Redfin Corp - Quarter Report: 2022 September (Form 10-Q)

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, 2022

☐ 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)			576-8610
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 108,748,718 shares of common stock outstanding as of October 27, 2022.

Redfin Corporation

Quarterly Report on Form 10-Q

For the Quarter Ended September 30, 2022

Table of Contents



PART I		Page

Item 1.	Financial Statements (unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Comprehensive 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	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	57
Item 5.	Other Information	60

PART II

Item 1	Legal Proceedings	58
Item 1A.	Risk Factors	58
Item 6.	Exhibits	61

	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, the 2025 notes, and the 2027 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, 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 to Redfin Mortgage, LLC or Bay Equity LLC, as the context dictates.

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 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, 2021, 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. 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, 2022		December 31, 2021
Assets
Current assets
Cash and cash equivalents	$	359,724	$	591,003
Restricted cash	43,992		127,278
Short-term investments	110,316		33,737
Accounts receivable, net of allowances for credit losses of $1,979 and $1,298	96,343		69,594
Inventory	301,231		358,221
Loans held for sale	256,339		35,759
Prepaid expenses	27,361		22,948
Other current assets	26,738		7,524
Total current assets	1,222,044		1,246,064
Property and equipment, net	59,238		58,671
Right-of-use assets, net	45,647		54,200
Mortgage servicing rights, at fair value	36,914		—
Long-term investments	41,677		54,828
Goodwill	461,349		409,382
Intangible assets, net	172,019		185,929
Other assets, noncurrent	12,054		12,898
Total assets	$	2,050,942	$	2,021,972
Liabilities, mezzanine equity, and stockholders' equity
Current liabilities
Accounts payable	$	12,422	$	12,546
Accrued and other liabilities	133,885		118,122
Warehouse credit facilities	252,529		33,043
Secured revolving credit facility	202,416		199,781
Convertible senior notes, net	23,393		23,280
Lease liabilities	21,094		15,040
Total current liabilities	645,739		401,812
Lease liabilities, noncurrent	39,803		55,222
Convertible senior notes, net, noncurrent	1,217,768		1,214,017

Deferred tax liabilities	344		1,201
Total liabilities	1,903,654		1,672,252
Commitments and contingencies (Note 8)
Series A convertible preferred stock—par value $0.001 per share; 10,000,000 shares authorized; 40,000 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	39,902		39,868
Stockholders’ equity
Common stock—par value $0.001 per share; 500,000,000 shares authorized; 108,716,990 and 106,308,767 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively	109		106
Additional paid-in capital	739,689		682,084
Accumulated other comprehensive loss	(1,051)		(174)
Accumulated deficit	(631,361)		(372,164)
Total stockholders’ equity	107,386		309,852
Total liabilities, mezzanine equity, and stockholders’ equity	$	2,050,942	$	2,021,972

See Notes to the consolidated financial statements.

Table of Contents

Redfin Corporation and Subsidiaries

Consolidated Statements of Comprehensive Loss

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue
Service	$	300,854	$	301,657	$	862,756	$	776,120
Product	299,663		238,417		942,022		503,588
Total revenue	600,517		540,074		1,804,778		1,279,708
Cost of revenue
Service	210,189		174,267		608,884		486,880
Product	332,251		238,505		947,277		497,032
Total cost of revenue	542,440		412,772		1,556,161		983,912
Gross profit	58,077		127,302		248,617		295,796
Operating expenses
Technology and development	48,063		43,658		149,209		112,824
Marketing	33,748		49,143		133,832		116,343
General and administrative	61,005		54,395		191,704		151,352
Restructuring and reorganization	284		—		18,670		—
Total operating expenses	143,100		147,196		493,415		380,519
Loss from operations	(85,023)		(19,894)		(244,798)		(84,723)
Interest income	1,174		178		1,948		472
Interest expense	(5,359)		(3,672)		(12,841)		(7,822)
Income tax (expense) benefit	(132)		311		(425)		5,363
Other (expense) income, net	(905)		4,128		(3,081)		4,099
Net loss	$	(90,245)	$	(18,949)	$	(259,197)	$	(82,611)
Non-cash dividends on convertible preferred stock	(272)		(1,662)		(1,416)		(5,875)

Net loss attributable to common stock—basic and diluted	$	(90,517)	$	(20,611)	$	(260,613)	$	(88,486)
Net loss per share attributable to common stock—basic and diluted	$	(0.83)	$	(0.20)	$	(2.42)	$	(0.85)
Weighted-average shares to compute net loss per share attributable to common stock—basic and diluted	108,618,491		105,144,872		107,566,894		104,327,614



Net loss	$	(90,245)	$	(18,949)	$	(259,197)	$	(82,611)
Other comprehensive income
Foreign currency translation adjustments	27		3		65		3
Unrealized gain on available-for-sale debt securities	34		27		812		161
Comprehensive loss	$	(90,184)	$	(18,919)	$	(258,320)	$	(82,447)

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,
	2022		2021
Operating Activities
Net loss	$	(259,197)	$	(82,611)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	47,438		32,303
Stock-based compensation	51,672		39,438
Amortization of debt discount and issuance costs	4,358		3,583
Non-cash lease expense	11,313		8,510
Impairment costs	913		—
Net loss on IRLCs, forward sales commitments, and loans held for sale	4,228		342
Change in fair value of mortgage servicing rights, net	(1,472)		—
Other	3,254		(3,847)
Change in assets and liabilities:
Accounts receivable, net	(17,052)		(29,487)
Inventory	56,990		(385,986)
Prepaid expenses and other assets	(2,721)		(9,532)
Accounts payable	(1,875)		616
Accrued and other liabilities, deferred tax liabilities, and payroll tax liabilities, noncurrent	(24,202)		23,011
Lease liabilities	(12,435)		(9,644)
Origination of mortgage servicing rights	(2,774)		—
Proceeds from sale of mortgage servicing rights	1,314		—
Origination of loans held for sale	(3,091,099)		(745,703)
Proceeds from sale of loans originated as held for sale	3,082,858		744,886
Net cash used in operating activities	(148,489)		(414,121)
Investing activities
Purchases of property and equipment	(17,496)		(20,575)
Purchases of investments	(145,273)		(129,277)
Sales of investments	12,946		98,687
Maturities of investments	66,055		96,303
Cash paid for acquisition, net of cash, cash equivalents, and restricted cash acquired	(97,341)		(608,000)
Net cash used in investing activities	(181,109)		(562,862)
Financing activities


Proceeds from the issuance of common stock pursuant to employee equity plans	9,679		14,194
Tax payments related to net share settlements on restricted stock units	(6,650)		(21,088)
Borrowings from warehouse credit facilities	3,080,606		710,535
Repayments to warehouse credit facilities	(3,069,728)		(709,739)
Borrowings from secured revolving credit facility	552,051		431,717
Repayments to secured revolving credit facility	(549,416)		(256,039)
Proceeds from issuance of convertible senior notes, net of issuance costs	—		561,529
Purchases of capped calls related to convertible senior notes	—		(62,647)
Payments for repurchases and conversions of convertible senior notes	—		(2,159)
Other financing payables	—		3,161
Principal payments under finance lease obligations	(680)		(567)
Cash paid for secured revolving credit facility issuance costs	(764)		(485)
Net cash provided by financing activities	15,098		668,412
Effect of exchange rate changes on cash, cash equivalents, and restricted cash	(65)		(3)
Net change in cash, cash equivalents, and restricted cash	(314,565)		(308,574)
Cash, cash equivalents, and restricted cash:
Beginning of period	718,281		945,820
End of period	$	403,716	$	637,246

Supplemental disclosure of cash flow information
Cash paid for interest	$	12,887	$	5,539
Non-cash transactions
Stock-based compensation capitalized in property and equipment	2,983		2,745
Property and equipment additions in accounts payable and accrued liabilities	28		—
Leasehold improvements paid directly by lessor	77		1,334

	As of September 30,
	2022		2021
Reconciliation of cash, cash equivalents, and restricted cash
Cash and cash equivalents	$	359,724	$	562,714
Restricted cash	43,992		74,532
Total cash, cash equivalents, and restricted cash	$	403,716	$	637,246

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 Loss		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance, June 30, 2022	40,000	$	39,891	108,415,939	$	108	$	723,251	$	(541,116)	$	(990)	$	181,253
Issuance of convertible preferred stock, net	—	11		—	—		—		—		—		—
Issuance of common stock as dividend on convertible preferred stock	—	—		30,640	—		—		—		—		—

Issuance of common stock pursuant to exercise of stock options	—	—		50,585	—		344		—		—		344
Issuance of common stock pursuant to settlement of restricted stock units	—	—		305,603	1		—		—		—		1
Common stock surrendered for employees' tax liability upon settlement of restricted stock units	—	—		(85,777)	—		(2,906)		—		—		(2,906)



Stock-based compensation	—	—		—	—		19,000		—		—		19,000
Other comprehensive loss	—	—		—	—		—		—		(61)		(61)
Net loss	—	—		—	—		—		(90,245)		—		(90,245)
Balance, September 30, 2022	40,000	$	39,902	108,716,990	$	109	$	739,689	$	(631,361)	$	(1,051)	$	107,386

Balance, December 31, 2021	40,000	$	39,868	106,308,767	$	106	$	682,084	$	(372,164)	$	(174)	$	309,852
Issuance of convertible preferred stock, net	—	34		—	—		—		—		—		—
Issuance of common stock as dividend on convertible preferred stock	—	—		91,920	—		—		—		—		—
Issuance of common stock pursuant to employee stock purchase program	—	—		661,054	1		4,629		—		—		4,630
Issuance of common stock pursuant to exercise of stock options	—	—		695,705	1		4,971		—		—		4,972
Issuance of common stock pursuant to settlement of restricted stock units	—	—		1,362,071	1		(1)		—		—		—
Common stock surrendered for employees' tax liability upon settlement of restricted stock units	—	—		(402,527)	—		(6,649)		—		—		(6,649)

Stock-based compensation	—	—		—	—		54,655		—		—		54,655
Other comprehensive loss	—	—		—	—		—		—		(877)		(877)
Net loss	—	—		—	—		—		(259,197)		—		(259,197)
Balance, September 30, 2022	40,000	$	39,902	108,716,990	$	109	$	739,689	$	(631,361)	$	(1,051)	$	107,386


	Series A Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Income (Loss)		Total Stockholders' Equity
	Shares	Amount		Shares	Amount
Balance, June 30, 2021	40,000	$	39,846	104,838,095	$	105	$	651,627	$	(326,213)	$	77	$	325,596
Issuance of convertible preferred stock, net	—	11		—	—		—		—		—		—
Issuance of common stock as dividend on convertible preferred stock	—	—		30,640	—		—		—		—		—


Issuance of common stock pursuant to exercise of stock options	—	—		264,875	—		1,696		—		—		1,696
Issuance of common stock pursuant to settlement of restricted stock units	—	—		334,283	—		—		—		—		—
Common stock surrendered for employees' tax liability upon settlement of restricted stock units	—	—		(95,122)	—		(4,558)		—		—		(4,558)

Issuance of common stock in connection with conversion of convertible senior notes	—	—		3,164	—		(10)		—		—		(10)
Stock-based compensation	—	—		—	—		14,139		—		—		14,139
Other comprehensive loss	—	—		—	—		—		—		(30)		(30)
Net loss	—	—		—	—		—		(18,949)		—		(18,949)
Balance, September 30, 2021	40,000	$	39,857	105,375,935	$	105	$	662,894	$	(345,162)	$	47	$	317,884

Balance, December 31, 2020	40,000	$	39,823	103,000,594	$	103	$	860,556	$	(270,313)	$	211	$	590,557
Issuance of convertible preferred stock, net	—	34		—	—		—		—		—		—
Issuance of common stock as dividend on convertible preferred stock	—	—		91,920	—		—		—		—		—
Issuance of common stock pursuant to employee stock purchase program	—	—		135,426	—		7,299		—		—		7,299
Issuance of common stock pursuant to exercise of stock options	—	—		1,354,078	1		6,895		—		—		6,896
Issuance of common stock pursuant to settlement of restricted stock units	—	—		1,072,378	1		(1)		—		—		—
Common stock surrendered for employees' tax liability upon settlement of restricted stock units	—	—		(319,229)	—		(21,088)		—		—		(21,088)
Cumulative-effect adjustment from accounting changes	—	—		—	—		(170,240)		7,762		—		(162,478)
Purchases of capped calls related to convertible senior notes	—	—		—	—		(62,647)		—		—		(62,647)
Issuance of common stock in connection with conversion of convertible senior notes	—	—		40,768	—		(63)		—		—		(63)
Stock-based compensation	—	—		—	—		42,183		—		—		42,183
Other comprehensive loss	—	—		—	—		—		—		(164)		(164)
Net loss	—	—		—	—		—		(82,611)		—		(82,611)
Balance, September 30, 2021	40,000	$	39,857	105,375,935	$	105	$	662,894	$	(345,162)	$	47	$	317,884

See Notes to the consolidated financial statements.

Table of Contents

Index to Notes to Consolidated Financial Statements


Note 1:	Summary of Accounting Policies	6
Note 2:	Business Combinations	7
Note 3:	Segment Reporting and Revenue	9
Note 4:	Financial Instruments	11
Note 5:	Inventory	15
Note 6:	Property and Equipment	16
Note 7:	Leases	16
Note 8:	Commitments and Contingencies	17
Note 9:	Acquired Intangible Assets and Goodwill	19
Note 10:	Accrued and Other Liabilities	20
Note 11:	Mezzanine Equity	20
Note 12:	Equity and Equity Compensation Plans	21
Note 13:	Net Loss per Share Attributable to Common Stock	24
Note 14:	Income Taxes	25
Note 15:	Debt	25
Note 16:	Subsequent Events	29

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, 2021 that is included in this quarterly report is derived from the audited consolidated financial statements and notes for the year ended December 31, 2021 included in Item 8 in our annual report for the year ended December 31, 2021. 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, 2022, our statements of comprehensive loss, and statements of changes in mezzanine equity and stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, as well as our statements of cash flows for the nine months ended September 30, 2022 and 2021. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the year ending December 31, 2022 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 Corporation 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.

Use of Estimates—The preparation of consolidated financial statements, in conformity with GAAP, requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the respective periods. Our estimates include, but are not limited to, valuation of deferred income taxes, stock-based compensation, net realizable value of inventory, capitalization of website and software development costs, the incremental borrowing rate for the determination of the present value of lease payments, recoverability of intangible assets with finite lives, fair value of our mortgage loans held for sale (“LHFS”) and mortgage servicing rights, estimated useful life of intangible assets, fair value of reporting units for purposes of allocating and evaluating goodwill for impairment, and current expected credit losses on certain financial assets. 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.

Restructuring and Reorganization—Restructuring and reorganization expenses primarily consist of employee termination costs (including severance, retention, benefits, and payroll taxes) associated with the restructuring and reorganization activities from our acquisitions of Bay Equity LLC (“Bay Equity”), our mortgage business, and Rent Group Inc. (“Rent.”), our rentals business, and from our June 2022 workforce reduction. Restructuring and reorganization expenses will also include additional expenses throughout 2022 and into 2023 related to our November 9, 2022 workforce reduction and wind-down of our RedfinNow operations. These expenses are included in restructuring and reorganization in our consolidated statements of comprehensive loss and in accrued and other liabilities in our consolidated balance sheets. See Note 16 to our consolidated financial statements for more information on our November 9, 2022 workforce reduction and wind-down of our RedfinNow operations. We expect to complete our restructuring and reorganization activities by the end of 2023.

Mortgage Servicing Rights (“MSRs”)—We determine the fair value of MSRs using a valuation model that calculates the net present value of estimated future cash flows. Key estimates of future cash flows include prepayment speeds, default rates, discount rates, cost of servicing, objective portfolio characteristics, and others factors. Changes in these estimates could materially change the estimated fair value.

Index to Notes to Financial Statements

Lease Impairment—During the third quarter of 2022 we recognized an impairment loss of $913 due to subleasing one of our operating leases.

Recently Adopted Accounting Pronouncements—On October 28, 2021, the Financial Accounting Standards Board issued ASU 2021-08—Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends ASC 805 to “require acquiring entities to apply Topic 606 to recognize and measure contract assets and contract liabilities in a business combination.” Under current GAAP, an acquirer generally recognizes such items at fair value on the acquisition date. As a result of the amendments made by ASU 2021-08, it is expected that an acquirer will generally recognize and measure acquired contract assets and contract liabilities in a manner consistent with how the acquiree recognized and measured them in its pre-acquisition financial statements. The amendments made by ASU 2021-08 are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in interim periods, for any financial statements that have not yet been issued. We elected to early adopt this standard in the second quarter of 2022, and there was not any material impact on our financial statements as a result of adopting ASU 2021-08.

Recently Issued Accounting Pronouncements—None applicable.

Note 2: Business Combinations

On April 1, 2022, we acquired, for $139,671 in cash, all of the equity interests of Bay Equity, and Bay Equity became one of our wholly owned subsidiaries. We acquired Bay Equity to expand our mortgage business.

The results of operations and the fair values of the assets acquired and liabilities assumed have been included in our consolidated financial statements since the date of acquisition. The revenue from Bay Equity is reported in our mortgage segment in Note 3. The goodwill recognized in connection with our acquisition of Bay Equity is primarily attributable to the anticipated synergies from future growth of the combined business and is not expected to be deductible for tax purposes. We assigned the recognized goodwill of $51,967 to the mortgage segment.

Index to Notes to Financial Statements

The following table summarizes the preliminary fair value of assets acquired and liabilities assumed as a result of the Bay Equity acquisition and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed becomes available:


Cash and cash equivalents	$	39,963
Restricted cash	2,367
Accounts receivable	9,697
Prepaid expenses	1,222
Other current assets	19,262
Property and equipment, net	897
Operating lease right-of-use assets	4,995
Loans held for sale	213,891
Mortgage servicing rights, at fair value	33,982
Other assets, noncurrent	294
Intangible assets	14,510
Goodwill	51,967
Total assets acquired	393,047
Accounts payable	1,747
Accrued and other liabilities	38,026
Lease liabilities	2,848
Lease liabilities and deposits, noncurrent	2,147
Warehouse credit facilities	208,608
Total liabilities assumed	253,376
Total purchase consideration	$	139,671

Acquisition-related costs consisted of external fees for advisory, legal, and other professional services and totaled approximately $13 and $2,437 for the three and nine months ended September 30, 2022, respectively. These costs were expensed as incurred and recorded in general and administrative costs in our consolidated statements of comprehensive loss.

Identifiable Intangible Assets—The following table provides the preliminary fair values of the Bay Equity intangible assets, along with their estimated useful lives:


	Estimated Fair Value		Estimated Useful Life (in years)
Trade names	$	11,650	5
Developed technology	2,860		3
Total	$	14,510

The identifiable intangible assets include trade names and developed technology. Trade names primarily relate to the Bay Equity brand. Developed technology primarily relates to website functionality around data consolidation and optimization which helps drive efficiencies in loan origination and processing. The fair values of trade names and developed technology are derived by applying the relief from royalty method and replacement cost method, respectively. Critical estimates in valuing the intangible assets include revenue growth rate, royalty rate, discount rate, and number of months to recreate the underlying application.

Unaudited Pro Forma Financial Information—The following table presents unaudited pro forma financial information for the three and nine months ended September 30, 2022 and 2021. The pro forma financial information combines our results of operations with that of Bay Equity as though the companies had been combined as of January 1, 2021. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Bay Equity acquisition had taken place at such time. The pro forma financial information presented below includes adjustments for depreciation and amortization, restructuring costs, and transaction costs:

Index to Notes to Financial Statements


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Revenue	$	600,126	$	621,555	$	1,860,255	$	1,563,545
Net loss	(90,272)		(8,544)		(255,832)		(41,329)

There were no material non-recurring adjustments made in the pro forma financial information disclosed above.

Note 3: Segment Reporting and Revenue

In its operation of our business, our management, including our chief operating decision maker ("CODM"), who is also our chief executive officer, evaluates the performance of our operating segments based on our statement of operations results, inclusive of net loss. We do not analyze discrete segment balance sheet information related to long-term assets, substantially all of which are located in the United States. We have six operating segments and four reportable segments, real estate services, properties, rentals, and mortgage. As a result of our decision to wind-down RedfinNow operations, we plan to report our properties segment as a discontinued operation beginning with the period during which we complete wind-down of the business.

We generate revenue primarily from commissions and fees charged on each real estate services transaction closed by our lead agents or partner agents, from the sale of RedfinNow homes, from subscription-based product offerings for our rentals business, and from the origination, sales, and servicing of mortgages. Our key revenue components are brokerage revenue, partner revenue, properties revenue, rentals revenue, mortgage revenue, and other revenue.

Information on each of the reportable and other segments and reconciliation to consolidated net loss is presented in the table below. We have assigned certain previously reported expenses to each segment to conform to the way we internally manage and monitor our business. We allocated indirect costs to each segment based on a reasonable allocation methodology, when such costs are significant to the performance measures of the segments.


	Three Months Ended September 30, 2022
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Revenue	$	211,540	$	299,663	$	38,686	$	48,469	$	7,079	$	(4,920)	$	600,517
Cost of revenue	156,632		332,251		8,676		43,783		6,018		(4,920)		542,440
Gross profit	54,908		(32,588)		30,010		4,686		1,061		—		58,077
Operating expenses
Technology and development	25,709		4,728		15,385		985		751		505		48,063
Marketing	18,772		506		12,678		1,653		48		91		33,748
General and administrative	20,244		3,029		22,722		7,073		784		7,153		61,005
Restructuring and reorganization	—		—		—		—		—		284		284
Total operating expenses	64,725		8,263		50,785		9,711		1,583		8,033		143,100
Loss from operations	(9,817)		(40,851)		(20,775)		(5,025)		(522)		(8,033)		(85,023)
Interest income, interest expense, income tax expense, and other expense, net	—		(2,814)		397		(129)		40		(2,716)		(5,222)
Net loss	$	(9,817)	$	(43,665)	$	(20,378)	$	(5,154)	$	(482)	$	(10,749)	$	(90,245)

Index to Notes to Financial Statements


	Three Months Ended September 30, 2021
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Revenue	$	257,795	$	238,417	$	40,406	$	5,013	$	3,193	$	(4,750)	$	540,074
Cost of revenue	161,449		238,397		7,395		6,705		3,576		(4,750)		412,772
Gross profit	96,346		20		33,011		(1,692)		(383)		—		127,302
Operating expenses
Technology and development	20,732		3,602		13,849		2,910		586		1,979		43,658
Marketing	33,894		645		14,113		149		42		300		49,143
General and administrative	18,383		2,258		23,264		2,334		533		7,623		54,395

Total operating expenses	73,009		6,505		51,226		5,393		1,161		9,902		147,196
Income (loss) from operations	23,337		(6,485)		(18,215)		(7,085)		(1,544)		(9,902)		(19,894)
Interest income, interest expense, income tax expense, and other expense, net	(56)		(1,456)		311		1		1		2,144		945
Net income (loss)	$	23,281	$	(7,941)	$	(17,904)	$	(7,084)	$	(1,543)	$	(7,758)	$	(18,949)


	Nine Months Ended September 30, 2022
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Revenue	$	640,835	$	942,022	$	114,979	$	104,484	$	17,341	$	(14,883)	$	1,804,778
Cost of revenue	488,114		946,955		23,769		95,616		16,590		(14,883)		1,556,161
Gross profit	152,721		(4,933)		91,210		8,868		751		—		248,617
Operating expenses
Technology and development	80,144		13,531		44,539		5,236		2,975		2,784		149,209
Marketing	90,380		2,480		36,806		3,525		173		468		133,832
General and administrative	67,578		9,064		68,738		18,047		2,346		25,931		191,704
Restructuring and reorganization	—		—		—		—		—		18,670		18,670
Total operating expenses	238,102		25,075		150,083		26,808		5,494		47,853		493,415
Loss from operations	(85,381)		(30,008)		(58,873)		(17,940)		(4,743)		(47,853)		(244,798)
Interest income, interest expense, income tax expense, and other expense, net	(123)		(5,682)		1,098		(164)		51		(9,579)		(14,399)
Net loss	$	(85,504)	$	(35,690)	$	(57,775)	$	(18,104)	$	(4,692)	$	(57,432)	$	(259,197)

Index to Notes to Financial Statements


	Nine Months Ended September 30, 2021
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Revenue	$	678,602	$	503,588	$	82,954	$	15,823	$	10,261	$	(11,520)	$	1,279,708
Cost of revenue	453,790		496,948		14,965		19,406		10,323		(11,520)		983,912
Gross profit	224,812		6,640		67,989		(3,583)		(62)		—		295,796
Operating expenses
Technology and development	60,862		9,512		27,616		7,814		1,538		5,482		112,824
Marketing	86,823		1,423		26,724		413		105		855		116,343
General and administrative	60,813		6,765		46,413		5,686		1,466		30,209		151,352

Total operating expenses	208,498		17,700		100,753		13,913		3,109		36,546		380,519
Income (loss) from operations	16,314		(11,060)		(32,764)		(17,496)		(3,171)		(36,546)		(84,723)
Interest income, interest expense, income tax expense, and other expense, net	(87)		(2,538)		523		2		2		4,210		2,112
Net income (loss)	$	16,227	$	(13,598)	$	(32,241)	$	(17,494)	$	(3,169)	$	(32,336)	$	(82,611)

Note 4: 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.

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.

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.


Notional Amounts	September 30, 2022		December 31, 2021
Forward sales commitments	$	476,903	$	70,550
IRLCs	390,091		67,485

Index to Notes to Financial Statements

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	2022		2021		2022		2021
Forward sales commitments	Service revenue	$	11,602	$	859	$	1,757	$	938
IRLCs	Service revenue	(8,462)		(888)		(4,433)		(687)

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, 2022		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	$	294,396	$	294,396	$	—	$	—


Total cash equivalents	294,396		294,396		—		—
Short-term investments
U.S. treasury securities	87,313		87,313		—		—
Agency bonds	23,003		23,003		—		—
Total short-term investments	110,316		110,316		—		—
Loans held for sale	256,339		—		256,339		—
Other current assets
Forward sales commitments	13,153		—		13,153		—
IRLCs	5,764		—		—		5,764
Total other current assets	18,917		—		13,153		5,764
Mortgage servicing rights, at fair value	36,914		—		—		36,914
Long-term investments
U.S. treasury securities	41,677		41,677		—		—

Total assets	$	758,559	$	446,389	$	269,492	$	42,678
Liabilities
Accrued and other liabilities
Forward sales commitments	$	263	$	—	$	263	$	—
IRLCs	4,716		—		—		4,716
Total liabilities	$	4,979	$	—	$	263	$	4,716

Index to Notes to Financial Statements


	Balance at December 31, 2021		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	$	509,971	$	509,971	$	—	$	—

Total cash equivalents	509,971		509,971		—		—
Short-term investments
U.S. treasury securities	16,718		16,718		—		—
Agency bonds	11,906		11,906		—		—
Equity securities	5,113		5,113		—		—
Loans held for sale	35,759		—		35,759		—
Other current assets
Forward sales commitments	138		—		138		—
IRLCs	1,191		—		—		1,191
Total other current assets	1,329		—		138		1,191
Long-term investments
U.S. treasury securities	54,828		54,828		—		—
Total assets	$	635,624	$	598,536	$	35,897	$	1,191
Liabilities
Accrued liabilities
Forward sales commitments	$	93	$	—	$	93	$	—
IRLCs	60		—		—		60
Total liabilities	$	153	$	—	$	93	$	60

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

The significant unobservable inputs used to determine the fair value of IRLCs and MSRs that could result in a significant change in fair value measurement were as follows:

September 30, 2022

December 31, 2021

Key Inputs

Valuation Technique

Range

Weighted-Average

Range

Weighted-Average

IRLCs

Pull-through rate

Market pricing

58.0% - 100.0%

91.7%

71.1%

MSRs

Prepayment speed

Discounted cash flow

6.0% - 14.2%

6.5%

N/A

Default rates

Discounted cash flow

0.0% - 0.5%

0.1%

N/A

Discount rate

Discounted cash flow

9.5% - 12.4%

9.6%

N/A

The following is a summary of changes in the fair value of IRLCs for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Balance, net—beginning of period	$	9,510	$	1,972	$	1,155	$	1,771
IRLCs acquired in business combination	—		—		4,326		—
Issuances of IRLCs	20,440		3,849		40,740		14,523
Settlements of IRLCs	(23,494)		(4,248)		(40,762)		(14,956)
Fair value changes recognized in earnings	(5,408)		(489)		(4,411)		(254)
Balance, net—end of period	$	1,048	$	1,084	$	1,048	$	1,084

Index to Notes to Financial Statements

The following is a summary of changes in the fair value of MSRs for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Balance—beginning of period	$	35,050	$	—	$	—	$	—
MSRs acquired in business combination	—		—		33,982		—
MSRs originated	1,811		—		2,774		—
MSRs sales	(541)		—		(1,314)		—
Fair value changes recognized in earnings	594		—		1,472		—
Balance, net—end of period	$	36,914	$	—	$	36,914	$	—

The following table presents the carrying amounts and estimated fair values of our convertible senior notes that are not recorded at fair value on our consolidated balance sheets:


	September 30, 2022				December 31, 2021
Issuance	Net Carrying Amount		Estimated Fair Value		Net Carrying Amount		Estimated Fair Value
2023 notes	$	23,393	$	21,634	$	23,280	$	34,487
2025 notes	652,854		385,985		650,783		593,366
2027 notes	564,914		285,511		563,234		467,814

The difference between the principal amounts of our 2023 notes, our 2025 notes, and our 2027 notes, which were $23,512, $661,250, and $575,000, respectively, and the net carrying amounts of the notes represents the unamortized debt issuance costs. The estimated fair value of each tranche of convertible senior notes is based on the closing trading price of the notes on the last day of trading for the period, and is classified as Level 2 within the fair value hierarchy due to the limited trading activity of the notes. Based on the closing price of our common stock of $5.84 on September 30, 2022, the if-converted values of all three convertible notes were less than the principal amounts, respectively. See Note 15 for additional details on our convertible senior notes.

See Note 11 for the carrying amount of our convertible preferred stock.

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, and other assets. These assets are remeasured at fair value if determined to be impaired.

The cost or amortized cost, gross unrealized gains and losses, and estimated fair market value of our cash, money market funds, restricted cash, available-for-sale investments, and equity securities were as follows:


	September 30, 2022
	Cost or Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Cash, Cash Equivalents, and Restricted Cash		Short-term Investments		Long-term Investments
Cash	$	65,328	$	—	$	—	$	65,328	$	65,328	$	—	$	—
Money markets funds	294,396		—		—		294,396		294,396		—		—
Restricted cash	43,992		—		—		43,992		43,992		—		—
U.S. treasury securities	130,002		26		(1,038)		128,990		—		87,313		41,677
Agency bonds	23,000		3		—		23,003		—		23,003		—

Total	$	556,718	$	29	$	(1,038)	$	555,709	$	403,716	$	110,316	$	41,677

Index to Notes to Financial Statements


	December 31, 2021
	Cost or Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Cash, Cash Equivalents, and Restricted Cash		Short-term Investments		Long-term Investments
Cash	$	81,032	$	—	$	—	$	81,032	$	81,032	$	—	$	—
Money markets funds	509,971		—		—		509,971		509,971		—		—
Restricted cash	127,278		—		—		127,278		127,278		—		—
U.S. treasury securities	71,749		1		(204)		71,546		—		16,718		54,828
Agency bonds	11,900		6		—		11,906		—		11,906		—
Equity securities	500		4,613		—		5,113		—		5,113		—
Total	$	802,430	$	4,620	$	(204)	$	806,846	$	718,281	$	33,737	$	54,828

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. government securities, all with a high quality credit rating issued by various credit agencies.

As of September 30, 2022 and December 31, 2021, we had accrued interest of $363 and $86, respectively, on our available-for-sale investments, of which we have recorded no expected credit losses. Accrued interest receivable is recorded in other current assets in our consolidated balance sheets.

Note 5: Inventory

The components of inventory were as follows:


	September 30, 2022		December 31, 2021
Finished goods
Properties for sale	$	147,993	$	36,302
Properties under contract for sale	86,985		83,108
Work in progress
Properties not available for sale	9,002		16,377
Properties under improvement	57,251		222,434
Inventory	$	301,231	$	358,221

Inventory includes direct home purchase costs and any capitalized improvements, net of inventory reserves, which reflect the lower of cost or net realizable value write-downs applied on a specific home basis. As of September 30, 2022 and December 31, 2021, lower of cost or net realizable value write-downs were $18,274 and $2,364, respectively. These write-downs are included within the changes in inventory in net cash used in operating activities in our consolidated statements of cash flows. During the nine months ended September 30, 2022, we purchased 1,438 homes with an inventory value of $746,248 and sold 1,570 homes with an inventory value of $786,483. During the nine months ended September 30, 2021, we purchased 1,528 homes with an inventory value of $790,738 and sold 851 homes with an inventory value of $415,110.

Homes that are under contract to purchase through our properties business, but that have not closed, are excluded from inventory and represent commitments at the end of the period. As of September 30, 2022, the aggregate purchase price of these homes was $41,540.

Index to Notes to Financial Statements

Note 6: Property and Equipment

The components of property and equipment were as follows:


	Useful Lives (Years)	September 30, 2022		December 31, 2021
Leasehold improvements	Shorter of lease term or economic life	$	32,496	$	33,455
Website and software development costs	2 - 3	61,903		50,439
Computer and office equipment	3 - 5	18,331		14,216
Software	3	1,871		1,871
Furniture	7	7,816		8,091
Property and equipment, gross		122,417		108,072
Accumulated depreciation and amortization		(72,932)		(59,766)
Construction in progress		9,753		10,365
Property and equipment, net		$	59,238	$	58,671

Depreciation and amortization expense for property and equipment amounted to $6,552 and $5,399 for the three months ended September 30, 2022 and 2021, respectively, and $19,018 and $14,369 for the nine months ended September 30, 2022 and 2021, respectively. We capitalized website and software development costs, including stock-based compensation, of $5,031 and $4,727 for the three months ended September 30, 2022 and 2021, respectively, and $16,042 and $13,137 for the nine months ended September 30, 2022 and 2021, respectively.

Note 7: Leases

We lease office space under noncancelable operating leases with original 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. The components of lease expense were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,
Lease Cost	Classification	2022		2021		2022		2021
Operating lease cost
Operating lease cost(1)	Cost of revenue	$	3,599	$	2,400	$	9,682	$	7,105
Operating lease cost(1)	Operating expenses	2,056		1,727		5,542		4,440
Total operating lease cost		$	5,655	$	4,127	$	15,224	$	11,545

Finance lease cost
Amortization of right-of-use assets	Cost of revenue	$	209	$	139	$	576	$	335
Interest on lease liabilities	Cost of revenue	26		21		74		51
Total finance lease cost		$	235	$	160	$	650	$	386

(1) Includes lease expense with initial terms of twelve months or less of $1,459 and $430 for the three months ended September 30, 2022 and 2021, respectively, and $2,882 and $1,156 for the nine months ended September 30, 2022 and 2021, respectively.

Index to Notes to Financial Statements


	Lease Liabilities				Other Leases		Total Lease Obligations
Maturity of Lease Liabilities	Operating		Financing		Operating
2022, excluding the nine months ended September 30, 2022	$	6,674	$	196	$	738	$	7,608
2023	19,823		772		1,012		21,607
2024	13,911		686		615		15,212
2025	9,846		362		579		10,787
2026	8,396		78		160		8,634
Thereafter	5,248		—		155		5,403
Total lease payments	$	63,898	$	2,094	$	3,259	$	69,251
Less: Interest(1)	4,945		150
Present value of lease liabilities	$	58,953	$	1,944

(1) Includes interest on operating leases of $2,109 and financing lease of $85 within the next twelve months.


Lease Term and Discount Rate	September 30, 2022		December 31, 2021
Weighted-average remaining operating lease term (years)	3.7		4.8
Weighted-average remaining finance lease term (years)	2.9		3.2
Weighted-average discount rate for operating leases	4.5	%	4.4	%
Weighted-average discount rate for finance leases	5.4	%	5.4	%


	Nine Months Ended September 30,
Supplemental Cash Flow Information	2022		2021
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	14,758	$	12,006
Operating cash flows from finance leases	74		64
Financing cash flows from finance leases	442		226
Right-of-use assets obtained in exchange for lease liabilities
Operating leases(1)	$	(2,257)	$	6,544
Finance leases	934		987

(1) The nine months ended September 30, 2022 include a $5,119 right-of-use asset reduction from the exercise of an early termination option in one of our operating leases.

Note 8: Commitments and Contingencies

Legal Proceedings

Below is a discussion of our material, pending legal proceedings. We cannot estimate a range of reasonably possible losses given the preliminary stage of these proceedings and the claims and issues presented. In addition to the matters discussed below, from time to time, we are involved in litigation, claims, and other proceedings arising in the ordinary course of our business. Except for the matters discussed below, we do not believe that any of our pending litigation, claims, and other proceedings are material to our business.

Lawsuit by David Eraker—On May 11, 2020, David Eraker, our co-founder and former chief executive officer who departed Redfin in 2006, filed a complaint through Appliance Computing III, Inc. (d/b/a Surefield) ("Surefield"), which is a company that Mr. Eraker founded and that we believe he controls, in the U.S. District Court for the Western District of Texas, Waco Division. The complaint alleged that we were infringing four patents claimed to be owned by Surefield without its authorization or license. Surefield sought an unspecified amount of damages and an injunction against us offering products and services that allegedly infringe the patents at issue. On May 17, 2022, the jury returned a verdict in our favor, finding that we did not infringe any of the asserted claims of the patents claimed to be owned by Surefield, and accordingly, we do not owe any damages to Surefield. The jury also found that all asserted claims of Surefield’s claimed patents were invalid. The court entered final judgment on August 15, 2022. On September 12, 2022, Surefield filed a motion for judgment as a matter of law and a motion for a new trial. In the motions, Surefield asserts that no jury could have found non-infringement based on the trial record, among other things. We filed oppositions to the motions on October 3, 2022 and Surefield filed replies on October 21, 2022.

Index to Notes to Financial Statements

Lawsuit Alleging Violations of the Fair Housing Act—On October 28, 2020, a group of ten organizations filed a complaint against us in the U.S. District Court for the Western District of Washington. The organizations are the National Fair Housing Alliance, the Fair Housing Center of Metropolitan Detroit, the Fair Housing Justice Center, the Fair Housing Rights Center in Southeastern Pennsylvania, the HOPE Fair Housing Center, the Lexington Fair Housing Council, the Long Island Housing Services, the Metropolitan Milwaukee Fair Housing Council, Open Communities, and the South Suburban Housing Center. The complaint alleged that certain of our business policies and practices violate certain provisions of the Fair Housing Act (the “FHA”). The plaintiffs alleged that these policies and practices (i) have the effect of our services being unavailable in predominantly non-white communities on a more frequent basis than predominantly white communities and (ii) are unnecessary to achieve a valid interest or legitimate objective. The complaint focused on the following policies and practices, as alleged by the plaintiffs: (i) a home's price must exceed a certain dollar amount before we offer service through one of our lead agents or partner agents and (ii) our services and pricing structures are available only for homes serviced by one of our lead agents and those same services and pricing structures may not be offered by one of our partner agents. The plaintiffs sought (i) a declaration that our alleged policies and practices violate the FHA, (ii) an order enjoining us from further alleged violations, (iii) an unspecified amount of monetary damages, and (iv) payment of plaintiffs’ attorneys' fees and costs.

On April 29, 2022, we settled this lawsuit. As part of the settlement, we paid an aggregate of $3,000 to the ten organizations on May 25, 2022 and will pay an additional aggregate of $1,000 to the ten organizations by April 29, 2023. The latter payment will be dedicated to fund programs devoted to expanding home ownership opportunities. In addition to the financial payments, we also agreed to certain changes to our business practices, including expanding our brokerage services to lower-priced homes in certain markets, designating a fair housing compliance officer, revamping our fair housing training, and expanding our diversity recruiting efforts.

Lawsuits Alleging Misclassification—On August 28, 2019, Devin Cook, who was one of our former independent contractor licensed sales associates, whom we call associate agents, filed a complaint against us in the Superior Court of California, County of San Francisco. The plaintiff initially pled the complaint as a class action and alleged that we misclassified her as an independent contractor instead of an employee. The plaintiff also sought unspecified penalties pursuant to representative claims under California’s Private Attorney General Act ("PAGA"). On January 30, 2020, the plaintiff filed a first amended complaint dismissing her class action claim and asserting only claims under PAGA.

On November 20, 2020, Jason Bell, who was one of our former lead agents as well as a former associate agent, filed a complaint against us in the U.S. District Court for the Southern District of California. The complaint was pled as a class action and alleges that, (1) during the time he served as an associate agent, we misclassified him as an independent contractor instead of an employee and (2) during the time he served as a lead agent, we misclassified him as an employee who was exempt from minimum wage and overtime laws. The plaintiff also asserted representative claims under PAGA. The plaintiff sought unspecified amounts of unpaid overtime wages, regular wages, meal and rest period compensation, waiting time and other penalties, injunctive and other equitable relief, and plaintiff's attorneys' fees and costs.

On May 23, 2022, pursuant to a combined mediation, we settled the lawsuits brought by Ms. Cook and Mr. Bell for an aggregate of $3,000. This amount is subject to adjustment if our actual number of associate agents, lead agents, or their respective workweeks differs from the number that we represented to the plaintiffs. This settlement is subject to each court’s approval.

Index to Notes to Financial Statements

On March 24, 2021, Anthony Bush, who is one our former lead agents as well as a former associate agent, filed a complaint against us in the Superior Court of California, County of Alameda. The original complaint alleges that, during the time he served as an associate agent, we misclassified him as an independent contractor instead of an employee. The plaintiff also asserts representative claims under PAGA. The plaintiff is seeking unspecified amounts of unpaid overtime wages, regular wages, meal and rest period compensation, penalties, injunctive, and other equitable relief, and plaintiff's attorneys' fees and costs. On September 27, 2021, the court granted our motion to stay the plaintiff’s action pending resolution of the PAGA claims brought against us by Devin Cook described above. The plaintiff subsequently filed an arbitration demand. In arbitration, the plaintiff alleged that (i) during the time he served as an associate agent, we misclassified him as an independent contractor instead of an employee and (ii) during the time he served as a lead agent, we misclassified him as an exempt employee. We settled the lawsuit on August 24, 2022 for an immaterial amount.

Other Commitments

Our title and settlement business and our mortgage business each holds cash in escrow at third-party financial institutions on behalf of homebuyers and home sellers. As of September 30, 2022, we held $31,338 in escrow and did not record this amount on our consolidated balance sheets. We may be held contingently liable for the disposition of the cash we hold in escrow. See Note 5 for our commitments related to inventory under contract but not closed.

Note 9: Acquired Intangible Assets and Goodwill

Acquired Intangible Assets—The gross carrying amounts and accumulated amortization of intangible assets were as follows:


		September 30, 2022						December 31, 2021
	Weighted-Average Useful Lives (Years)	Gross		Accumulated Amortization		Net		Gross		Accumulated Amortization		Net
Trade names	9.3	$	82,690	$	(12,497)	$	70,193	$	71,040	$	(6,004)	$	65,036
Developed technology	3.3	66,340		(33,111)		33,229		63,480		(17,285)		46,195
Customer relationships	10	81,360		(12,763)		68,597		81,360		(6,662)		74,698
Total		$	230,390	$	(58,371)	$	172,019	$	215,880	$	(29,951)	$	185,929

Amortization expense amounted to $9,747 and $8,926 for the three months ended September 30, 2022 and 2021, respectively, and $28,420 and $17,974 for the nine months ended September 30, 2022 and 2021, respectively.

Our estimate of remaining amortization expense for intangible assets that existed as of September 30, 2022 is as follows:


2022, excluding the nine months ended September 30, 2022	$	9,747
2023	38,988
2024	23,741
2025	17,618
2026	17,380
Thereafter	64,545
Estimated remaining amortization expense	$	172,019

Index to Notes to Financial Statements

Goodwill—The carrying amounts of goodwill by reportable segment were as follows:


	Real Estate Services		Rentals		Mortgage		Total
Balance as of December 31, 2021	$	250,231	$	159,151	$	—	$	409,382
Goodwill resulting from acquisition	—		—		51,967		51,967
Balance as of September 30, 2022	$	250,231	$	159,151	$	51,967	$	461,349

Note 10: Accrued and Other Liabilities

The components of accrued and other liabilities were as follows:


	September 30, 2022		December 31, 2021
Accrued compensation and benefits	$	84,259	$	78,437
Miscellaneous accrued liabilities	34,679		25,217
Payroll tax liability deferred by the CARES Act	7,760		7,760
Customer contract liabilities	7,187		6,708
Total accrued and other liabilities	$	133,885	$	118,122

Note 11: Mezzanine Equity

On April 1, 2020, we issued 4,484,305 shares of our common stock, at a price of $15.61 per share, and 40,000 shares of our preferred stock, at a price of $1,000 per share, for aggregate gross proceeds of $110,000. We designated this preferred stock as Series A Convertible Preferred Stock (our "convertible preferred stock"). Our convertible preferred stock is classified as mezzanine equity in our consolidated financial statements as the substantive conversion features at the option of the holder precludes liability classification. We have determined there are no material embedded features that require recognition as a derivative asset or liability.

We allocated the gross proceeds of $110,000 to the common stock issuance and the convertible preferred stock issuance based on the standalone fair value of the issuances, resulting in a fair valuation of $40,000 for the preferred stock, which is also the value of the mandatory redemption amount.

As of September 30, 2022, the carrying value of our convertible preferred stock, net of issuance costs, is $39,902, and holders have earned unpaid stock dividends in the amount of 30,640 shares of common stock. This stock dividend was issued on April 1, 2022. These shares are included in basic and diluted net loss per share attributable to common stock in Note 13. As of September 30, 2022, no shares of the preferred stock have been converted, and the preferred stock was not redeemable, nor probable to become redeemable in the future as there is a more than remote chance the shares will be automatically converted prior to the mandatory redemption date. The number of shares of common stock reserved for future issuance resulting from dividends, conversion, or redemption with respect to the preferred stock was 2,622,177 as of the issuance date.

Dividends—The holders of our convertible preferred stock are entitled to dividends. Dividends accrue daily based on a 360 day fiscal year at a rate of 5.5% per annum based on the issue price and are payable quarterly in arrears on the first business day following the end of each calendar quarter. Assuming we satisfy certain conditions, we will pay dividends in shares of common stock at a rate of the dividend payable divided by $17.95. If we do not satisfy such conditions, we will pay dividends in a cash amount equal to (i) the dividend shares otherwise issuable on the dividends multiplied by (ii) the volume-weighted average closing price of our common stock for the ten trading days preceding the date the dividends are payable.

Participation Rights—Holders of our convertible preferred stock are entitled to dividends paid and distributions made to holders of our common stock to the same extent as if such preferred stockholders had converted their shares of preferred stock into common stock and held such shares on the record date for such dividends and distributions.

Index to Notes to Financial Statements

Conversion—Holders may convert their convertible preferred stock into common stock at any time at a rate per share of preferred stock equal to the issue price divided by $19.51 (the "conversion price"). A holder that converts will also receive any dividend shares resulting from accrued dividends.

Our convertible preferred stock may also be automatically converted to shares of our common stock. If the closing price of our common stock exceeds $27.32 per share (i) for each day of the 30 consecutive trading days immediately preceding April 1, 2023 or (ii) following April 1, 2023 until 30 trading days prior to November 30, 2024, for each day of any 30 consecutive trading days, then each outstanding share of preferred stock will automatically convert into a number of shares of our common stock at a rate per share of preferred stock equal to the issue price divided by the conversion price. Upon an automatic conversion, a holder will also receive any dividend shares resulting from accrued dividends.

Redemption—On November 30, 2024, we will be required to redeem any outstanding shares of our convertible preferred stock, and each holder may elect to receive cash, shares of common stock, or a combination of cash and shares. If a holder elects to receive cash, we will pay, for each share of preferred stock, an amount equal to the issue price plus any accrued dividends. If a holder elects to receive shares, we will issue, for each share of preferred stock, a number of shares of common stock at a rate of the issue price divided by the conversion price plus any dividend shares resulting from accrued dividends.

A holder of our convertible preferred stock has the right to require us to redeem up to all shares of preferred stock it holds following certain events outlined in the document governing the preferred stock. If a holder redeems as the result of such events, such holder may elect to receive cash or shares of common stock, as calculated in the same manner as the mandatory redemption described above. Additionally, such holder will also receive, in cash or shares of common stock as elected by the holder, an amount equal to all scheduled dividend payments on the preferred stock for all remaining dividend periods from the date the holder gives its notice of redemption.

Liquidation Rights—Upon our liquidation, dissolution, or winding up, holders of our convertible preferred stock will be entitled to receive cash out of our assets prior to holders of the common stock.

Note 12: Equity and Equity Compensation Plans

Common Stock—As of September 30, 2022 and December 31, 2021, our amended and restated certificate of incorporation authorized us to issue 500,000,000 shares of common stock with a par value of $0.001 per share.

Preferred Stock—As of September 30, 2022 and December 31, 2021, our amended and restated certificate of incorporation authorized us to issue 10,000,000 shares of preferred stock with a par value of $0.001 per share.

Amended and Restated 2004 Equity Incentive Plan—We granted options under our 2004 Equity Incentive Plan, as amended (our "2004 Plan"), until July 26, 2017, when we terminated it in connection with our initial public offering. Accordingly, no shares are available for future issuance under our 2004 Plan. Our 2004 Plan continues to govern outstanding equity awards granted thereunder. The term of each stock option under the plan is no more than 10 years, and each stock option generally vests over a four-year period.

2017 Equity Incentive Plan—Our 2017 Equity Incentive Plan (our "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, and consultants. The number of shares of common stock initially reserved for issuance under our 2017 EIP was 7,898,159. The number of shares reserved for issuance under our 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 our common stock as of the immediately preceding December 31 or an amount determined by our board of directors. The term of each stock option and restricted stock unit under the plan will not exceed 10 years, and each award generally vests between two and four years.

Index to Notes to Financial Statements

We have reserved shares of common stock for future issuance under our 2017 EIP as follows:


	September 30, 2022	December 31, 2021
Stock options issued and outstanding	3,309,305	4,019,011
Restricted stock units outstanding	11,322,125	4,617,425
Shares available for future equity grants	12,774,103	15,205,854
Total shares reserved for future issuance	27,405,533	23,842,290

2017 Employee Stock Purchase Plan—Our 2017 Employee Stock Purchase Plan (our "ESPP") was approved by our board of directors on July 27, 2017 and enables eligible employees to purchase shares of our common stock at a discount. Purchases will be accomplished through participation in discrete offering periods. We initially reserved 1,600,000 shares of common stock for issuance under our ESPP. The number of shares reserved for issuance under our 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 our common stock as of the immediately preceding December 31 or an amount determined by our board of directors. On each purchase date, eligible employees will purchase our common stock at a price per share equal to 85% of the lesser of (i) the fair market value of our common stock on the first trading day of the offering period and (ii) the fair market value of our common stock on the purchase date.

We have reserved shares of common stock for future issuance under our ESPP as follows:


	Nine Months Ended September 30, 2022	Year Ended December 31, 2021
Shares available for issuance at beginning of period	4,768,506	4,039,667
Shares issued during the period	(661,054)	(334,248)
Total shares available for future issuance at end of period	4,107,452	3,705,419

Stock Options—Option activity for the nine months ended September 30, 2022 was as follows:


	Number of Options	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Outstanding as of January 1, 2022(1)	4,019,011	$	8.02	3.73	$	122,038
PSOs earned(1)	150,000	27.50
Options exercised	(695,705)	6.96

Options expired	(164,001)	9.06
Outstanding as of September 30, 2022	3,309,305	9.08		3.18	2,405
Options exercisable as of September 30, 2022	3,309,305	9.08		3.18	2,405

(1) We granted stock options subject to performance conditions (“PSOs”) to our chief executive officer in 2019. We previously reported the target achievement level of these PSOs - 150,000 PSOs - within our outstanding stock options. During the first quarter of 2022, our board of directors determined that our chief executive officer earned his PSOs at the maximum achievement level. Accordingly, we are reporting an additional 150,000 PSOs as being earned during the first quarter of 2022.

The grant date fair value of our stock options was recorded as stock-based compensation over the stock options' vesting period. All outstanding options were fully vested as of September 30, 2022. We did not recognize any option-related expense during the nine months ended September 30, 2022. With respect to our PSOs, we had previously expensed the PSOs based on their maximum achievement level. During the first quarter of 2022, our board of directors certified our maximum achievement of the PSOs.

Index to Notes to Financial Statements

Restricted Stock Units—Restricted stock unit activity for the nine months ended September 30, 2022 was as follows:


	Restricted Stock Units	Weighted-Average Grant-Date Fair Value
Outstanding as of January 1, 2022	4,617,425	$	37.13
Granted	9,866,403	10.53
Vested	(1,362,071)	28.05
Forfeited or canceled	(1,799,632)	25.94
Outstanding or deferred as of September 30, 2022(1)	11,322,125	16.82

(1) Starting with the restricted stock units granted to them in June 2019, our non-employee directors have the option to defer the issuance of common stock receivable upon vesting of such restricted stock units until 60 days following the day they are no longer providing services to us or, if earlier, upon a change in control transaction. The amount reported as vested excludes restricted stock units that have vested but whose settlement into shares has been deferred. The amount reported as outstanding or deferred as of September 30, 2022 includes these restricted stock units. As no further conditions exist to prevent the issuance of the shares of common stock underlying these restricted stock units, the shares are included in basic and diluted weighted shares outstanding used to calculate net loss per share attributable to common stock. The amount of shares whose issuance have been deferred is not considered material and is not reported separately from stock-based compensation in our consolidated statements of changes in mezzanine equity and stockholders’ equity.

The grant date fair value of restricted stock units is recorded as stock-based compensation over the vesting period. As of September 30, 2022, there was $153,216 of total unrecognized compensation cost related to restricted stock units, which is expected to be recognized over a weighted-average period of 3.11 years.

As of September 30, 2022, there were 1,119,236 restricted stock units subject to performance and market conditions ("PSUs") at 100% of the target level. Depending on our achievement of the performance and market conditions, the actual number of shares of common stock issuable upon vesting of PSUs will range from 0% to 200% of the target amount. For each PSU recipient, the awards will vest only if the recipient is continuing to provide service to us upon our board of directors, or its compensation committee, certifying that we have achieved the PSU's related performance or market conditions. Stock-based compensation expense for PSUs with performance conditions is recognized when it is probable that the performance conditions will be achieved. For PSUs with market conditions, the market condition is reflected in the grant-date fair value of the award and the expense is recognized over the life of the award. Stock-based compensation expense associated with the PSUs is as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
PSU expense	$	1,867	$	1,844	$	3,536	$	4,465
Expense due to reassessment of achievement related to prior periods	(815)		—		(815)		—
Total expense	$	1,052	$	1,844	$	2,721	$	4,465

Compensation Cost—The following table details, for each period indicated, our stock-based compensation, net of forfeitures, and the amount capitalized in website and software development costs, each as included in our consolidated statements of comprehensive loss:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Cost of revenue	$	4,387	$	3,283	$	11,644	$	10,019
Technology and development(1)	7,371		5,455		23,036		16,987
Marketing	1,028		537		3,024		1,615
General and administrative	5,284		3,835		13,968		10,817
Total stock-based compensation	$	18,070	$	13,110	$	51,672	$	39,438

(1) Net of $930 and $1,028 of stock-based compensation that was capitalized in the three months ended September 30, 2022 and 2021, respectively, and $2,983 and $2,745 for the nine months ended September 30, 2022 and 2021, respectively.

Index to Notes to Financial Statements

Note 13: Net Loss per Share Attributable to Common Stock

Net loss per share attributable to common stock is computed by dividing the net loss attributable to common stock by the weighted-average number of common shares outstanding. We have outstanding stock options, restricted stock units, options to purchase shares under our ESPP, convertible preferred stock, and convertible senior notes, which are considered in the calculation of diluted net loss per share whenever doing so would be dilutive.

We calculate basic and diluted net loss per share attributable to common stock in conformity with the two-class method required for companies with participating securities. We consider our convertible preferred stock to be participating securities. Under the two-class method, net loss attributable to common stock is not allocated to the preferred stock as its holders do not have a contractual obligation to share in losses, as discussed in Note 12.

The calculation of basic and diluted net loss per share attributable to common stock was as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Numerator:
Net loss	$	(90,245)	$	(18,949)	$	(259,197)	$	(82,611)
Non-cash dividends on convertible preferred stock	(272)		(1,662)		(1,416)		(5,875)

Net loss attributable to common stock—basic and diluted	$	(90,517)	$	(20,611)	$	(260,613)	$	(88,486)
Denominator:
Weighted-average shares—basic and diluted(1)	108,618,491		105,144,872		107,566,894		104,327,614



Net loss per share attributable to common stock—basic and diluted	$	(0.83)	$	(0.20)	$	(2.42)	$	(0.85)

(1) Basic and diluted weighted-average shares outstanding include (i) common stock earned but not yet issued related to share-based dividends on our convertible preferred stock, and (ii) restricted stock units that have vested but whose settlement into common stock were deferred at the option of certain non-employee directors.

The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per share for the periods presented because their effect would have been anti-dilutive:


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
2023 notes as if converted	769,623	769,623	769,623	769,623
2025 notes as if converted	9,119,960	9,119,960	9,119,960	9,119,960
2027 notes as if converted	6,147,900	6,147,900	6,147,900	6,147,900
Convertible preferred stock as if converted	2,040,000	2,040,000	2,040,000	2,040,000
Stock options outstanding	3,309,305	4,374,257	3,309,305	4,374,257
Restricted stock units outstanding(1)(2)	11,300,717	3,424,733	11,300,717	3,424,733
Employee stock purchase plan	775,579	153,208	775,579	153,208
Total	33,463,084	26,029,681	33,463,084	26,029,681

(1) Excludes 1,119,236 incremental PSUs that could vest, assuming applicable performance criteria and market conditions are achieved at 200% of target, which is the maximum achievement level. See Note 12 for additional information regarding PSUs.

(2) Excludes 21,408 restricted stock units that have vested but whose settlement into common stock were deferred at the option of certain non-employee directors as of September 30, 2022.

Index to Notes to Financial Statements

Note 14: Income Taxes

During the nine months ended September 30, 2022, we recorded income tax expense of $425, resulting in an effective tax rate of (0.16)%, which is primarily a result of current state income taxes. Our current income tax expense was partially offset by a deferred tax benefit resulting from a reduction to deferred tax liabilities originally created through our April 2021 acquisition of Rent. Our September 30, 2021 effective tax rate of 6.10% was primarily a result of our deferred tax liability created through our April 2021 acquisition of Rent in which we realized certain deferred tax assets against which we had previously recorded a full valuation allowance.

In determining the realizability of the net U.S. federal and state deferred tax assets, we consider numerous factors including historical profitability, estimated future taxable income, prudent and feasible tax planning strategies, and the industry in which we operate. Management reassesses the realization of the deferred tax assets each reporting period, which resulted in a valuation allowance against the full amount of our U.S. deferred tax assets for the nine months ended September 30, 2022 and 2021. To the extent that the financial results of our U.S. operations improve in the future and the deferred tax assets become realizable, we will reduce the valuation allowance through earnings.

Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended, substantial changes in our ownership may limit the amount of net operating loss ("NOL") and income tax credit carryforwards that could be utilized annually in the future to offset taxable income and income tax liabilities. Any such annual limitation may significantly reduce the utilization of the NOLs and income tax credits before they expire. A Section 382 limitation study performed as of March 31, 2017 determined that we experienced an ownership change in 2006 with $1,506 of the 2006 NOL and $32 of the 2006 research and development tax credit unavailable for future use. Furthermore, in connection with our acquisition of Rent., Rent. experienced an ownership change that triggered Section 382. As of September 30, 2021, Rent. completed a Section 382 limitation study and, based on this analysis, we do not expect a reduction in our ability to fully utilize Rent.'s pre-change NOLs.

As of December 31, 2021, we had accumulated approximately $611,296 of federal net operating losses, approximately $18,777 (tax effected) of state net operating losses, and approximately $3,213 of foreign net operating losses. Federal net operating losses are available to offset federal taxable income and begin to expire in 2025, with net operating loss carryforwards of $320,123 generated after 2017 available to offset future U.S. federal taxable income over an indefinite period.

Net research and development credit carryforwards of $18,828 are available as of December 31, 2021 to reduce future liabilities. The research and development credit carryforwards begin to expire in 2026.

Deductible but limited federal business interest expense carryforwards of $149,710 are available as of December 31, 2021 to offset future U.S. federal taxable income over an indefinite period.

Our material income tax jurisdiction is the United States (federal) and Canada (foreign). As a result of NOL carryforwards, we are subject to audit for all tax years for federal purposes. All tax years remain subject to examination in various other jurisdictions that are not material to our consolidated financial statements.

Note 15: Debt

Warehouse Credit Facilities—To provide capital for the mortgage loans that it originates, our mortgage segment utilizes warehouse credit facilities that are classified as current liabilities in our consolidated balance sheets. Borrowings under each warehouse credit facility are secured by the related mortgage loan and rights and income associated with the loan. The following table summarizes borrowings under these facilities as of the periods presented:

Index to Notes to Financial Statements


	September 30, 2022
Lender	Borrowing Capacity		Outstanding Borrowings		Weighted-Average Interest Rate on Outstanding Borrowings		Maturity Date
City National Bank	$	100,000	$	36,010	4.43	%	11/24/2022
Comerica Bank	75,000		29,599		5.14		Upon lender demand
Origin Bank	75,000		33,572		4.82		9/29/2023
M&T Bank	50,000		21,068		4.91		10/13/2023
Prosperity Bank	150,000		59,578		4.93		10/30/2023
Republic Bank & Trust Company	75,000		29,171		4.38		8/16/2023
Wells Fargo Bank, N.A.	100,000		43,531		5.12		As determined by lender
Total	$	625,000	$	252,529


	December 31, 2021
Lender	Borrowing Capacity		Outstanding Borrowings		Weighted-Average Interest Rate on Outstanding Borrowings
Western Alliance Bank	$	50,000	$	17,089	3.00	%
Texas Capital Bank, N.A.	40,000		11,852		3.01
Flagstar Bank, FSB	25,000		4,102		3.00
Total	$	115,000	$	33,043

Secured Revolving Credit Facility—To provide capital for the homes that it purchases, RedfinNow has, through a special purpose entity called RedfinNow Borrower, entered into a secured revolving credit facility with Goldman Sachs Bank, N.A. ("Goldman Sachs"). Borrowings under the facility are secured by RedfinNow Borrower's assets, including the financed homes, as well as the equity interests in RedfinNow Borrower. Under the facility, RedfinNow Borrower and certain other Redfin entities have ongoing obligations, including Redfin Corporation’s compliance with financial covenants based on its net worth, liquidity, and leverage ratio, each measured on a quarterly basis. The following table summarizes borrowings under this facility as of the periods presented:


	September 30, 2022						December 31, 2021
Lender	Borrowing Capacity		Outstanding Borrowings		Weighted-Average Interest Rate on Outstanding Borrowings		Borrowing Capacity		Outstanding Borrowings		Weighted-Average Interest Rate on Outstanding Borrowings
Goldman Sachs Bank USA	$	400,000	$	202,416	6.10	%	$	200,000	$	199,781	3.30	%

The facility matures on August 9, 2023, but we may extend the maturity date for an additional six months to repay outstanding borrowings. Goldman Sachs may, at its sole option, finance a portion of RedfinNow Borrower's acquisition costs of qualified homes that have been purchased. The portion financed is based, in part, on how long the qualifying home has been owned by a Redfin entity. Beginning on January 1, 2022, all outstanding borrowings generally bear interest at a rate equal to (i) the USD-SOFR-Compound rate plus (ii) 11.448 basis points (subject to a floor of 0.30%) plus (iii) 3.00%. Outstanding borrowings before January 1, 2022 generally bore interest at a rate of one-month LIBOR (subject to a floor of 0.30%) plus 3.00%.

RedfinNow Borrower must repay all borrowings and accrued interest upon the termination of the facility, and it has the option to repay the borrowings, and the related interest, with respect to a specific financed home upon the sale of such home. In certain situations involving a financed home remaining unsold after a certain time period or becoming ineligible for financing under the facility, RedfinNow Borrower may be obligated to repay all or a portion of the borrowings, and related interest, with respect to such home prior to the sale of such home. In instances involving "bad acts," Redfin Corporation has guaranteed repayment of amounts owed under the facility, in some situations, and indemnification of certain expenses incurred, in other situations.

Index to Notes to Financial Statements

As of September 30, 2022, RedfinNow Borrower had $419,269 of total assets, of which $297,469 related to inventory and $72,914 in cash and cash equivalents. As of December 31, 2021, RedfinNow Borrower had $567,128 of total assets, of which $337,630 related to inventory and $101,064 in cash and equivalents.

For the three months ended September 30, 2022 and 2021, we amortized $95 and $81 of debt issuance costs, respectively, and recognized $2,980 and $1,375 of interest expense, respectively. For the nine months ended September 30, 2022 and 2021, we amortized $280 and $217 of debt issuance costs, respectively, and recognized $5,731 and $2,328 of interest expense, respectively.

Convertible Senior Notes—We have issued convertible senior notes with the following characteristics:


Issuance	Maturity Date	Stated Cash Interest Rate		Effective Interest Rate		First Interest Payment Date	Semi-Annual Interest Payment Dates	Conversion Rate
2023 notes	July 15, 2023	1.75	%	2.45	%	January 15, 2019	January 15; July 15	32.7332
2025 notes	October 15, 2025	—		0.42		—	—	13.7920
2027 notes	April 1, 2027	0.50		0.90		October 1, 2021	April 1; October 1	10.6920

We issued our 2023 notes on July 23, 2018, with an aggregate principal amount of $143,750. Subsequent to the issuance date, we repurchased or settled conversions of an aggregate of $120,238 of our 2023 notes. On July 20, 2021, our 2023 notes became redeemable by us, but we did not exercise our redemption right during the three months ended September 30, 2022.

We issued our 2025 notes on October 20, 2020, with an aggregate principal amount of $661,250.

We issued our 2027 notes on March 25, 2021 and April 5, 2021, with an aggregate principal amount of $575,000.

The components of our convertible senior notes were as follows:


	September 30, 2022
Issuance	Aggregate Principal Amount		Unamortized Debt Discount		Unamortized Debt Issuance Costs		Net Carrying Amount
2023 notes	$	23,512	$	—	$	119	$	23,393
2025 notes	661,250		—		8,396		652,854
2027 notes	575,000		—		10,086		564,914


	December 31, 2021
Issuance	Aggregate Principal Amount		Unamortized Debt Discount		Unamortized Debt Issuance Costs		Net Carrying Amount
2023 notes	$	23,512	$	—	$	232	$	23,280
2025 notes	661,250		—		10,467		650,783
2027 notes	575,000		—		11,766		563,234

Index to Notes to Financial Statements


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
2023 notes
Contractual interest expense	$	103	$	103	$	309	$	311
Amortization of debt discount	—		—		—		—
Amortization of debt issuance costs	38		41		113		151
Total interest expense	$	141	$	144	$	422	$	462

2025 notes
Contractual interest expense	—		—		—		—
Amortization of debt discount	—		—		—		—
Amortization of debt issuance costs	690		690		2,070		2,070
Total interest expense	$	690	$	690	$	2,070	$	2,070

2027 notes
Contractual interest expense	719		719		2,156		1,468
Amortization of debt discount	—		—		—		—
Amortization of debt issuance costs	560		560		1,680		1,145
Total interest expense	$	1,279	$	1,279	$	3,836	$	2,613

Total
Contractual interest expense	822		822		2,465		1,779
Amortization of debt discount	—		—		—		—
Amortization of debt issuance costs	1,288		1,291		3,863		3,366
Total interest expense	$	2,110	$	2,113	$	6,328	$	5,145

Conversion of Our Convertible Senior Notes

Prior to the free conversion date, a holder of each tranche of our convertible senior notes may convert its notes in multiples of $1,000 principal amount only if one or more of the conditions described below is satisfied. On or after the free conversion date, a holder may convert its notes in such multiples without any conditions. The free conversion date is April 15, 2023 for our 2023 notes, July 15, 2025 for our 2025 notes, and January 1, 2027 for our 2027 notes.

The conditions are:

•during any calendar quarter (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day;

•during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the applicable notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the applicable conversion rate on each such trading day;

•if we call any or all of the applicable notes for redemption, at any time prior to the close of business on the scheduled trading day prior to the redemption date; or

•upon the occurrence of specified corporate events.

Index to Notes to Financial Statements

We intend to settle any future conversions of our convertible senior notes by paying or delivering, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. We apply the if-converted method to calculate diluted earnings per share when applicable. Under the if-converted method, the denominator of the diluted earnings per share calculation is adjusted to reflect the full number of common shares issuable upon conversion, while the numerator is adjusted to add back interest expense for the period.

Classification of Our Convertible Senior Notes

Historically, we had separated our 2023 notes and our 2025 notes into liability and equity components. With our adoption of ASU 2020-06 on January 1, 2021, using the modified retrospective approach, this accounting treatment is no longer applicable. All of our convertible senior notes are now accounted for wholly as liabilities. The difference between the principal amount of the notes and the net carrying amount represents the unamortized debt discount, which we record as a deduction from the debt liability in our consolidated balance sheets. This discount is amortized to interest expense using the effective interest method over the term of the notes.

See Note 4 for fair value information related to our convertible senior notes.

2027 Capped Calls—In connection with the pricing of our 2027 notes, we entered into capped call transactions with certain counterparties (the “2027 capped calls”). The 2027 capped calls have initial strike prices of $93.53 per share and initial cap prices of $138.56 per share, in each case subject to certain adjustments. Conditions that cause adjustments to the initial strike price and initial cap price of the 2027 capped calls are similar to the conditions that result in corresponding adjustments to the conversion rate for our 2027 notes. The 2027 capped calls cover, subject to anti-dilution adjustments, 6,147,900 shares of our common stock and are generally intended to reduce or offset the potential dilution to our common stock upon any conversion of the 2027 notes, with such reduction or offset, as the case may be, subject to a cap based on the cap price. The 2027 capped calls are separate transactions, and not part of the terms of our 2027 notes. As these instruments meet certain accounting criteria, the 2027 capped calls are recorded in stockholders’ equity and are not accounted for as derivatives. The cost of $62,647 incurred in connection with the 2027 capped calls was recorded as a reduction to additional paid-in capital.

Note 16: Subsequent Events

Wind-Down of RedfinNow and Workforce Reduction—On November 7, 2022, we decided to wind-down RedfinNow and to reduce our number of employees by approximately 862, which represents 13 percent of our total employees. Of these, 264 job eliminations are directly related to the wind-down of RedfinNow. In addition, approximately 218 employees will have their current role eliminated, but are being offered a new role within the company.

Winding down RedfinNow is a strategic decision we made in order to focus our resources on our core business in the face of the rising cost of capital.

The remaining workforce reductions are primarily among our real estate services and headquarters employees in response to macroeconomic conditions. This workforce reduction will reduce our number of lead agents by approximately 197, which represents 9 percent of total lead agents. This action comes in the wake of our June workforce reduction, which was a response to slowing 2022 home sales. Since June, mortgage interest rates have continued to climb and expectations for home sales have come down even further. Today’s workforce reduction assumes a housing downturn that lasts at least through 2023. Since April 2022, through involuntary reductions and attrition, we have reduced our total number of employees by 27 percent, including a reduction in lead agents of 28 percent.

We expect to complete the liquidation of our RedfinNow inventory in the second quarter of 2023. While the bulk of the workforce reduction is occurring today, we expect to complete this workforce reduction and wind-down of RedfinNow promptly after selling the remaining properties currently in inventory, likely into 2023.

Index to Notes to Financial Statements

In connection with the preparation of our financial statements for the third quarter of 2022, we recorded an $18,274 write-down of inventory associated with RedfinNow as a result of purchasing homes during 2022 at higher prices than RedfinNow’s current estimates of the values if we were to sell the homes as of September 30, 2022, net of selling costs.

Amendment of Secured Revolving Credit Facility—In connection with our decision to close RedfinNow, on November 4, 2022 we amended our secured revolving credit facility to wind it down in an orderly manner. This amendment:

•provides that no further advances may be made under the credit agreement,

•amends certain financial covenants to ensure compliance throughout the wind-down period,

•requires us to apply cash available for distribution to the repayment of outstanding principal amounts until all outstanding amounts are repaid before distributing cash to Redfin, and

•requires us to terminate and pay off the remainder of the facility on the earlier of January 30, 2023 or when the facility’s credit balance reaches $30,000.

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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 consolidated financial statements, the accompanying notes, and other information included in this quarterly report and our annual report for the year ended December 31, 2021. In particular, the disclosure contained in Item 1A in our annual report, as updated by Part II, Item 1A 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 "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements. The following discussion also contains information using industry publications. Please see "Note Regarding Industry and Market Data" for more information about relying on these industry publications.

When we use the term "basis points" in the following discussion, we refer to units of one-hundredth of one percent.

Overview

We help people buy and sell homes. Representing customers in over 100 markets in the United States and Canada, we are a residential real estate brokerage. We pair our own agents with our own technology to create a service that is faster, better, and costs less. We meet customers through our listings-search website and mobile application.

We use the same combination of technology and local service to originate and service mortgage loans and offer title and settlement services. We also buy homes directly from homeowners who want an immediate sale, taking responsibility for selling the home while the original owner moves on. Beginning in April 2021, we started using digital platforms to connect consumers with available apartments and houses for rent.

Our mission is to redefine real estate in the consumer’s favor.

Adverse Macroeconomic Conditions and Our Associated Actions

On November 7, 2022, we decided to wind-down RedfinNow and to reduce our number of employees by approximately 862, which represents 13 percent of our total employees. Of these, 264 job eliminations are directly related to the wind-down of RedfinNow. In addition, approximately 218 employees will have their current role eliminated, but are being offered a new role within the company.

Winding down RedfinNow is a strategic decision we made in order to focus our resources on our core business in the face of the rising cost of capital.

See Note 16 to our consolidated financial statements for more information on this workforce reduction and wind-down of our RedfinNow operations.

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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, 2022			Jun. 30, 2022			Mar. 31, 2022			Dec. 31, 2021			Sep. 30, 2021			Jun. 30, 2021			Mar. 31, 2021			Dec. 31, 2020			Sep. 30 2020
Monthly average visitors (in thousands)	50,785			52,698			51,287			44,665			49,147			48,437			46,202			44,135			49,258
Real estate services transactions
Brokerage	18,245			20,565			15,001			19,428			21,929			21,006			14,317			16,951			18,980
Partner	3,507			3,983			3,417			4,603			4,755			4,597			3,944			4,940			5,180
Total	21,752			24,548			18,418			24,031			26,684			25,603			18,261			21,891			24,160
Real estate services revenue per transaction
Brokerage	$	11,103		$	11,692		$	11,191		$	10,900		$	11,107		$	11,307		$	10,927		$	10,751		$	10,241
Partner	2,556			2,851			2,814			2,819			2,990			3,195			3,084			3,123			2,988
Aggregate	9,725			10,258			9,637			9,352			9,661			9,850			9,233			9,030			8,686
U.S. market share by units(1)	0.80		%	0.82		%	0.79		%	0.78		%	0.78		%	0.77		%	0.75		%	0.68		%	0.70		%
Revenue from top-10 Redfin markets as a percentage of real estate services revenue	58		%	59		%	57		%	61		%	62		%	64		%	62		%	63		%	63		%
Average number of lead agents	2,293			2,640			2,750			2,485			2,370			2,456			2,277			1,981			1,820
RedfinNow homes sold	530			423			617			600			388			292			171			83			37
Revenue per RedfinNow home sold (in ones)	$	550,903		$	604,120		$	608,851		$	622,519		$	599,963		$	571,670		$	525,765		$	471,895		$	504,730
Mortgage originations by dollars (in millions)	$	1,557		$	1,565		$	159		$	242		$	258		$	261		$	227		$	206		$	185
Mortgage originations by units (in ones)	3,720			3,860			414			591			671			749			632			570			539

(1) Prior to the second quarter of 2022, we reported our U.S. market share based on the aggregate home value of our real estate services transactions, relative to the aggregate value of all U.S. home sales, which we computed based on the mean sale price of U.S. homes provided by the National Association of REALTORS® (“NAR”). Beginning in the second quarter of 2022, NAR (1) revised its methodology of computing the mean sale price, (2) restated its previously reported mean sale price beginning from January 2020 (and indicated that previously reported mean sale price prior to January 2020 is not comparable), and (3) discontinued publication of the mean sale price as part of its primary data set. Due to these changes, as of the second quarter of 2022, we report our U.S. market share based on the number of homes sold, rather than the dollar value of homes sold. Our market share by number of homes sold has historically been lower than our market share by dollar value of homes sold. We also stopped reporting the aggregate home value of our real estate services transactions.

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. The number of visitors is influenced by, among other things, market conditions that affect interest in buying or selling homes, the level and success of our marketing programs, seasonality, and how our website appears in search results. We believe we can continue to increase visitors, which helps our growth, including through adding rental properties to our website and mobile application.

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.

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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 applications for each of the months in that period, as measured by Google Analytics, a product that provides digital marketing intelligence. Google Analytics tracks visitors using cookies, with a unique cookie being assigned to each browser or mobile application on a device. For any given month, Google Analytics counts all of the unique cookies that visited our website and mobile applications during that month. Google Analytics considers each unique cookie as a unique visitor. Due to third-party technological limitations, user software settings, or user behavior, it is possible that Google Analytics may assign a unique cookie to different visits by the same person to our website or mobile application. In such instances, Google Analytics would count different visits by the same person as separate visits by unique visitors. Accordingly, reliance on the number of unique cookies counted by Google Analytics may overstate the actual number of unique persons who visit our website or our mobile applications for a given month.

Our monthly average visitors exclude visitors to the websites and mobile applications of Bay Equity, our mortgage business, and Rent., our rental business.

Real Estate Services Transactions

We record a brokerage real estate services transaction when one of our lead agents represented the homebuyer or home seller in the purchase or sale, respectively, of a home. We record a partner real estate services transaction (i) when one of our partner agents represented the homebuyer or home seller in the purchase or sale, respectively, of a home or (ii) when a Redfin customer sold his or her home to a third-party institutional buyer following our introduction of that customer to the buyer. We include a single transaction twice when our lead agents or our partner agents serve both the homebuyer and the home seller of the transaction. Additionally, when one of our lead agents represents RedfinNow in its sale of a home, we include that transaction as a brokerage real estate services transaction.

Increasing the number of real estate services transactions is critical to increasing our revenue and, in turn, to achieving profitability. Real estate services transaction volume is influenced by, among other things, 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.

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 revenue growth. We also use this metric to evaluate pricing changes. Changes in real estate services revenue per transaction can be affected by, among other things, 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 and any third-party institutional buyer. 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.

We generally generate more real estate services revenue per transaction from representing homebuyers than home sellers. However, we believe that representing home sellers has unique strategic value, including the marketing power of yard signs and other campaigns, and the market effect of controlling listing inventory.

Prior to July 2022, homebuyers who purchased their home using our brokerage services would receive a commission refund in a substantial majority of our markets. In July 2022, we began a pilot program in certain of those markets to eliminate our commission refund. If this pilot is successful, we intend to eliminate our commission refund in all markets as early as December 2022. We expect that elimination of our commission refund in all markets will increase our real estate services revenue per transaction.

U.S. Market Share by Units

Increasing our U.S. market share by units 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.

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We calculate our market share by aggregating the number of brokerage and partner real estate services transactions. We then divide that number by two times the aggregate number of U.S. home sales, in order to account for both the sell- and buy-side components of each home sale. We obtain the aggregate number of U.S. home sales from the National Association of REALTORS® ("NAR"). NAR data for the most recent period is preliminary and may subsequently be updated by NAR.

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. This metric is an indicator of the geographic concentration of our real estate services segment. We expect our revenue from top-10 markets to decline as a percentage of our total real estate services revenue over time.

Average Number of Lead Agents

The average number of lead agents, in combination with our other key metrics such as the number of brokerage transactions, is a basis for calculating agent productivity and is one indicator of the potential future growth of our business. We systematically evaluate traffic to our website and mobile application and customer activity to anticipate changes in customer demand, helping determine when and where to hire lead agents.

We calculate the average number of lead agents by taking the average of the number of lead agents at the end of each month included in the period.

RedfinNow Homes Sold

The number of homes sold by RedfinNow is an indicator for investors to understand the underlying transaction volume growth of our RedfinNow business. This number is influenced by, among other things, the level and quality of our homes available for sale inventory and market conditions that affect home sales, such as local inventory levels and mortgage interest rates.

Revenue per RedfinNow Home Sold

Revenue per RedfinNow home sold, together with the number of RedfinNow homes sold, is a factor in evaluating revenue growth. Changes in revenue per RedfinNow home sold can be affected by, among other things, the geographic mix of home sales, the types and sizes of homes that it had previously purchased, pricing of homes listed for sale, and changes in the value of homes in the markets it serves. For any period, we calculate revenue per RedfinNow home sold by dividing revenue from sales of homes by RedfinNow, including any revenue from leasebacks, by the number of homes sold by RedfinNow during that period.

Mortgage Originations

Mortgage originations is the volume of mortgage loans originated by our mortgage business, measured by both dollar value of loans and number of loans. This volume is an indicator for the growth of our mortgage business. Mortgage originations is affected by mortgage interest rates, the ability of our mortgage loan officers to close loans, and the number of our homebuyer customers who use our mortgage business for a mortgage loan, among other factors.

Prior to April 1, 2022, our mortgage business consisted solely of Redfin Mortgage, LLC. From April 1, 2022 through June 30, 2022, our mortgage business consisted of both Bay Equity LLC and Redfin Mortgage, LLC. We dissolved Redfin Mortgage, LLC on June 30, 2022, and since that time, our mortgage business has consisted solely of Bay Equity LLC.

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Components of Our Results of Operations

Revenue

Real Estate Services Revenue

Brokerage Revenue—Brokerage revenue includes our offer and listing services, where our lead agents represent homebuyers and home sellers. We recognize commission-based brokerage revenue upon closing of a brokerage transaction, less the amount of any commission refunds, closing-cost reductions, or promotional offers that may result in a material right. Brokerage revenue is affected by the number of brokerage transactions we close, the mix of brokerage transactions, home-sale prices, commission rates, and the amount we give to customers.

Partner Revenue—Partner revenue consists of fees paid to us from partner agents or under other referral agreements, less the amount of any payments we make to homebuyers and home sellers. 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 refund to customers. If the portion of customers we introduce to our own lead agents increases, we expect the portion of revenue closed by partner agents to decrease.

Properties Revenue

Properties Revenue—Properties revenue consists of revenues earned when we sell homes that we previously bought directly from homeowners and when we perform maintenance on customers' homes. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home or maintenance performed.

Rentals Revenue

Rentals Revenue—Rentals revenue is primarily composed of subscription-based product offerings for internet listing services, as well as lead management and digital marketing solutions.

Mortgage Revenue

Mortgage Revenue—Mortgage revenue includes fees from the origination and subsequent sale of loans, loan servicing income, interest income on loans held for sale, origination of IRLCs, and the changes in fair value of our IRLCs, forward sales commitments, loans held for sale, and MSRs.

Other Revenue

Other Revenue—Other services revenue includes fees earned from title settlement services, Walk Score data services, and advertising. Substantially all fees and revenue from other services are recognized when the service is provided.

Intercompany Eliminations

Intercompany Eliminations—Revenue earned from transactions between operating segments are eliminated in consolidating our financial statements. Intercompany transactions primarily consist of services performed from our real estate services segment for our properties segment.

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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, home costs related to our properties segment, customer fulfillment costs related to our rentals segment, office and occupancy expenses, and depreciation and amortization related to fixed assets and acquired intangible assets. Home costs related to our properties segment include home purchase costs, capitalized improvements, selling expenses directly attributable to the transaction, and home maintenance expenses.

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 the mix of revenue from our relatively higher-gross-margin real estate services segment and our relatively lower-gross-margin properties segment, real estate services revenue per transaction, agent and support-staff productivity, personnel costs and transaction bonuses, and, for properties, the home purchase costs.

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 primarily include personnel costs (including base pay, bonuses, benefits, and stock-based compensation), data licenses, software and equipment, and infrastructure such as for data centers and hosted services. The expenses also include amortization of capitalized internal-use software and website and mobile application development costs as well as amortization of acquired intangible assets. We expense research and development costs as incurred and record them in technology and development expenses.

Marketing

Marketing expenses consist primarily of media costs for online and offline advertising, as well as personnel costs (including base pay, benefits, and stock-based compensation).

General and Administrative

General and administrative expenses consist primarily of personnel costs (including base pay, benefits, and 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. For our rentals business, personnel costs include employees in the sales department. These employees are responsible for attracting potential rental properties and agreeing to contract terms, but they are not responsible for delivering a service to the rental property.

Restructuring and Reorganization

Restructuring and reorganization expenses primarily consist of employee termination costs (including severance, retention, benefits, and payroll taxes) associated with the restructuring and reorganization activities from our acquisitions of Bay Equity and Rent. and from our June 2022 workforce reduction.

Interest Income, Interest Expense, Income Tax Expense, and Other (Expense) Income, Net

Interest Income

Interest income consists primarily of interest earned on our cash, cash equivalents, and investments, and interest income related to originated mortgage loans.

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Interest Expense

Interest expense consists primarily of any interest payable on our convertible senior notes and, for the three and nine months ended September 30, 2022, the amortization of debt discounts and issuance cost related to our convertible senior notes. See Note 15 to our consolidated financial statements for information regarding interest on our convertible senior notes.

Interest expense also includes interest on borrowings and the amortization of debt issuance costs related to our secured revolving credit facility and our warehouse credit facilities. See Note 15 to our consolidated financial statements for information regarding interest for the facility.

Income Tax (Expense) Benefit

Income tax (expense) benefit relates to the partial release of our valuation allowance as a result of the intangible assets we acquired in connection with acquiring Rent. and certain state income taxes.

Other (Expense) Income, Net

Other (expense) income, net consists primarily of realized and unrealized gains and losses on investments and other assets. See Note 4 to our consolidated financial statements for information regarding unrealized gains and losses on our investments.

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. As a result of our decision to wind-down RedfinNow operations, we expect the portion of intercompany revenue and cost of revenue related to services performed from our real estate services and other segments for our properties segment will decrease throughout 2022 and eventually decline to zero in 2023. Given the remaining uncertainty surrounding our plans to wind-down our RedfinNow business, financial performance for prior and current periods may not be indicative of future performance.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)

Revenue	$	600,517	$	540,074	$	1,804,778	$	1,279,708
Cost of revenue(1)	542,440		412,772		1,556,161		983,912
Gross profit	58,077		127,302		248,617		295,796
Operating expenses
Technology and development(1)	48,063		43,658		149,209		112,824
Marketing(1)	33,748		49,143		133,832		116,343
General and administrative(1)	61,005		54,395		191,704		151,352
Restructuring and reorganization	284		—		18,670		—
Total operating expenses	143,100		147,196		493,415		380,519
Loss from operations	(85,023)		(19,894)		(244,798)		(84,723)
Interest income	1,174		178		1,948		472
Interest expense	(5,359)		(3,672)		(12,841)		(7,822)
Income tax (expense) benefit	(132)		311		(425)		5,363
Other (expense) income, net	(905)		4,128		(3,081)		4,099
Net loss	$	(90,245)	$	(18,949)	$	(259,197)	$	(82,611)

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(1) Includes stock-based compensation as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in thousands)

Cost of revenue	$	4,387	$	3,283	$	11,644	$	10,019
Technology and development	7,371		5,455		23,036		16,987
Marketing	1,028		537		3,024		1,615
General and administrative	5,284		3,835		13,968		10,817
Total stock-based compensation	$	18,070	$	13,110	$	51,672	$	39,438


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(as a percentage of revenue)

Revenue	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenue(1)	90.3		76.4		86.2		76.9
Gross profit	9.7		23.6		13.8		23.1
Operating expenses
Technology and development(1)	8.0		8.1		8.3		8.8
Marketing(1)	5.6		9.1		7.4		9.1
General and administrative(1)	10.2		10.1		10.6		11.8
Restructuring and reorganization	0.0		0.0		1.0		0.0
Total operating expenses	23.8		27.3		27.3		29.7
Loss from operations	(14.2)		(3.7)		(13.6)		(6.6)
Interest income	0.2		0.0		0.1		0.0
Interest expense	(0.9)		(0.7)		(0.7)		(0.6)
Income tax (expense) benefit	0.0		0.1		0.0		0.4
Other expense, net	(0.2)		0.8		(0.2)		0.3
Net loss	(15.0)	%	(3.5)	%	(14.4)	%	(6.5)	%

(1) Includes stock-based compensation as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(as a percentage of revenue)

Cost of revenue	0.7	%	0.6	%	0.6	%	0.8	%
Technology and development	1.2		1.0		1.3		1.4
Marketing	0.2		0.1		0.2		0.1
General and administrative	0.9		0.7		0.8		0.8
Total	3.0	%	2.4	%	2.9	%	3.1	%

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Comparison of the Three Months Ended September 30, 2022 and 2021

Revenue


	Three Months Ended September 30,						Change
	2022			2021			Dollars		Percentage

	(in thousands, except percentages)

Real estate services
Brokerage	$	202,578		$	243,575		$	(40,997)	(17)	%
Partner	8,962			14,220			(5,258)		(37)
Total real estate services	211,540			257,795			(46,255)		(18)
Properties	299,663			238,417			61,246		26
Rentals	38,686			40,406			(1,720)		(4)
Mortgage	48,469			5,013			43,456		867
Other	7,079			3,193			3,886		122
Intercompany elimination	(4,920)			(4,750)			(170)		4
Total revenue	$	600,517		$	540,074		$	60,443	11
Percentage of revenue
Real estate services
Brokerage	33.7		%	45.1		%
Partner	1.5			2.6
Total real estate services	35.2			47.7
Properties	49.9			44.1
Rentals	6.4			7.5
Mortgage	8.1			1.0
Other	1.2			0.6
Intercompany elimination	(0.8)			(0.9)
Total revenue	100.0		%	100.0		%

In the three months ended September 30, 2022, revenue increased by $60.4 million, or 11%, as compared with the same period in 2021. Included in the increase was $48.5 million resulting from our acquisition of Bay Equity, and there were no such revenues in the three months ended September 30, 2021. Excluding these revenues from Bay Equity, this increase in revenue was primarily attributable to a $61.2 million increase in properties revenue. Properties revenue increased 26%, primarily driven by a 37% increase in RedfinNow homes sold. This was partially offset by an 8% decrease in revenue per RedfinNow home sold. These increases are largely due to our properties business's expansion. Brokerage revenue decreased by $41.0 million, and partner revenue decreased by $5.3 million. Brokerage revenue decreased 17% during the period, driven by no change in brokerage revenue per transaction and a 17% decrease in brokerage transactions.

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Cost of Revenue and Gross Margin


	Three Months Ended September 30,						Change
	2022			2021			Dollars		Percentage

	(in thousands, except percentages)

Cost of revenue
Real estate services	$	156,632		$	161,449		$	(4,817)	(3)	%
Properties	332,251			238,397			93,854		39
Rentals	8,676			7,395			1,281		17
Mortgage	43,783			6,705			37,078		553
Other	6,018			3,576			2,442		68
Intercompany elimination	(4,920)			(4,750)			(170)		4
Total cost of revenue	$	542,440		$	412,772		$	129,668	31

Gross profit
Real estate services	$	54,908		$	96,346		$	(41,438)	(43)	%
Properties	(32,588)			20			(32,608)		(163,040)
Rentals	30,010			33,011			(3,001)		(9)
Mortgage	4,686			(1,692)			6,378		(377)
Other	1,061			(383)			1,444		(377)
Total gross profit	$	58,077		$	127,302		$	(69,225)	(54)

Gross margin (percentage of revenue)
Real estate services	26.0		%	37.4		%
Properties	(10.9)			0.0
Rentals	77.6			81.7
Mortgage	9.7			(33.8)
Other	15.0			(12.0)
Total gross margin	9.7			23.6

In the three months ended September 30, 2022, total cost of revenue increased by $129.7 million, or 31%, as compared with the same period in 2021. Included in the increase was $43.2 million resulting from our acquisition of Bay Equity, and there were no such expenses in the three months ended September 30, 2021. Excluding these expenses from Bay Equity, this increase in cost of revenue was primarily attributable to an $88.2 million increase in home purchase costs and related capitalized improvements by our properties business, due to more RedfinNow homes being sold. This was partially offset by a $1.4 million decrease in personnel costs and transaction bonuses, due to decreased brokerage transactions.

In the three months ended September 30, 2022, total gross margin decreased 1,390 basis points as compared with the same period in 2021, driven primarily by the relative growth of our properties business compared to our real estate services and other businesses, and the decreases in properties and real estate services gross margin. This was partially offset by the increases in mortgage and other gross margin.

In the three months ended September 30, 2022, real estate services gross margin decreased 1,140 basis points as compared with the same period in 2021. This was primarily attributable to a 970 basis point increase in personnel costs and transaction bonuses as a percentage of revenue.

In the three months ended September 30, 2022, properties gross margin decreased 1,090 basis points as compared with the same period in 2021. This was primarily attributable to a 1,110 basis point increase in home purchase and related capitalized improvements, including our lower of cost or net realizable value write-downs, as a percentage of revenue.

In the three months ended September 30, 2022, rentals gross margin decreased 410 basis points as compared with the same period in 2021. This was primarily attributable to a 230 basis point increase in personnel costs and transaction bonuses as a percentage of revenue due to expanded services.

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In the three months ended September 30, 2022, mortgage gross margin increased 4,350 basis points as compared with the same period in 2021. This was primarily attributable to a 3,680 basis point decrease in personnel costs and transaction bonuses as a percentage of revenue, driven by the performance of Bay Equity as compared to our prior mortgage business.

In the three months ended September 30, 2022, other gross margin increased 2,700 basis points. This was primarily attributable to a 1,690 basis point decrease in personnel costs and transaction bonuses as a percentage of revenue.

Operating Expenses


	Three Months Ended September 30,						Change
	2022			2021			Dollars		Percentage

	(in thousands, except percentages)

Technology and development	$	48,063		$	43,658		$	4,405	10	%
Marketing	33,748			49,143			(15,395)		(31)
General and administrative	61,005			54,395			6,610		12
Restructuring and reorganization	284			—			284		n/a
Total operating expenses	$	143,100		$	147,196		$	(4,096)	(3)
Percentage of revenue
Technology and development	8.0		%	8.1		%
Marketing	5.6			9.1
General and administrative	10.2			10.1
Restructuring and reorganization	0.0			—
Total operating expenses	23.8		%	27.3		%

In the three months ended September 30, 2022, technology and development expenses increased by $4.4 million, or 10%, as compared with the same period in 2021. Included in the increase was $0.6 million resulting from our acquisition of Bay Equity, and there were no such expenses in the three months ended September 30, 2021. Excluding these expenses from Bay Equity, the increase was primarily attributable to an $3.0 million increase in personnel costs.

In the three months ended September 30, 2022, marketing expenses decreased by $15.4 million, or 31%, as compared with the same period in 2021. Included in the increase was $1.6 million resulting from our acquisition of Bay Equity, and there were no such expenses in the three months ended September 30, 2021. Excluding these expenses from Bay Equity, the decrease was primarily attributable to a $17.7 million decrease in marketing media as we reduced advertising.

In the three months ended September 30, 2022, general and administrative expenses increased by $6.6 million, or 12%, as compared with the same period in 2021. Included in the increase was $6.8 million resulting from our acquisition of Bay Equity, and there were no such expenses in the three months ended September 30, 2021.

In the three months ended September 30, 2022, restructuring and reorganization expenses increased by $0.3 million, and there were no such expenses in the three months ended September 30, 2021. See Note 1 to our consolidated financial statements for more information on our restructuring and reorganization costs.

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Interest Income, Interest Expense, Income Tax (Expense) Benefit, and Other (Expense) Income, Net


	Three Months Ended September 30,						Change
	2022			2021			Dollars		Percentage

	(in thousands, except percentages)

Interest income	$	1,174		$	178		$	996	560	%
Interest expense	(5,359)			(3,672)			(1,687)		46
Income tax (expense) benefit	(132)			311			(443)		(142)
Other (expense) income, net	(905)			4,128			(5,033)		(122)
Interest income, interest expense, income tax (expense) benefit, and other (expense) income, net	$	(5,222)		$	945		$	(6,167)	(653)
Percentage of revenue
Interest income	0.2		%	0.0		%
Interest expense	(0.9)			(0.7)
Income tax (expense) benefit	0.0			0.1
Other (expense) income, net	(0.2)			0.8
Interest income, interest expense, income tax (expense) benefit, and other (expense) income, net	(0.9)		%	0.2		%

In the three months ended September 30, 2022, interest income, interest expense, income tax (expense) benefit, and other (expense) income, net decreased by $6.2 million as compared to the same period in 2021.

Interest expense increased by $1.7 million due primarily to use of our secured revolving credit facility and interest on our 2027 convertible senior notes. See Note 15 to our consolidated financial statements for more information.

We had an income tax expense rather than benefit, with a net decrease of $0.4 million. See Note 14 to our consolidated financial statements for more information.

Other (expense) income, net decreased $5.0 million. In the three months ended September 30, 2021, we recorded the fair value of one of our investments, and had no such activity in the three months ended September 30, 2022.

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Comparison of the Nine Months Ended September 30, 2022 and 2021

Revenue


	Nine Months Ended September 30,						Change
	2022			2021			Dollars		Percentage

	(in thousands, except percentages)

Real estate services
Brokerage	$	610,904		$	637,532		$	(26,628)	(4)	%
Partner	29,931			41,070			(11,139)		(27)
Total real estate services	640,835			678,602			(37,767)		(6)
Properties	942,022			503,588			438,434		87
Rentals	114,979			82,954			32,025		39
Mortgage	104,484			15,823			88,661		560
Other	17,341			10,261			7,080		69
Intercompany elimination	(14,883)			(11,520)			(3,363)		29
Total revenue	$	1,804,778		$	1,279,708		$	525,070	41
Percentage of revenue
Real estate services
Brokerage	33.8		%	49.8		%
Partner	1.7			3.2
Total real estate services	35.5			53.0
Properties	52.2			39.4
Rentals	6.4			6.5
Mortgage	5.8			1.2
Other	0.9			0.8
Intercompany elimination	(0.8)			(0.9)
Total revenue	100.0		%	100.0		%

In the nine months ended September 30, 2022, revenue increased by $525.1 million, or 41%, as compared with the same period in 2021. Included in the increase was $115.0 million resulting from our acquisition of Rent., and there was $83.0 million of such revenue in the nine months ended September 30, 2021. Also included in the increase was $101.8 million resulting from our acquisition of Bay Equity, and there were no such revenues in the nine months ended September 30, 2021. Excluding these revenues from Rent. and Bay Equity, this increase in revenue was primarily attributable to a $438.4 million increase in properties revenue. Properties revenue increased 87%, primarily driven by a 84% increase in RedfinNow homes sold and a 4% increase in revenue per RedfinNow home sold. These increases are largely due to our properties business's expansion. Brokerage revenue decreased by $26.6 million, and partner revenue decreased by $11.1 million. Brokerage revenue decreased 4% during the period, driven by a 6% decrease in brokerage transactions. This was partially offset by a 2% increase in brokerage revenue per transaction.

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Cost of Revenue and Gross Margin


	Nine Months Ended September 30,						Change
	2022			2021			Dollars		Percentage

	(in thousands, except percentages)

Cost of revenue
Real estate services	$	488,114		$	453,790		$	34,324	8	%
Properties	946,955			496,948			450,007		91
Rentals	23,769			14,965			8,804		59
Mortgage	95,616			19,406			76,210		393
Other	16,590			10,323			6,267		61
Intercompany elimination	(14,883)			(11,520)			(3,363)		29
Total cost of revenue	$	1,556,161		$	983,912		$	572,249	58

Gross profit
Real estate services	$	152,721		$	224,812		$	(72,091)	(32)	%
Properties	(4,933)			6,640			(11,573)		(174)
Rentals	91,210			67,989			23,221		34
Mortgage	8,868			(3,583)			12,451		(348)
Other	751			(62)			813		(1,311)
Total gross profit	$	248,617		$	295,796		$	(47,179)	(16)

Gross margin (percentage of revenue)
Real estate services	23.8		%	33.1		%
Properties	(0.5)			1.3
Rentals	79.3			82.0
Mortgage	8.5			(22.6)
Other	4.3			(0.6)
Total gross margin	13.8			23.1

In the nine months ended September 30, 2022, total cost of revenue increased by $572.2 million, or 58%, as compared with the same period in 2021. Included in the increase was $23.8 million resulting from our acquisition of Rent., and there were $15.0 million of such expenses in the nine months ended September 30, 2021. Also included in the increase was $87.3 million from our acquisition of Bay Equity, and there were no such expenses in the nine months ended September 30, 2021. Excluding these expenses from Rent. and Bay Equity, this increase in cost of revenue was primarily attributable to (1) a $415.6 million increase in home purchase costs and related capitalized improvements by our properties business, due to more RedfinNow homes being sold, and (2) a $44.1 million increase in personnel costs and transaction bonuses, due to increased headcount and increased brokerage transactions, respectively.

In the nine months ended September 30, 2022, total gross margin decreased 930 basis points as compared with the same period in 2021, driven primarily by the relative growth of our properties business compared to our real estate services and other businesses, and decreases in real estate services and properties gross margin. This was partially offset by the increase in mortgage and other gross margin.

In the nine months ended September 30, 2022, real estate services gross margin decreased 930 basis points as compared with the same period in 2021. This was primarily attributable to a 900 basis point increase in personnel costs and transaction bonuses as a percentage of revenue.

In the nine months ended September 30, 2022, properties gross margin decreased 180 basis points as compared with the same period in 2021. This was primarily attributable to a 310 basis point increase in home purchase and related capitalized improvements, including our lower of cost or net realizable value write-downs, as a percentage of revenue. This was partially offset by a 100 basis point decrease in personnel costs and transaction bonuses.

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In the nine months ended September 30, 2022, rentals gross margin decreased 270 basis points as compared with the same period in 2021. This was primarily attributable to a 200 basis point increase in personnel costs as a percentage of revenue due to expanded services.

In the nine months ended September 30, 2022, mortgage gross margin increased 3,110 basis points as compared with the same period in 2021. This was primarily attributable to a 2,500 basis point decrease in personnel costs and transaction bonuses as a percentage of revenue, driven by the performance of Bay Equity as compared to our prior mortgage business.

In the nine months ended September 30, 2022, other gross margin increased 490 basis points. This was primarily attributable to a 180 basis point decrease in outside services, and a 130 basis point decrease in office and occupancy expenses.

Operating Expenses


	Nine Months Ended September 30,						Change
	2022			2021			Dollars		Percentage

	(in thousands, except percentages)

Technology and development	$	149,209		$	112,824		$	36,385	32	%
Marketing	133,832			116,343			17,489		15
General and administrative	191,704			151,352			40,352		27
Restructuring and reorganization	18,670			—			18,670		n/a
Total operating expenses	$	493,415		$	380,519		$	112,896	30
Percentage of revenue
Technology and development	8.3		%	8.8		%
Marketing	7.4			9.1
General and administrative	10.6			11.8
Restructuring and reorganization	1.0			—
Total operating expenses	27.3		%	29.7		%

In the nine months ended September 30, 2022, technology and development expenses increased by $36.4 million, or 32%, as compared with the same period in 2021. Included in the increase was $39.1 million resulting from our acquisition of Rent., and there were $26.1 million such expenses in the nine months ended September 30, 2021. Also included in the increase was $1.3 million resulting from our acquisition of Bay Equity, and there were no such expenses in the nine months ended September 30, 2021. Excluding these expenses from Rent. and Bay Equity, the increase was primarily attributable to a $16.6 million increase in personnel costs due to increased headcount.

In the nine months ended September 30, 2022, marketing expenses increased by $17.5 million, or 15%, as compared with the same period in 2021. Included in the increase was $36.8 million resulting from our acquisition of Rent., and there were $26.7 million such expenses in the nine months ended September 30, 2021. Also included in the increase was $3.4 million resulting from our acquisition of Bay Equity, and there were no such expenses in the nine months ended September 30, 2021. Excluding these expenses from Rent. and Bay Equity, the increase was primarily attributable to a $2.6 million increase in personnel costs due to increased headcount.

In the nine months ended September 30, 2022, general and administrative expenses increased by $40.4 million, or 27%, as compared with the same period in 2021. Included in the increase was $66.9 million resulting from our acquisition of Rent., and there were $46.1 million such expenses in the nine months ended September 30, 2021. Also included in the increase was $15.2 million resulting from our acquisition of Bay Equity, and there were no such expenses in the nine months ended September 30, 2021. Excluding these expenses from Rent. and Bay Equity, the increase was primarily attributable to a $9.0 million increase in personnel costs due to increased headcount, and a $4.1 million increase in internet-based software services. This was partially offset by a $6.4 million decrease in advertising campaign and contractor expenses for recruiting employees, and a $5.4 million decrease in acquisition transaction expenses.

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In the nine months ended September 30, 2022, restructuring and reorganization expenses increased by $18.7 million, and there were no such expenses in the nine months ended September 30, 2021. These expenses were attributable to $10.6 million in severance and other costs associated with our June 2022 workforce reduction, and $6.5 million in severance and other costs associated with our mortgage restructuring, and $1.5 million in severance costs associated with our rentals restructuring. See Note 1 to our consolidated financial statements for more information on our restructuring and reorganization costs.

Interest Income, Interest Expense, Income Tax (Expense) Benefit, and Other (Expense) Income, Net


	Nine Months Ended September 30,						Change
	2022			2021			Dollars		Percentage

	(in thousands, except percentages)

Interest income	$	1,948		$	472		$	1,476	313	%
Interest expense	(12,841)			(7,822)			(5,019)		64
Income tax (expense) benefit	(425)			5,363			(5,788)		(108)
Other (expense) income, net	(3,081)			4,099			(7,180)		(175)
Interest income, interest expense, income tax benefit, and other (expense) income, net	$	(14,399)		$	2,112		$	(16,511)	(782)
Percentage of revenue
Interest income	0.1		%	0.0		%
Interest expense	(0.7)			(0.6)
Income tax (expense) benefit	0.0			0.4
Other (expense) income, net	(0.2)			0.3
Interest income, interest expense, income tax benefit, and other (expense) income, net	(0.8)		%	0.2		%

In the nine months ended September 30, 2022, interest income, interest expense, income tax (expense) benefit, and other (expense) income, net decreased by $16.5 million as compared to the same period in 2021.

Interest expense increased by $5.0 million due primarily to use of our secured revolving credit facility and interest on our 2027 convertible senior notes. See Note 15 to our consolidated financial statements for more information on these.

We had an income tax expense rather than benefit, with a net decrease of $5.8 million. See Note 14 to our consolidated financial statements for more information.

Other (expense) income, net decreased $7.2 million. In the three months ended September 30, 2021, we recorded the fair value of one of our investments, and had no such activity in the three months ended September 30, 2022.

Segment Financial Information

The tables below present, for each of our reportable and other segments, financial information on a GAAP basis and adjusted EBITDA, which is a non-GAAP financial measure, for the three and nine months ended September 30, 2022 and 2021.

See Note 3 to our consolidated financial statements for more information regarding our GAAP segment reporting.

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To supplement our consolidated financial statements that are prepared and presented in accordance with GAAP, we also compute and present adjusted EBITDA, which is a non-GAAP financial measure. We believe adjusted EBITDA is useful for investors because it enhances period-to-period comparability of our financial statements on a consistent basis and provides investors with useful insight into the underlying trends of the business. The presentation of this financial measure is not intended to be considered in isolation or as a substitute of, or superior to, our financial information prepared and presented in accordance with GAAP. Our calculation of adjusted EBITDA may be different from adjusted EBITDA or similar non-GAAP financial measures used by other companies, limiting its usefulness for comparison purposes. Our adjusted EBITDA for the three and nine months ended September 30, 2022 and 2021 is presented below, along with a reconciliation of adjusted EBITDA to net loss.


	Three Months Ended September 30, 2022
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Revenue	$	211,540	$	299,663	$	38,686	$	48,469	$	7,079	$	(4,920)	$	600,517
Cost of revenue	156,632		332,251		8,676		43,783		6,018		(4,920)		542,440
Gross profit	54,908		(32,588)		30,010		4,686		1,061		—		58,077
Operating expenses
Technology and development	25,709		4,728		15,385		985		751		505		48,063
Marketing	18,772		506		12,678		1,653		48		91		33,748
General and administrative	20,244		3,029		22,722		7,073		784		7,153		61,005
Restructuring and reorganization	—		—		—		—		—		284		284
Total operating expenses	64,725		8,263		50,785		9,711		1,583		8,033		143,100
Loss from operations	(9,817)		(40,851)		(20,775)		(5,025)		(522)		(8,033)		(85,023)
Interest income, interest expense, income tax expense, and other expense, net	—		(2,814)		397		(129)		40		(2,716)		(5,222)
Net loss	$	(9,817)	$	(43,665)	$	(20,378)	$	(5,154)	$	(482)	$	(10,749)	$	(90,245)


	Three Months Ended September 30, 2022
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Net loss	$	(9,817)	$	(43,665)	$	(20,378)	$	(5,154)	$	(482)	$	(10,749)	$	(90,245)
Interest income(1)	—		(330)		—		(4,049)		(42)		(786)		(5,207)
Interest expense(2)	—		3,140		—		3,364		—		2,215		8,719
Income tax expense	—		—		(355)		141		—		346		132
Depreciation and amortization	4,388		642		9,683		1,053		241		291		16,298
Stock-based compensation(3)	9,834		1,646		3,632		1,209		341		1,408		18,070
Acquisition-related costs(4)	—		—		—		—		—		13		13
Restructuring and reorganization(5)	—		—		—		—		—		284		284
Impairment(6)	—		—		—		—		—		913		913
Adjusted EBITDA	$	4,405	$	(38,567)	$	(7,418)	$	(3,436)	$	58	$	(6,065)	$	(51,023)

(1) Interest income includes $4.0 million of interest income related to originated mortgage loans for the three months ended September 30, 2022.

(2) Interest expense includes $3.4 million of interest expense related to our warehouse credit facilities for the three months ended September 30, 2022.

(3) Stock-based compensation consists of expenses related to stock options, restricted stock units, and our employee stock purchase program. See Note 12 to our consolidated financial statements for more information.

(4) Acquisition-related costs consist of fees for external advisory, legal, and other professional services incurred in connection with our acquisition of other companies.

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(5) Restructuring and reorganization expenses primarily consist of personnel-related costs associated with employee terminations, furloughs, or retention due to the restructuring and reorganization activities from our acquisitions of Bay Equity and Rent., and from our June 2022 workforce reduction.

(6) Impairment consists of an impairment loss due to subleasing one of our operating leases.


	Three Months Ended September 30, 2021
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Revenue	$	257,795	$	238,417	$	40,406	$	5,013	$	3,193	$	(4,750)	$	540,074
Cost of revenue	161,449		238,397		7,395		6,705		3,576		(4,750)		412,772
Gross profit	96,346		20		33,011		(1,692)		(383)		—		127,302
Operating expenses
Technology and development	20,732		3,602		13,849		2,910		586		1,979		43,658
Marketing	33,894		645		14,113		149		42		300		49,143
General and administrative	18,383		2,258		23,264		2,334		533		7,623		54,395

Total operating expenses	73,009		6,505		51,226		5,393		1,161		9,902		147,196
Income (loss) from operations	23,337		(6,485)		(18,215)		(7,085)		(1,544)		(9,902)		(19,894)
Interest income, interest expense, income tax expense, and other expense, net	(56)		(1,456)		311		1		1		2,144		945
Net income (loss)	$	23,281	$	(7,941)	$	(17,904)	$	(7,084)	$	(1,543)	$	(7,758)	$	(18,949)


	Three Months Ended September 30, 2021
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Net income (loss)	$	23,281	$	(7,941)	$	(17,904)	$	(7,084)	$	(1,543)	$	(7,758)	$	(18,949)
Interest income(1)	—		(1)		—		(402)		(1)		(176)		(580)
Interest expense(2)	—		1,456		—		399		—		2,216		4,071
Income tax expense	—		—		(311)		—		—		—		(311)
Depreciation and amortization	3,470		530		9,189		427		181		488		14,285
Stock-based compensation(3)	8,138		1,312		143		721		167		2,629		13,110
Acquisition-related costs(4)	—		—		—		—		—		202		202
Restructuring and reorganization(5)	—		—		—		—		—		—		—

Adjusted EBITDA	$	34,889	$	(4,644)	$	(8,883)	$	(5,939)	$	(1,196)	$	(2,399)	$	11,828

(1) Interest income includes $0.4 million of interest income related to originated mortgage loans for the three months ended September 30, 2021.

(2) Interest expense includes $0.4 million of interest expense related to our warehouse credit facilities for the three months ended September 30, 2021.

(4) Acquisition-related costs consist of fees for external advisory, legal, and other professional services incurred in connection with our acquisition of other companies.

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	Nine Months Ended September 30, 2022
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Revenue	$	640,835	$	942,022	$	114,979	$	104,484	$	17,341	$	(14,883)	$	1,804,778
Cost of revenue	488,114		946,955		23,769		95,616		16,590		(14,883)		1,556,161
Gross profit	152,721		(4,933)		91,210		8,868		751		—		248,617
Operating expenses
Technology and development	80,144		13,531		44,539		5,236		2,975		2,784		149,209
Marketing	90,380		2,480		36,806		3,525		173		468		133,832
General and administrative	67,578		9,064		68,738		18,047		2,346		25,931		191,704
Restructuring and reorganization	—		—		—		—		—		18,670		18,670
Total operating expenses	238,102		25,075		150,083		26,808		5,494		47,853		493,415
(Loss) income from operations	(85,381)		(30,008)		(58,873)		(17,940)		(4,743)		(47,853)		(244,798)
Interest income, interest expense, income tax expense, and other expense, net	(123)		(5,682)		1,098		(164)		51		(9,579)		(14,399)
Net (loss) income	$	(85,504)	$	(35,690)	$	(57,775)	$	(18,104)	$	(4,692)	$	(57,432)	$	(259,197)


	Nine Months Ended September 30, 2022
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Net loss	$	(85,504)	$	(35,690)	$	(57,775)	$	(18,104)	$	(4,692)	$	(57,432)	$	(259,197)
Interest income(1)	—		(514)		(1)		(7,296)		(55)		(1,361)		(9,227)
Interest expense(2)	—		6,192		—		5,599		—		6,642		18,433
Income tax expense	—		—		(789)		174		—		1,040		425
Depreciation and amortization	12,957		1,783		28,550		2,425		814		909		47,438
Stock-based compensation(3)	29,644		4,710		8,611		2,590		1,151		4,966		51,672
Acquisition-related costs(4)	—		—		—		—		—		2,437		2,437
Restructuring and reorganization(5)	—		—		—		—		—		18,670		18,670
Impairment(6)	—		—		—		—		—		913		913
Adjusted EBITDA	$	(42,903)	$	(23,519)	$	(21,404)	$	(14,612)	$	(2,782)	$	(23,216)	$	(128,436)

(1) Interest income includes $7.3 million of interest income related to originated mortgage loans for the nine months ended September 30, 2022.

(2) Interest expense includes $5.6 million of interest expense related to our warehouse credit facilities for the nine months ended September 30, 2022.

(4) Acquisition-related costs consist of fees for external advisory, legal, and other professional services incurred in connection with our acquisition of other companies.

(6) Impairment consists of an impairment loss due to subleasing one of our operating leases.

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	Nine Months Ended September 30, 2021
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Revenue	$	678,602	$	503,588	$	82,954	$	15,823	$	10,261	$	(11,520)	$	1,279,708
Cost of revenue	453,790		496,948		14,965		19,406		10,323		(11,520)		983,912
Gross profit	224,812		6,640		67,989		(3,583)		(62)		—		295,796
Operating expenses
Technology and development	60,862		9,512		27,616		7,814		1,538		5,482		112,824
Marketing	86,823		1,423		26,724		413		105		855		116,343
General and administrative	60,813		6,765		46,413		5,686		1,466		30,209		151,352

Total operating expenses	208,498		17,700		100,753		13,913		3,109		36,546		380,519
Loss from operations	16,314		(11,060)		(32,764)		(17,496)		(3,171)		(36,546)		(84,723)
Interest income, interest expense, income tax expense, and other expense, net	(87)		(2,538)		523		2		2		4,210		2,112
Net loss	$	16,227	$	(13,598)	$	(32,241)	$	(17,494)	$	(3,169)	$	(32,336)	$	(82,611)


	Nine Months Ended September 30, 2021
	Real estate services		Properties		Rentals		Mortgage		Other		Corporate Overhead and Intercompany Eliminations		Total
Net income (loss)	$	16,227	$	(13,598)	$	(32,241)	$	(17,494)	$	(3,169)	$	(32,336)	$	(82,611)
Interest income(1)	—		(8)		—		(1,174)		(2)		(459)		(1,643)
Interest expense(2)	—		2,546		—		1,235		—		5,277		9,058
Income tax expense	—		—		(523)		—		—		(4,840)		(5,363)
Depreciation and amortization	9,700		1,333		18,299		1,019		514		1,438		32,303
Stock-based compensation(3)	25,699		3,686		317		2,165		508		7,063		39,438
Acquisition-related costs(4)	—		—		—		—		—		7,925		7,925
Restructuring and reorganization(5)	—		—		—		—		—		—		—

Adjusted EBITDA	$	51,626	$	(6,041)	$	(14,148)	$	(14,249)	$	(2,149)	$	(15,932)	$	(893)

(1) Interest income includes $1.2 million of interest income related to originated mortgage loans for the nine months ended September 30, 2021.

(2) Interest expense includes $1.2 million of interest expense related to our warehouse credit facilities for the nine months ended September 30, 2021.

(4) Acquisition-related costs consist of fees for external advisory, legal, and other professional services incurred in connection with our acquisition of other companies.

Liquidity and Capital Resources

As of September 30, 2022, we had cash and cash equivalents of $359.7 million and investments of $152.0 million, which consist primarily of operating cash on deposit with financial institutions, money market instruments, U.S. treasury securities, and agency bonds.

Also as of September 30, 2022, we had $1,259.8 million aggregate principal amount of convertible senior notes outstanding across three issuances maturing between July 15, 2023 and April 1, 2027. See Note 15 to our consolidated financial statements for our obligations to pay semi-annual interest and to repay any outstanding amounts at the notes' maturity.

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Also as of September 30, 2022, we had 40,000 shares of convertible preferred stock outstanding. See Note 11 to our consolidated financial statements for our obligations to pay quarterly interest and to redeem any outstanding shares on November 30, 2024.

With respect to the cash outlay for our properties business, for the quarter ended September 30, 2022, we relied on (i) a combination of our cash on hand and borrowings from a secured revolving credit facility to fund home purchase prices and (ii) solely on our cash on hand to fund capitalized improvement costs and home maintenance expenses. See Note 5 to our consolidated financial statements for more information on our home purchases during the quarter ended September 30, 2022 and our home purchase commitments as of September 30, 2022. See Note 15 to our consolidated financial statements for more information regarding the secured revolving credit facility and the section titled "Risk Factors” in Part II, Item 1A in this quarterly report for a discussion of additional risks related to the secured revolving credit facility.

Our mortgage business has significant cash requirements due to the period of time between its origination of a mortgage loan and the sale of that loan. We have relied on warehouse credit facilities with different lenders to fund substantially the entire portion of the mortgage loans that our mortgage business originates. Once our mortgage business sells a loan in the secondary mortgage market, we use the proceeds to reduce the outstanding balance under the related facility. See Note 15 to our consolidated financial statements for more information regarding our warehouse credit facilities and the section titled "Risk Factors” in Part II, Item 1A in this quarterly report for a discussion of additional risks related to our warehouse credit facilities.

We believe that our existing cash and cash equivalents and investments, together with cash we expect to generate from future operations, and borrowings from our secured revolving credit facility (if available) and our warehouse credit facilities, will provide sufficient liquidity to meet our operational needs, repay all outstanding borrowings under our secured revolving credit facility in the event of a termination, satisfy commitments by our properties business to purchase homes, and fulfill our payment obligations with respect to our convertible senior notes and convertible preferred stock. However, our liquidity assumptions may change or prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. As a result, we may seek new sources of credit financing or elect to raise additional funds through equity, equity-linked, or debt financing arrangements. We cannot assure you that any additional financing will be available to us on acceptable terms or at all.

Our title and settlement business and our mortgage business each holds cash in escrow that we do not record on our consolidated balance sheets. See Note 8 to our consolidated financial statements for more information regarding these amounts.

Cash Flows

The following table summarizes our cash flows for the periods presented:


	Nine Months Ended September 30,
	2022		2021

	(in thousands)

Net cash used in operating activities	$	(148,489)	$	(414,121)
Net cash used in investing activities	(181,109)		(562,862)
Net cash provided by financing activities	15,098		668,412

Net Cash Used In Operating Activities

Our operating cash flows result primarily from cash generated by commissions paid to us from our real estate services business, sales of homes from our properties business, and subscription-based product offerings from our rentals business. Our primary uses of cash from operating activities include payments for personnel-related costs, including employee benefits and bonus programs, marketing and advertising activities, purchases of homes for our properties business, office and occupancy costs, and outside services costs. Additionally, our mortgage business generates a significant amount operating cash flow activity from the origination and sale of loans held for sale.

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Net cash used in operating activities was $148.5 million for the nine months ended September 30, 2022, primarily attributable to (i) our net loss of $259.2 million, (ii) $121.7 million of non-cash items related to stock-based compensation, depreciation and amortization, amortization of debt discounts and issuances costs, lease expense related to right-of-use assets, impairment costs, and other non-cash items, and (iii) changes in assets and liabilities, which decreased cash provided by operating activities by $11.0 million. The primary uses of cash related to changes in our assets and liabilities were a $57.0 million decrease in inventory related to our properties business and a $26.1 million decrease in accounts payable and accrued and other liabilities related to the timing of vendor payments and payroll related expenses.

Net cash used in operating activities was $414.1 million for the nine months ended September 30, 2021, primarily attributable to a net loss of $82.6 million, offset by $80.3 million of non-cash items related to stock-based compensation, depreciation and amortization, amortization of debt discounts and issuances costs, lease expense related to right-of-use assets, and other non-cash items. Changes in assets and liabilities decreased cash provided by operating activities by $411.8 million. The primary sources of cash related to changes in our assets and liabilities were a $23.6 million increase in accounts payable and other accrued liabilities related to the timing of vendor payments and payroll related expenses. The primary use of cash related to changes in our assets and liabilities was a $386.0 million increase in inventory related to our properties business. The increase in inventory was largely due to our properties business’s expansion.

Net Cash Used In Investing Activities

Our primary investing activities include the purchase, sale, and maturity of investments and purchases of property and equipment, primarily related to capitalized software development expenses and computer equipment and software.

Net cash used in investing activities was $181.1 million for the nine months ended September 30, 2022, primarily attributable to the net cash paid for our acquisition of Bay Equity of $97.3 million, $66.3 million in net investments in U.S. government securities, and $13.1 million of capitalized software development expenses.

Net cash used in investing activities was $562.9 million for the nine months ended September 30, 2021, primarily attributable to cash paid for our acquisition of Rent. of $608.0 million, $65.7 million in net investments in U.S. government securities, and $10.4 million of capitalized software development expenses.

Net Cash Provided By Financing Activities

Our primary financing activities have come from (i) our initial public offering in August 2017, (ii) sales of our common stock and 2023 notes in July 2018, our common stock and convertible preferred stock in April 2020, our 2025 notes in October 2020, and our 2027 notes in March 2021, and (iii) the sale of our common stock pursuant to stock option exercises and our ESPP. Additionally, we generate a significant amount of financing cash flow activity due to borrowings from and repayments to our warehouse credit facilities and our secured revolving credit facility.

Net cash provided by financing activities was $15.1 million for the nine months ended September 30, 2022, attributable to a $2.6 million increase in net borrowings under our secured revolving credit facility and a $10.9 million increase in net borrowings under our warehouse credit facilities.

Net cash provided by financing activities was $668.4 million for the nine months ended September 30, 2021, primarily attributable to $498.9 million in net proceeds from the issuance of our 2027 notes offering including the purchase of capped calls related to those notes, and a $175.7 million increase in net borrowings under our secured revolving credit facility.

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Critical Accounting Policies and Estimates

Discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities, revenue, and expenses at the date of the financial statements. Generally, we base our estimates on historical experience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

Critical accounting policies and estimates are those that we consider the most important to the portrayal of our financial condition and results of operations because they require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and estimates addressed below. In addition, we have other key accounting policies and estimates that are described in Note 1 to our consolidated financial statements.

Revenue Recognition

Our key revenue components are brokerage revenue, partner revenue, properties revenue, rentals revenue, mortgage revenue, and other revenue. Of these, we consider the most critical of our revenue recognition policies to be those related to commissions and fees charged on brokerage transactions closed by our lead agents, and from the sale of homes. We recognize commission-based brokerage revenue upon closing of a brokerage transaction, less the amount of any commission refunds, closing-cost reductions, or promotional offers that may result in a material right. We determined that brokerage revenue primarily contains a single performance obligation that is satisfied upon the closing of a transaction, at which point the entire transaction price is earned. We evaluate our brokerage contracts and promotional pricing to determine if there are any additional material rights and allocate the transaction price based on standalone selling prices.

Properties revenue is earned when we sell homes that were previously bought directly from homeowners. Our contracts with customers contain a single performance obligation that is satisfied upon a transaction closing. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home.

Rentals revenue is primarily recognized on a straight-line basis over the term of the contract, which is generally less than one year. Revenue is presented net of sales allowances, which are not material.

Mortgage revenue is recognized (1) when an interest rate lock commitment is made to a customer, adjusted for a pull-through percentage, (2) for origination fees, when the purchase or refinance of a loan is complete, and (3) when the fair value of our interest rate lock commitments, forward sale commitments, and loans held for sale are recorded at current market quotes.

We have utilized the practical expedient in ASC 606, Revenue from Contracts with Customers, and elected not to capitalize contract costs for contracts with customers with durations less than one year. We do not have significant remaining performance obligations or contract balances.

See Note 1 to our consolidated financial statements for further discussion of our revenue recognition policy.

Acquired Intangible Assets and Goodwill

We recognize separately identifiable intangible assets acquired in a business combination. Determining the fair value of the intangible assets acquired requires management’s judgment, often utilizes third-party valuation specialists, and involves the use of significant estimates and assumptions with respect to the timing and amounts of future cash flows, discount rates, replacement costs, and asset lives, among other estimates.

The judgments made in the determination of the estimated fair value assigned to the intangible assets acquired and the estimated useful life of each asset could significantly impact our consolidated financial statements in periods after the acquisition, such as through depreciation and amortization expense.

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We evaluate intangible assets for impairment whenever events or circumstances indicate that they may not be recoverable. We measure recoverability by comparing the carrying amount of an asset group to future undiscounted net cash flows expected to be generated.

Goodwill represents the excess of the purchase price over the fair value of the net tangible assets and identifiable intangible assets acquired in a business combination. Goodwill is not amortized, but is subject to impairment testing. We assess the impairment of goodwill on an annual basis, during the fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired. We assess goodwill for possible impairment by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we qualitatively determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then no additional impairment steps are necessary.

See Note 2 to our consolidated financial statements for a summary of our valuation of the Bay Equity intangible assets, along with their estimated useful lives.

Inventory

Our inventory represents homes purchased with the intent of resale and are accounted for under the specific identification method. Direct home acquisition and improvement costs are capitalized and tracked directly with each specific home. Homes are stated in inventory at cost and are reviewed on a home by home basis. When evidence exists that the net realizable value of a home is lower than its cost, we recognize the difference as a loss in the period in which it occurs. In determining net realizable value, management must use judgment and estimates, including assessment of readily available market value indicators such as the Redfin Estimate and other third-party home value indicators, assessment of a current listing or pending offer price if either are available, and the value of any improvements made to the home. If a home's estimated market value is less than the inventory cost then the home is written down to net realizable value. As of September 30, 2022, we wrote down our inventory by $18.3 million, described in further detail in Note 16, and further material adjustments may be required in the future due to changing market conditions, natural disasters, or other forces outside of our control.

See Note 5 to our consolidated financial statements for a summary of our inventory categories and any write-downs.

Business Combinations

The results of businesses acquired in a business combination are included in our consolidated financial statements from the date of acquisition. We record assets and liabilities of an acquired business at their estimated fair values on the acquisition date. Any excess consideration over the fair value of assets acquired and liabilities assumed is recognized as goodwill. During the measurement period, which may be up to one year from the acquisition date, we may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

The purchase price allocation process requires our management to make significant estimates and assumptions. Although we believe the assumptions and estimates made are reasonable, they are inherently uncertain and based in part on experience, market conditions, projections of future performance, and information obtained from legacy management of acquired companies. Critical estimates include but are not limited to:

•future revenue, cost of revenue and operating margin projections,

•discount rates,

•terminal growth rate; and

•market data of comparable guideline companies.

See Note 2 to our consolidated financial statements for a summary of our business combinations activities.

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Recent Accounting Standards

For information on recent accounting standards, see Note 1 to our consolidated financial statements.

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Item 3. Qualitative and Quantitative Disclosures About Market Risk.

Our primary operations are within the United States and Canada. We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.

Interest Rate Risk

Our investment policy allows us to maintain a portfolio of cash equivalents and investments in a variety of securities, including U.S. treasury and agency issues, bank certificates of deposit that are 100% insured by the Federal Deposit Insurance Corporation, and SEC-registered money market funds that consist of a minimum of $1 billion in assets and meet the above requirements. The goals of our investment policy are liquidity and capital preservation. We do not enter into investments for trading or speculative purposes.

As of September 30, 2022, we had cash and cash equivalents of $359.7 million and investments of $152.0 million. Our investments are comprised of available-for-sale securities that consist primarily of U.S. treasury securities with maturities of two years or less. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the relatively short-term nature and risk profile of our portfolio. Declines in interest rates, however, would reduce future investment income. Assuming no change in our outstanding cash, cash equivalents, and investments during the third quarter of 2022, a hypothetical 10% change in interest rates, occurring during and sustained throughout that quarter, would not have a material impact on our financial results for that quarter.

We are exposed to interest rate risk on our mortgage loans held for sale and IRLCs associated with our mortgage loan origination services. We manage this interest rate risk through the use of forward sales commitments on both a best effort whole loans basis and on a mandatory basis. Forward sales commitments entered into on a mandatory basis are done through the use of commitments to sell mortgage-backed securities. We do not enter into or hold derivatives for trading or speculative purposes. The fair value of our IRLCs and forward sales commitments are reflected in other current assets and accrued liabilities, as applicable, with changes in the fair value of these commitments recognized as revenue. The net fair value change for the periods presented were not material. See Note 4 to our consolidated financial statements for a summary of the fair value of our forward sales commitments and our IRLCs as of September 30, 2022.

We are subject to interest rate risk on borrowings under our secured revolving credit facility. See Note 15 to our consolidated financial statements for a description of this facility. Changes in the market interest rate will increase or decrease our interest expense. Assuming no change in the outstanding borrowings under the facility during the third quarter of 2022, a hypothetical 10% change in interest rates, occurring during and sustained throughout that quarter, would not have a material impact on our financial results for that quarter.

Foreign Currency Exchange Risk

As our operations in Canada have been limited, and we do not maintain a significant balance of foreign currency, we do not currently face significant foreign currency exchange rate risk.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this quarterly report. Based on such evaluation, our principal executive and principal financial officers have concluded that as of such date, our disclosure controls and procedures were effective at the reasonable assurance level described below.

Changes in Internal Control

In connection with the evaluation required by Rule 13a-15(d) under the Securities Exchange Act of 1934, there were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

See "Legal Proceedings" under Note 8 to our consolidated financial statements for a discussion of our material, pending legal proceedings.

Item 1A. Risk Factors.

Except as discussed below, there have not been any material changes from the risk factors included in Item 1A of our annual report for the year ended December 31, 2021. You should carefully consider the risks described below, together with all other information in this quarterly report, before investing in any of our securities. The occurrence of any single risk or any combination of risks could materially and adversely affect our business, operating results, financial condition, liquidity, or competitive position, and consequently, the value of our securities. The material adverse effects include, but are not limited to, not growing our revenue or market share at the pace that they have grown historically or at all, our revenue and market share fluctuating on a quarterly and annual basis, an extension of our history of losses and a failure to become profitable, not achieving the revenue and net income (loss) guidance that we provide, and harm to our reputation and brand.

Our wind-down plan for our RedfinNow operations may adversely impact our business, results of operations, financial performance, and reputation.

There are risks and uncertainties inherent to the wind-down of RedfinNow operations that could adversely impact our overall business, results of operations, financial performance, and reputation, including, but not limited to:

•Our ability to operate RedfinNow during the wind-down period, including our ability to complete the purchase of homes we are contractually obligated to purchase and renovate, and to market and close on the sale of homes in inventory, may be adversely impacted by disruptions in relationships with customers, suppliers, vendors, broker partners, contractors, utility providers, employees, lenders, real estate investment trusts, and consumers, which may lead to longer hold times for homes in inventory, increased holding, renovation, and transactions costs, lower sales prices, and an overall decrease in profitability.

•Our financial projections and financial performance may be adversely impacted by, among other things, the accuracy of the estimates and assumptions related to the wind-down of RedfinNow operations on which our projections are based; other facts we discover that could require us to incur additional expense and record additional charges that may be materially different from our initial expectations about the financial performance of the business and the costs of the wind-down; and unanticipated changes to management’s estimates (including, but not limited to, the accounting for the estimated net realizable value of inventory), reserves, or allowances and future costs we incur, such as those related to warranty or consumer claims.

•Our wind-down of RedfinNow may create unintended staffing challenges, including impacting workforce morale, impacting our ability to recruit going forward, and result in failure to retain key employees, partners, and critical functions during the wind-down period and beyond. This could, among other things, negatively impact our ability to operate other non-RedfinNow business lines, corporate functions, or critical technology systems, and our ability to maintain necessary state broker or entity-level licenses and manage renovations, transactions, and closings and support other critical functions necessary to maintain RedfinNow operations through the wind-down period and the broader company going forward.

•Our decision to wind-down our RedfinNow operations may have unintended impacts on our other business lines by, among other things, limiting our ability to meet new potential homebuyers and home sellers through marketing cash offers fulfilled by RedfinNow, limiting, and ultimately eliminating, the sale of RedfinNow-owned homes through our real estate services segment, and similarly impacting our title and settlement operations.

•We primarily utilize our secured revolving credit facility to finance the purchase of homes through RedfinNow. Our wind-down of RedfinNow operations may adversely impact our access to and the ongoing availability of financing on acceptable terms, which could require us to utilize cash and current investments to finance the purchase of homes we are contractually obligated to purchase.

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The extent to which the wind-down will impact our operations will depend on future developments, which are highly uncertain and cannot be predicted. Any of these risks could delay our wind-down of RedfinNow operations, increase costs and charges associated with the wind-down and disrupt the operations of our other businesses, any of which may adversely impact our business, results of operations, financial performance, and reputation.

A disruption in the secondary mortgage loan market or if Bay Equity becomes unable to sell the mortgage loans that it originates could adversely affect our business.

Demand in the secondary market for mortgage loans, and Bay Equity’s ability to sell the mortgage loans that it originates on favorable terms and in a timely manner, can be hindered by many factors, including changes in regulatory requirements, the willingness of the agencies, aggregators, or other investors to provide funding for and purchase mortgage loans, and general economic conditions. If Bay Equity cannot continue to sell mortgage loans that it originates on favorable terms to government-sponsored enterprises or other loan purchasers, our business, financial condition, and results of operations could be materially and adversely affected.

A substantial portion of our mortgage business’s assets are measured at fair value. If our estimates of fair value are inaccurate, we may be required to record a significant write down of our assets.

Bay Equity’s MSRs, interest rate lock commitments, and mortgage loans held for sale are recorded at fair value on our balance sheet. Fair value determinations require many assumptions and complex analyses, and we cannot control many of the underlying factors. If our estimates are incorrect, we could be required to write down the value of these assets, which could adversely affect our financial condition and results of operations.

In particular, our estimates of the fair value of Bay Equity’s MSRs are based on the cash flows projected to result from the servicing of the related mortgage loans and continually fluctuate due to a number of factors, including estimated discount rate, the cost of servicing, objective portfolio characteristics, contractual service fees, default rates, prepayment rates and other market conditions that affect the number of loans that ultimately become delinquent or are repaid or refinanced. These estimates are calculated by a third party using financial models that account for a high number of variables that drive cash flows associated with MSRs and anticipate changes in those variables over the life of the MSR. The accuracy of our estimates of the fair value of our MSRs are dependent on the reasonableness of the results of such models and the variables and assumptions that are built into them. If prepayment speeds or loan delinquencies are higher than anticipated, or other factors perform worse than modeled, the recorded value of certain of our MSRs may decrease, which could adversely affect our financial condition and results of operations.

Bay Equity relies on its warehouse credit facilities to fund the mortgage loans that it originates. If one or more of those facilities were to become unavailable, Bay Equity may be unable to find replacement financing on commercially reasonable terms, or at all, and this could adversely affect its ability to originate additional mortgage loans.

Bay Equity relies on borrowings from warehouse credit facilities to fund substantially all of the mortgage loans that it originates. To grow its business, Bay Equity depends, in part, on having sufficient borrowing capacity under its current facilities or obtaining additional borrowing capacity under new facilities. A current facility may become unavailable if Bay Equity fails to comply with its ongoing obligations under the facility, including failing to satisfy applicable financial covenants, or if it cannot agree with the lender on terms to renew the facility. New facilities may not be available on terms acceptable to us. If Bay Equity were unable to secure sufficient borrowing capacity through its warehouse credit facilities, then it may need to rely on our cash on hand to originate mortgage loans. If this cash were unavailable, then Bay Equity may be unable to maintain or increase the amount of mortgage loans that it originates, which will adversely affect its growth.

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Item 5. Other Information.

On October 17, 2022, our board of directors authorized spending up to a maximum amount of $250 million to repurchase and retire a portion of our convertible notes for cash through open market purchases, privately negotiated transactions, block trades, or 10b5-1 plans. Whether to make any repurchases, and the timing, volume, and nature of any such repurchases will be determined by our management on an opportunistic basis related to the market price of the notes, the capital needs of the business, market conditions, and other factors. The repurchase program has no expiration date and will continue until otherwise suspended, terminated, or modified at any time for any reason by our board of directors. We currently expect to fund the repurchase program from our existing cash balance and future cash flows from operations.

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Item 6. Exhibits.

The exhibits required to be filed or furnished as part of this Quarterly Report are listed below. Notwithstanding any language to the contrary, exhibits 32.1, 32.2, 101, and 104 shall not be deemed to be filed as part of this Quarterly Report for purposes of Section 18 of the Securities Exchange Act of 1934.

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

Exhibit

Filing Date

Filed or Furnished Herewith

10.1

Offer Letter by and between Redfin Corporation and Anna Stevens, dated June 3, 2022

31.1

Certification of principal executive officer, pursuant to Rule 13a-14(a)

31.2

Certification of principal financial officer, pursuant to Rule 13a-14(a)

32.1

Certification of chief executive officer, pursuant to 18 U.S.C. Section 1350

32.2

Certification of chief financial officer, pursuant to 18 U.S.C. Section 1350

101

Interactive data files

104

Cover page interactive data file, submitted using inline XBRL (contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Redfin Corporation

(Registrant)

November 9, 2022

/s/ Glenn Kelman

(Date)

Glenn Kelman

President and Chief Executive Officer

(Duly Authorized Officer)

November 9, 2022

/s/ Chris Nielsen

(Date)

Chris Nielsen

Chief Financial Officer

(Principal Financial Officer)