,063		45,941		176,837		176,913
Income (loss) from operations	37,009		7,436		(24,847)		(72,435)
Interest income	319		1,576		1,859		5,804
Interest expense	(2,522)		(2,274)		(7,631)		(6,564)
Other income (expense), net	(640)		44		(1,943)		172
Net income (loss)	$	34,166	$	6,782	$	(32,562)	$	(73,023)
Dividend on convertible preferred stock	(1,530)		—		(2,814)		—
Undistributed earnings attributable to participating securities	(653)		—		—		—
Net income (loss) attributable to common stock—basic and diluted	$	31,983	$	6,782	$	(35,376)	$	(73,023)
Net income (loss) per share attributable to common stock—basic	$	0.32	$	0.07	$	(0.36)	$	(0.80)
Weighted average shares of common stock—basic	99,840,144		91,994,731		97,365,122		91,279,086
Net income (loss) per share attributable to common stock—diluted	0.30		0.07		(0.36)		(0.80)
Weighted average shares of common stock—diluted	107,607,711		97,171,270		97,365,122		91,279,086

Other comprehensive income (loss)
Net income (loss)	$	34,166	$	6,782	$	(32,562)	$	(73,023)
Foreign currency translation adjustments	6		(10)		(16)		28
Unrealized gain (loss) on available-for-sale securities	(139)		(8)		282		(2)
Total comprehensive income (loss)	$	34,033	$	6,764	$	(32,296)	$	(72,997)

(1) Includes direct and incremental costs related to COVID-19 of $321 and $7,846, which are partially offset by $56 and $1,348 in employee retention credits allowed under the CARES Act, for the three and nine months ended September 30, 2020, respectively.

See Notes to the consolidated financial statements.

Table of Contents

Redfin Corporation and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands, unaudited)


	Nine Months Ended September 30,
	2020		2019
Operating Activities
Net loss	$	(32,562)	$	(73,023)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	10,581		6,366
Stock-based compensation	25,764		19,792
Amortization of debt discount and issuance costs	5,254		4,674
Non-cash lease expense	6,821		4,727
Impairment costs	2,063		—
Other	(693)		(401)
Change in assets and liabilities:
Accounts receivable, net	(21,862)		(9,071)
Inventory	49,597		(82,766)
Prepaid expenses and other assets	5,168		(82)
Accounts payable	851		579
Accrued liabilities, other payables, and non-current payroll tax liabilities	28,469		18,994
Lease liabilities	(8,368)		(5,095)
Origination of loans held for sale	(479,153)		(285,182)
Proceeds from sale of loans originated as held for sale	459,605		267,850
Net cash provided by (used in) operating activities	51,535		(132,638)
Investing activities
Purchases of property and equipment	(10,391)		(12,821)
Purchases of investments	(135,118)		(106,063)
Sales of investments	6,583		1,005
Maturities of investments	82,772		4,900
Net cash used in investing activities	(56,154)		(112,979)
Financing activities
Proceeds from the issuance of convertible preferred stock, net of issuance costs	39,801		—
Proceeds from the issuance of common stock, net of issuance costs	69,701		—
Proceeds from the issuance of shares resulting from employee equity plans	15,119		10,869
Tax payments related to net share settlements on restricted stock units	(10,987)		(2,856)
Borrowings from warehouse credit facilities	473,283		280,129
Repayments to warehouse credit facilities	(454,277)		(262,875)
Borrowings from secured revolving credit facility	57,378		—
Repayments to secured revolving credit facility	(46,899)		—
Other payables—deposits held in escrow	2,097		637
Principal payments for finance lease obligations	(59)		—

Cash paid for debt issuance costs	(4)		(152)
Net cash provided by financing activities	145,153		25,752
Effect of exchange rate changes on cash and cash equivalents	(16)		28
Net change in cash, cash equivalents, and restricted cash	140,518		(219,837)
Cash, cash equivalents, and restricted cash:
Beginning of period	247,448		439,055
End of period	$	387,966	$	219,218
Supplemental disclosure of cash flow information
Cash paid for interest	3,001		2,460
Non-cash transactions
Stock-based compensation capitalized in property and equipment	1,714		931
Property and equipment additions in accounts payable and accrued liabilities	973		404
Leasehold improvements paid directly by lessor	37		4,298

See Notes to the consolidated financial statements.

Table of Contents

Redfin Corporation and Subsidiaries

Consolidated Statements of Changes in Mezzanine Equity and Stockholders’ Equity

(in thousands, except share amounts, unaudited)


	Series A Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance, June 30, 2019	—	$	—	91,777,537	$	92	$	562,894	$	(250,785)	$	44	$	312,245
Issuance of common stock pursuant to employee stock purchase program	—	—		—	—		—		—		—		—
Issuance of common stock pursuant to exercise of stock options	—	—		297,475	—		1,897		—		—		1,897
Issuance of common stock pursuant to settlement of restricted stock units	—	—		195,840	—		—		—		—		—
Common stock surrendered for employees' tax liability upon settlement of restricted stock units	—	—		(58,536)	—		(1,064)		—		—		(1,064)
Stock-based compensation	—	—		—	—		7,880		—		—		7,880
Other comprehensive loss	—	—		—	—		—		—		(18)		(18)
Net income	—	—		—	—		—		6,782		—		6,782
Balance, September 30, 2019	—	$	—	92,212,316	$	92	$	571,607	$	(244,004)	$	26	$	327,721

Balance, June 30, 2020	40,000	$	39,801	99,394,432	$	99	$	673,234	$	(318,514)	$	441	$	355,260
Issuance of convertible preferred stock, net	—	11		—	—		—		—		—		—
Issuance of common stock as dividend on convertible preferred stock	—	—		30,640	—		—		—		—		—
Issuance of common stock, net	—	—		—	—		—		—		—		—
Issuance of common stock pursuant to employee stock purchase program	—	—		—	—		—		—		—		—
Issuance of common stock pursuant to exercise of stock options	—	—		567,854	1		3,997		—		—		3,998
Issuance of common stock pursuant to settlement of restricted stock units	—	—		353,160	—		—		—		—		—
Common stock surrendered for employees' tax liability upon settlement of restricted stock units	—	—		(104,670)	—		(4,922)		—		—		(4,922)
Stock-based compensation	—	—		—	—		11,910		—		—		11,910
Other comprehensive loss	—	—		—	—		—		—		(133)		(133)
Net income	—	—		—	—		—		34,166		—		34,166
Balance, September 30, 2020	40,000	$	39,812	100,241,416	$	100	$	684,219	$	(284,348)	$	308	$	400,279

Table of Contents


	Series A Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance, December 31, 2018	—	$	—	90,151,341	$	90	$	542,829	$	(170,981)	$	—	$	371,938
Issuance of common stock pursuant to employee stock purchase program	—	—		262,110	—		3,246		—		—		3,246
Issuance of common stock pursuant to exercise of stock options	—	—		1,397,074	2		7,665		—		—		7,667
Issuance of common stock pursuant to settlement of restricted stock units	—	—		562,755	—		—		—		—		—
Common stock surrendered for employees' tax liability upon settlement of restricted stock units	—	—		(160,964)	—		(2,856)		—		—		(2,856)


Stock-based compensation	—	—		—	—		20,723		—		—		20,723
Other comprehensive income	—	—		—	—		—		—		26		26
Net loss	—	—		—	—		—		(73,023)		—		(73,023)
Balance, September 30, 2019	—	$	—	92,212,316	$	92	$	571,607	$	(244,004)	$	26	$	327,721

Balance, December 31, 2019	—	$	—	93,001,597	$	93	$	583,097	$	(251,786)	$	42	$	331,446
Issuance of convertible preferred stock, net	40,000	39,812		—	—		—		—		—		—
Issuance of common stock as dividend on convertible preferred stock	—	—		30,640	—		—		—		—		—

Issuance of common stock, net	—	—		4,484,305	4		69,697		—		—		69,701
Issuance of common stock pursuant to employee stock purchase program	—	—		186,925	—		3,436		—		—		3,436
Issuance of common stock pursuant to exercise of stock options	—	—		1,825,684	2		11,500		—		—		11,502
Issuance of common stock pursuant to settlement of restricted stock units	—	—		1,017,675	1		(1)		—		—		—
Common stock surrendered for employees' tax liability upon settlement of restricted stock units	—	—		(305,410)	—		(10,987)		—		—		(10,987)
Stock-based compensation	—	—		—	—		27,477		—		—		27,477
Other comprehensive income	—	—		—	—		—		—		266		266
Net loss	—	—		—	—		—		(32,562)		—		(32,562)
Balance, September 30, 2020	40,000	$	39,812	100,241,416	$	100	$	684,219	$	(284,348)	$	308	$	400,279

See Notes to the consolidated financial statements.

Table of Contents

Index to Notes to Consolidated Financial Statements


Note 1:	Summary of Accounting Policies	7
Note 2:	Segment Reporting and Revenue	9
Note 3:	Financial Instruments	10
Note 4:	Inventory	13
Note 5:	Property and Equipment	14
Note 6:	Leases	14
Note 7:	Commitments and Contingencies	15
Note 8:	Acquired Intangible Assets	16
Note 9:	Accrued Liabilities	16
Note 10:	Other Payables	16
Note 11:	Mezzanine Equity	16
Note 12:	Equity and Equity Compensation Plans	17
Note 13:	Net Income (Loss ) per Share Attributable to Common Stock	20
Note 14:	Income Taxes	21
Note 15:	Debt	21
Note 16:	Subsequent Events	23

Index to Notes to Financial Statements

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 September 30, 2020, the statements of comprehensive income (loss) and statements of changes in mezzanine equity and stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and the statement of cash flows for the nine months ended September 30, 2020 and 2019. The results for the three and nine months ended September 30, 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 impacts on the residential real estate industry. Our management believes that these impacts, which include but are not limited to the following, could have a significant negative effect on our future financial position, results of operations, and cash flows: (i) prohibitions or limitations on in-person activities associated with residential real estate transactions; (ii) lack of consumer 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.

In April 2020, we reduced our number of employees by approximately 400 people and placed an additional 1,000 employees on furlough. As of the effective date of any furlough, we provided transition pay to each employee and for any employee enrolled in our health-care benefit plans, we continued to provide benefits through the duration of their furlough. These actions taken in response to the economic impact of COVID-19 on our business resulted in a charge of $321 and $7,846 for the three and nine months ended September 30, 2020, respectively. These costs are included in general and administrative expenses, as these costs were determined to be direct and incremental, and not related to revenue generating activities. These costs were partially offset by $56 and $1,348 in employee retention credits claimed under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") for the three and nine months ended September 30, 2020, respectively, which are also included as a reduction to general and administrative expenses. Pursuant to the CARES Act, we elected to defer eligible payroll taxes beginning in April 2020, which will be due in two equal installments in 2021 and 2022.

Use of Estimates—The 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

Index to Notes to Financial Statements

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 through our properties business. Accounts receivable related to these classes represent closed transactions for which cash has not yet been received. 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 and properties businesses. 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 June 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, including inflation protected 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

We have purchased equity interests in privately held companies, which are classified as long-term. The investments are equity securities without readily determinable fair values that are 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 investments are impaired as of the end of each reporting period. See Note 3 for information on our assessment.

Mezzanine Equity—We have issued convertible preferred stock that we have determined is a financial instrument with both equity and debt characteristics and are such classified as mezzanine equity in our consolidated financial statements. The instrument is initially recognized at fair value net of issuance costs. We reassess whether the instrument is currently redeemable or probable to become redeemable in the future as of each reporting date, in which, if the instrument meets either criteria, we will accrete the carrying value to the

Index to Notes to Financial Statements

redemption value based on the effective interest method over the remaining term. To assess classification, we review all features of the instrument, including mandatory redemption features and conversion features that may be substantive. All financial instruments that are classified as mezzanine equity are evaluated for embedded derivative features by evaluating each feature against the nature of the host instrument (e.g. more equity-like or debt-like). Features identified as embedded derivatives that are material are recognized separately as a derivative asset or liability in the consolidated financial statements. We have evaluated our convertible preferred stock and determined that its nature is that of an equity host and no material embedded derivatives exist that would require bifurcation on our balance sheet. See Note 11 for more information.

Advertising and Advertising Production Costs—We expense advertising costs as they are incurred and advertising production costs as of the first date the advertisement takes place. Advertising costs totaled $9,374 and $5,279 for the three months ended September 30, 2020 and 2019, respectively, and $38,961 and $59,357 for the nine months ended September 30, 2020 and 2019, respectively, and are included in marketing expenses. Advertising production costs totaled $8 and $17 for the three months ended September 30, 2020 and 2019, respectively, and $209 and $166 for the nine months ended September 30, 2020 and 2019, respectively, and are included in marketing expenses.

Recently Adopted Accounting Pronouncements—In 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 financial statements. See "—Accounts Receivable and Allowance for Credit Losses" for specific accounting policies for accounts receivable and available-for-sale debt securities, and see Note 2 and Note 3 for additional impacts from the adoption.

Recently Issued Accounting Pronouncements—In August 2020, the Financial Accounting Standards Board issued authoritative guidance under ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity's own equity. This guidance removes the liability and equity separation models for convertible instruments with a cash conversion feature or beneficial conversion feature. As a result, after adoption, entities will not separately present in equity an embedded conversion feature in such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change is expected to reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion features from stockholders' equity to liabilities as it relates to certain convertible debt instruments. Additionally, this guidance requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. The ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We have not yet completed our assessment of the impact of the new standard on our 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.

Index to Notes to Financial Statements

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 September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Real estate services
Brokerage revenue	$	194,375	$	146,096	$	425,269	$	372,809
Partner revenue	15,478		8,030		28,269		20,053
Total real estate services revenue	209,853		154,126		453,538		392,862
Cost of revenue	117,944		100,048		300,305		284,447
Gross profit	91,909		54,078		153,233		108,415
Properties
Revenue	19,005		80,164		170,287		141,445
Cost of revenue	20,460		80,909		173,107		144,807
Gross profit	(1,455)		(745)		(2,820)		(3,362)
Other
Revenue	8,503		5,161		19,999		13,490
Cost of revenue	5,885		5,117		18,422		14,065
Gross profit	2,618		44		1,577		(575)
Intercompany eliminations
Revenue	(445)		(768)		(2,248)		(1,192)
Cost of revenue	(445)		(768)		(2,248)		(1,192)
Gross profit	—		—		—		—
Consolidated
Revenue	236,916		238,683		641,576		546,605
Cost of revenue	143,844		185,306		489,586		442,127
Gross profit	93,072		53,377		151,990		104,478
Operating expenses	56,063		45,941		176,837		176,913
Interest income	319		1,576		1,859		5,804
Interest expense	(2,522)		(2,274)		(7,631)		(6,564)
Other income (expense), net	(640)		44		(1,943)		172
Net Income (loss)	$	34,166	$	6,782	$	(32,562)	$	(73,023)

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 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

Index to Notes to Financial Statements

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	September 30, 2020		December 31, 2019
Interest rate lock commitments	$	74,681	$	37,453
Forward sales commitments	116,091		39,447

The locations and amounts of gains (losses) recognized in income related to our derivatives are as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,
Instrument	Classification	2020		2019		2020		2019
Interest rate lock commitments	Service revenue	$	(233)	$	(209)	$	1,131	$	225
Forward sales commitments	Service revenue	553		554		442		312

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:


	Balance at September 30, 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	$	336,821	$	336,821	$	—	$	—
U.S. treasury securities	5,351		5,351		—		—
Total cash equivalents	342,172		342,172		—		—
Short-term investments
U.S. treasury securities	129,809		129,809		—		—
Loans held for sale	41,921		—		41,921		—
Prepaid expenses and other current assets
Interest rate lock commitments	1,965		—		—		1,965
Forward sales commitments	763		—		763		—
Total prepaid expenses and other current assets	2,728		—		763		1,965
Long-term investments
U.S. treasury securities	5,150		5,150		—		—
Agency bonds	11,922		11,922		—		—
Total long-term investments	17,072		17,072		—		—
Total assets	$	533,702