Redfin
Annual Report 2019

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549FORM 10-K(Mark One)☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2019or☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from ___ to ___Commission file number 001-38160Redfin 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 StreetSuite 600 SeattleWA 98101(Address of Principal Executive Offices) (Zip Code)(206)576-8333Registrant's telephone number, including area codeSecurities registered pursuant to Section 12(b) of the Act:Title of each classTrading SymbolName of each exchange on which registeredCommon Stock, $0.001 par value per shareRDFNThe Nasdaq Global Select MarketSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒☐NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. ☐☒NoIndicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒☐NoIndicate by check mark whether the registrant has submitted electronically every Interactive Data File required to besubmitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or forsuch shorter period that the registrant was required to submit such files). ☒☐NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. 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 filerAccelerated filerNon-accelerated filerSmaller reporting company Emerging growth companyIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transitionperiod for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of theExchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐☒NoAs of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant's commonstock held by its non-affiliates, computed by reference to the price at which the common stock was last sold, was $1,547,297,147.The registrant had 93,123,373 shares of common stock outstanding as of January 31, 2020.DOCUMENTS INCORPORATED BY REFERENCEThe portions of the registrant's proxy statement to be filed in connection with the registrant’s 2020 Annual Meeting of Stockholders that areresponsive to the disclosure required by Part III of Form 10-K are incorporated by reference into Part III of this Form 10-K.Redfin CorporationAnnual Report on Form 10-KFor the Year Ended December 31, 2019Table of Contents PART I PageItem 1.Business1Item 1A.Risk Factors5Item 1B.Unresolved Staff Comments20Item 2.Properties20Item 3.Legal Proceedings20Item 4.Mine Safety Disclosures20 PART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities21Item 6.Selected Financial Data23Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations24Item 7A.Quantitative and Qualitative Disclosures About Market Risk41Item 8.Financial Statements and Supplementary Data42Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure73Item 9A.Controls and Procedures73Item 9B.Other information73 PART III Item 10.Directors, Executive Officers and Corporate Governance74Item 11.Executive Compensation74Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters74Item 13.Certain Relationships and Related Transactions, and Director Independence74Item 14.Principal Accounting Fees and Services74 PART IV Item 15.Exhibits, Financial Statement Schedules75Item 16.Form 10-K Summary75 Signatures As used in this Annual Report on Form 10-K (this "Annual Report"), the terms "Redfin," "we," "us," and "our" refer to Redfin Corporation andits subsidiaries taken as a whole, unless otherwise noted or unless the context indicates otherwise.Note Regarding Forward-Looking StatementsThis Annual 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,” “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 andtrends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations andobjectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including thosedescribed under Item 1A. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It isnot 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, orcombination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light ofthese risks, uncertainties, and assumptions, the future events and trends discussed in this report may not occur and actual results could differmaterially and adversely from those anticipated or implied in the forward-looking statements. Accordingly, you should not rely on forward-lookingstatements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, wecannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved oroccur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this report or to conform thesestatements to actual results or revised expectations.Note Regarding Industry and Market DataThis Annual Report contains information using industry publications that generally state that the information contained therein has beenobtained from sources believed to be reliable, but such information may not be accurate or complete. While we are not aware of any misstatementsregarding the information from these industry publications, we have not independently verified any of the data from third-party sources nor have weascertained the underlying economic assumptions relied on therein.iTable of ContentsPART IItem 1. BusinessOverviewWe help people buy and sell homes. Our primary business is a residential real estate brokerage, representing customers in over 90markets in the United States and Canada. 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 mortgage loans and offer title and settlement services; we alsobuy homes directly from homeowners who want an immediate sale, taking responsibility for selling the home while the original owner moves on.Our mission is to redefine real estate in the consumer’s favor.Representing CustomersOur brokerage efficiency results in savings that we share with our customers. Our homebuyers saved on average approximately $1,850 pertransaction in 2019. And we charge most home sellers a commission of 1% to 1.5%, compared to the 2.5% to 3% typically charged by traditionalbrokerages.The results of our customer-first approach are clear. We:•helped customers buy or sell more than 235,000 homes worth more than $115 billion through 2019;•drew more than 33 million monthly average visitors to our website and mobile application in 2019, 23% more compared to 2018;•earned a net promoter score, which is a measure of customer satisfaction, that was 18% higher than competing brokerages, as measuredby a study we commissioned in November 2019;•had customers return to us for another transaction at a 59% higher rate than competing brokerages;•sold Redfin-listed homes for nearly $1,800 more on average compared to the list price than competing brokerages’ listings in 2019,according to a study we commissioned;•had listings on the market for an average of 36 days in 2019 compared to the industry average of 41 days, according to a study wecommissioned; and, according to the same study, approximately 77% of Redfin listings sold within 90 days versus the industry average ofapproximately 75%; and•employed lead agents who, in 2019, were on average three times more productive and earned a median income that was twice as much asagents at competing brokerages; our lead agents were also 24% more likely to stay with us from 2018 to 2019 than agents at competingbrokerages.To serve customers when our own agents can’t due to high demand or geographic limitations, we’ve developed partnerships with over3,600 agents at other brokerages. Once we refer a customer to a partner agent, that agent, not us, represents the customer from the initial meetingthrough closing, at which point the agent pays us a portion of her commission as a referral fee.Complete Customer SolutionOur long-term goal is to combine brokerage, mortgage, title services, and instant offers to directly purchase a consumer's home into onesolution, sharing information, coordinating deadlines, and streamlining processes so that a consumer's move is easier and often less costly. As weintegrate these1Table of Contentsservices more closely over time, we believe we can help consumers move much more efficiently than a combination of stand-alone brokerages,mortgage lenders, and title companies ever could.Redfin Mortgage underwrites mortgage loans according to investor guidelines and, after originating each loan, Redfin Mortgage sells theloans to those investors. Redfin Mortgage does not intend to retain or service mortgage loans. Redfin Mortgage has officially launched in 54 marketsacross Colorado, District of Columbia, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, North Carolina, Ohio,Pennsylvania, South Carolina, Tennessee, Texas, Virginia, and Wisconsin.We offer title and settlement services through Title Forward. Title Forward has officially launched in 28 markets across Colorado, District ofColumbia, Florida, Georgia, Illinois, Maryland, Minnesota, New Jersey, Pennsylvania, Tennessee, Texas, Virginia, and Wisconsin.We buy homes directly from homeowners and resell them to homebuyers through RedfinNow. Customers who sell through RedfinNowtypically get less money for their home than they would listing their home with a real estate agent. However, they get that money faster with lessrisk and disruption. RedfinNow has officially launched in 13 markets across California, Colorado, Nevada, and Texas.CompetitionThe residential brokerage industry is highly fragmented, with numerous active licensed agents and brokerages, and is evolving rapidly inresponse to technological advancements, changing customer preferences, and new offerings. We compete primarily against other residential realestate brokerages, which include franchise operations affiliated with national or local brands, and small independent brokerages. We also competewith hybrid residential brokerages, which combine Internet technology and brokerage services, and a growing number of others that operate withnon-traditional real estate business models. Competition is particularly intense in some of the densely populated metropolitan markets we serve, asthey are dominated by entrenched real estate brokerages and are the primary markets for innovative and well-capitalized new entrants.We believe we compete primarily based on:•access to timely, accurate data about homes for sale;•traffic to our website and mobile application, which themselves are subject to competition against real estate data websites that aggregatelistings and sell advertising to traditional brokers;•the speed and quality of our service, including agent responsiveness and local knowledge;•our ability to hire and retain agents who deliver the best customer service;•the costs of delivering our service and the price of our service to consumers;•consumer awareness of our service and the effectiveness of our marketing efforts;•technological innovation; and•depth and breadth of local referral networks.For mortgage origination, we compete with numerous national and local multi-product banks as well as focused mortgage originators. Wecompete with other providers based primarily on service, product selection, interest rates, and origination fees.For title and settlement services, we compete with numerous national and local companies that typically focus solely on these services. Wecompete primarily on timeliness of service and fees.2Table of ContentsOur RedfinNow service competes with real estate companies whose primary service is buying and selling homes, and home rentalcompanies that purchase homes and then rent them. We also compete with divisions of several residential real estate companies and a real estatedata website. We compete primarily on the prices we offer customers to buy their homes.Seasonality and Principal MarketsFor the impact of seasonality on our business, see "Quarterly Results of Operations and Key Business Metrics" under Item 7. For theprincipal markets for our brokerage business, see "Key Business Metrics-Revenue from Top-10 Markets as a Percentage of Real Estate ServicesRevenue" under Item 7.Information about our Executive OfficersBelow is information regarding our executive officers. Each executive officer holds office until his or her successor is duly elected andqualified or until the officer’s earlier resignation, disqualification, or removal.•Glenn Kelman, age 49, has served as our President and Chief Executive Officer since September 2005 and one of our directors sinceMarch 2006.•Bridget Frey, age 42, has served as our Chief Technology Officer since February 2015.•Scott Nagel, age 54, has served as our President of Real Estate Operations since April 2013.•Chris Nielsen, age 53, has served as our Chief Financial Officer since June 2013.•Christian Taubman, age 41, has served as our Chief Product Officer since October 2019. Previously, Mr. Taubman served in severaldifferent roles with Amazon (a technology company) from April 2011 to October 2019. As Director - Smart Home Verticals from December2017 to October 2019, Mr. Taubman led employees in product management, software engineering, and program management, with themission of helping customers to connect more smart devices to Amazon's Alexa virtual assistant. As Senior Manager - International RetailExpansion from May 2016 to December 2017, Mr. Taubman led an initiative to create a faster retail international expansion model. AsSenior Manager - Prime Delivery from April 2011 to May 2016, Mr. Taubman helped launch Amazon's Prime free same-day delivery benefitin the United States, United Kingdom, and Germany.•Adam Wiener, age 41, has served as our Chief Growth Officer since May 2015. Previously, Mr. Wiener served as our Senior Vice President- Marketing, Analytics & New Business from December 2013 to May 2015.Other InformationWe were incorporated as Appliance Computing Inc. in Washington in October 2002. We reincorporated in Delaware in February 2005 andchanged our name to Redfin Corporation in May 2006.We regard our trademarks, copyrights, patents, domain names, trade secrets, and similar intellectual property as critical to our success, andwe rely on trademark, copyright, and patent law, trade-secret protection, and contractual provisions and restrictions to protect our proprietary rights.Our patents expire between June 2025 and February 2034.As of December 31, 2019, we had 3,377 employees.Our website is www.redfin.com. Through this website, we make available, free of charge, our Annual Reports on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of theSecurities3Table of ContentsExchange Act of 1934, as soon as reasonably practicable after we file such material with, or furnish it to, the U.S. Securities and ExchangeCommission (the "SEC").4Table of ContentsItem 1A. Risk FactorsYou should carefully consider the risks described below, together with all other information in this Annual Report, before investing in any ofour 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 notlimited to, not growing our revenue or market share at the pace that they have grown historically or at all, our revenue and market share fluctuatingon 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.Risks Related to Our Business and IndustryThe health of the U.S. residential real estate industry and macroeconomic factors may significantly impact our business.Our success depends largely on the health of the U.S. residential real estate industry. This industry, in turn, is affected by changes ingeneral economic conditions, which are beyond our control. Any of the following factors could adversely affect the industry and harm our business:•seasonal or cyclical downturns in the U.S. residential real estate industry, which may be due to any single factor, or a combination offactors, listed below, or factors which are currently not known to us or that have not historically affected the industry;•slow economic growth or recessionary conditions;•increased unemployment rates or stagnant or declining wages;•inflationary conditions;•low consumer confidence in the economy or the U.S. residential real estate industry;•adverse changes in local or regional economic conditions in the markets that we serve, particularly our top-10 markets and markets intowhich we are attempting to expand;•increased mortgage rates; reduced availability of mortgage financing; or increased down payment requirements;•low home inventory levels, which may result from zoning regulations and higher construction costs, among other factors;•lack of affordably priced homes, which may result from home prices growing faster than wages;•volatility and general declines in the stock market or lower yields on individuals' investment portfolios;•rising insurance costs that increase the expenses associated with home ownership;•newly enacted and potential federal, state, and local legislative actions that would affect the residential real estate industry generally or inour top-10 markets, including (i) actions that would increase the tax liability arising from buying, selling, or owning real estate, (ii) actionsthat would change the way real estate brokerage commissions are negotiated, calculated, or paid, and (iii) potential reform relating toFannie Mae, Freddie Mac, and other government sponsored entities that provide liquidity to the mortgage market;•changes that cause U.S. real estate to be more expensive for foreign purchases, such as (i) increases in the exchange rate for the U.S.dollar compared to foreign currencies and (ii) foreign5Table of Contentsregulatory changes or capital controls that make it more difficult for foreign purchasers to withdraw capital from their home countries orpurchase and hold U.S. real estate;•changed generational views on homeownership and generally decreased financial resources available for purchasing homes; and•war, terrorism, political uncertainty, natural disasters, inclement weather, and acts of God.Our business is concentrated in certain geographic markets. Disruptions in these markets or events that disproportionately affect thesemarkets could harm our business. Furthermore, our failure to adapt to any substantial shift in the relative percentage of residentialhousing transactions from these markets to other markets in the United States could adversely affect our financial performance.For the year ended December 31, 2019, our top-10 markets by real estate services revenue consisted of the metropolitan areas of Boston,Chicago, Denver (including Boulder and Colorado Springs), Los Angeles (including Santa Barbara), Maryland, Northern Virginia, Portland (includingBend), San Diego, San Francisco, and Seattle.Local and regional economic conditions in these markets may differ significantly from prevailing conditions in the United States or otherparts of the country. Accordingly, events may adversely and disproportionately affect demand for and sales prices of homes in these markets. Anyoverall or disproportionate downturn in demand or home prices in any of our largest markets, particularly if we are unable to increase revenue fromour other markets, could result in a decline in our revenue and harm our business.Our top markets are primarily major metropolitan areas, where home prices and transaction volumes are generally higher than othermarkets. As a result, our real estate services revenue and gross margin are generally higher in these markets than in our smaller markets. To theextent people migrate to cities outside of these markets due to lower home prices or other factors, and this migration continues to take place overthe long-term, then the relative percentage of residential housing transactions may shift away from our historical top markets where we havehistorically generated most of our revenue. If we are unable to effectively adapt to any shift, including failing to increase revenue from other markets,then our financial performance may be harmed.Competition in each of our lines of business is intense, and if we cannot compete effectively, our business will be harmed.We face intense competition nationally and in each of the markets we serve for each of our businesses - residential brokerage, mortgage,title and escrow, and buying and selling homes directly. See "Competition" under Item 1 for a general discussion of the competitive conditions ineach of our businesses.Many of our competitors across each of our businesses have substantial competitive advantages, such as longer operating histories,stronger brand recognition, greater financial resources, more management, sales, marketing and other resources, superior local referral networks,perceived local knowledge and expertise, and extensive relationships with participants in the residential real estate industry, including third-partydata providers such as multiple listing services ("MLSs"). Consequently, these competitors may have an advantage in recruiting and retainingagents, attracting consumers, and growing their businesses. They may also be able to provide consumers with offerings that are different from orsuperior to those we provide. The success of our competitors could result in our loss of market share and harm our business.Each of our businesses also faces competition from potential new entrants, particularly those driven by technology. These potentialcompetitors may have substantial financial support that allows them to offer services superior to ours. The introduction of additional competitors mayalso adversely impact our market share and harm our business.6Table of ContentsWe may be unable to maintain or improve our current technology offerings at a competitive level or develop new technology offeringsthat meet customer or agent expectations. Our technology offerings may also contain undetected errors or vulnerabilities.Our technology offerings, including tools, features, and products, are key to our competitive plan for attracting potential customers andhiring and retaining lead agents. Maintaining or improving our current technology to meet evolving industry standards and customer and agentexpectations, as well as developing commercially successful and innovative new technology, is challenging and expensive. For example, the natureof development cycles may result in delays between the time we incur expenses and the time we introduce new technology and generate revenue, ifany, from those investments. Anticipated customer demand for a technology offering could also decrease after the development cycle hascommenced, and we would not be able to recoup costs, which may be substantial, we incurred.As standards and expectations evolve and new technology becomes available, we may be unable to identify, design, develop, andimplement, in a timely and cost-effective manner, new technology offerings to meet those standards and expectations. As a result, we may beunable to compete effectively, and to the extent our competitors develop new technology offerings faster than us, they may render our offeringsnoncompetitive or obsolete. Additionally, even if we implemented new technology offerings in a timely manner, our customers and agents may notaccept or be satisfied by the offerings.Furthermore, our development and testing processes may not detect errors and vulnerabilities in our technology offerings prior to theirimplementation. Any inefficiencies, errors, technical problems, or vulnerabilities arising in our technology offerings after their release could reducethe quality of our services or interfere with our customers' and agents' access to and use of our technology and offerings.We may be unable to obtain and provide comprehensive and accurate real estate listings quickly, or at all.We believe that users of our website and mobile application come to us primarily because of the real estate listing data that we provide.Accordingly, if we were unable to obtain and provide comprehensive and accurate real estate listings data, our primary channels for meetingcustomers will be diminished. We get listings data primarily from MLSs in the markets we serve. We also source listings data from public records,other third-party listing providers, and individual homeowners and brokers. Many of our competitors and other real estate websites also have accessto MLSs and other listings data, including proprietary data, and may be able to source listings data or other real estate information faster or moreefficiently than we can. Since MLS participation is voluntary, brokers and homeowners may decline to post their listings data to their local MLS ormay seek to change or limit the way that data is distributed. A competitor or another industry participant could also create an alternative listings dataservice, which may reduce the relevancy and comprehensive nature of the MLSs. If MLSs cease to be the predominant source of listings data in themarkets that we serve, we may be unable to get access to comprehensive listings data on commercially reasonable terms, or at all, which mayresult in fewer people using our website and mobile application.We rely on business data to make decisions and drive our machine-learning technology, and errors or inaccuracies in such data mayadversely affect our business decisions and the customer experience.We regularly analyze business data to evaluate growth trends, measure our performance, establish budgets, and make strategic decisions.Much of this data is internally generated and has not been independently verified. While our business decisions are based on what we believe to bereasonable calculations for the applicable period of measurement, there are inherent challenges in measuring and interpreting the data, and wecannot be certain that the data are accurate. Errors or inaccuracies in the data could result in poor business decisions, resource allocation, orstrategic initiatives. For example, if we overestimate traffic to our website and mobile application, we may not invest an adequate amount ofresources in attracting new customers or we may hire more lead agents in a given market than necessary to meet customer demand.7Table of ContentsWe also use our business data and proprietary algorithms to inform our machine learning, such as in the calculation of our Redfin Estimate,which provides an estimate on the market value of individual homes. If customers disagree with us or if our Redfin Estimate fails to accuratelyreflect market pricing such that we are unable to attract homebuyers or help our customers sell their homes at satisfactory prices, or at all,customers may lose confidence in us.We may be unable to attract homebuyers and home sellers to our website and mobile application in a cost-effective manner.Our website and mobile application are our primary channels for meeting customers. Accordingly, our success depends on our ability toattract homebuyers and home sellers to our website and mobile application in a cost-effective manner. To meet customers, we rely heavily on trafficgenerated from search engines and downloads of our mobile application from mobile application stores. We also rely on marketing methods suchas targeted email campaigns, paid search advertising, social media marketing, and traditional media, including TV, radio, and billboards.The number of visitors to our website and downloads of our mobile application depend in large part on how and where our website andmobile application rank in Internet search results and mobile application stores, respectively. While we use search engine optimization to help ourwebsite rank highly in search results, maintaining or improving our search result rankings is not within our control. Internet search enginesfrequently update and change their ranking algorithms, referral methodologies, or design layouts, which determine the placement and display of auser’s search results. In some instances, Internet search engines may change these rankings in order to promote their own competing services orthe services of one or more of our competitors. Similarly, mobile application stores can change how they display searches and how mobileapplications are featured. For instance, editors at the Apple iTunes Store can feature prominently editor-curated mobile applications and cause themobile application to appear larger than other applications or more visibly on a featured list.Additionally, our marketing efforts may fail to attract the desired number of customers for a variety of reasons, including the creativetreatment for our advertisements may be ineffective or new third-party email delivery policies that make it more difficult for us to execute targetedemail campaigns.If we are unable to deliver a rewarding experience on mobile devices, whether through our mobile website or mobile application, we maybe unable to attract and retain customers.Developing and supporting a mobile website and mobile application across multiple operating systems and devices requires substantialtime and resources. We may not be able to consistently provide a rewarding customer experience on mobile devices and, as a result, customers wemeet through our mobile website or mobile application may not choose to use our services at the same rate as customers we meet through ourwebsite.As new mobile devices and mobile operating systems are released, we may encounter problems in developing or supporting our mobilewebsite or mobile application for them. Developing or supporting our mobile website or mobile application for new devices and their operatingsystems may require substantial time and resources. The success of our mobile website and mobile application could also be harmed by factorsoutside of our control, such as:•increased costs to develop, distribute, or maintain our mobile website or mobile application;•changes to the terms of service or requirements of a mobile application store that requires us to change our mobile application developmentor features in an adverse manner; and•changes in mobile operating systems, such as Apple’s iOS and Google’s Android, that disproportionately affect us, degrade the functionalityof our mobile website or mobile application, require that we make costly upgrades to our technology offerings, or give preferential treatmentto competitors' websites or mobile applications.8Table of ContentsOur business model of employing lead agents subjects us to challenges not faced by our competitors.As a result of our business model of employing our lead agents, our lead agents generally earn less on a per transaction basis thantraditional agents who work as independent contractors at traditional brokerages. Because our model is uncommon in our industry, agentsconsidering working for us may not understand our compensation model or may not perceive it to be more attractive than the independentcontractor, commission-driven compensation model used by most traditional brokerages. If we are unable to attract, retain, effectively train,motivate, and utilize lead agents, we will be unable to grow our business and we may be required to change our compensation model, which couldsignificantly increase our lead agent compensation or other costs.Also as a result of employing our lead agents, we incur costs that our brokerage competitors do not, such as base pay, employee benefits,expense reimbursement, training, and employee transactional support staff. As a result, we have significant costs that, in the event of downturns indemand in the markets we serve, we will not be able to adjust as rapidly as some of our competitors. In turn, such downturns may impact us morethan our competitors. Additionally, due to these costs, our lead agent turnover may be more costly to us than to traditional brokerages. Our businessmay be harmed if we are unable to achieve the necessary level of lead agent productivity and retention to offset their related costs.Referring customers to our partner agents and our third-party partnerships may harm our business.We refer customers to third-party partner agents when we do not have a lead agent available due to high demand or geographic limitations.Our dependence on partner agents can be particularly heavy in certain new markets as we build our operations to scale in those markets. Ourpartner agents are independent licensed agents affiliated with other brokerages, and we do not have any control over their actions. If our partneragents were to provide poor customer service, engage in malfeasance, or otherwise violate the laws and rules to which we are subject, we may besubject to legal claims and our reputation and business may be harmed.In certain markets where RedfinNow does not currently operate, we have a partnership with Opendoor whereby home sellers can request,through Redfin's website and mobile applications, an instant offer from Opendoor to purchase their home. Home sellers will have this ability torequest an Opendoor offer in addition, and as an alternative, to retaining a Redfin agent to represent them during the home selling process.From time to time, we may enter into additional arrangements to refer consumers to, or partner with, third parties when we are unable orunwilling to serve those consumers directly.Our arrangements with third parties may limit our market share, revenue, growth, and brand awareness. For example, referring customersto third parties potentially redirects repeat and referral opportunities to those third parties. Furthermore, to the extent we enter into a new, or seek toexpand operations in an existing, market where we have an arrangement with a third party, consumers may choose to continue to work with thosethird parties, which limits our growth. Additionally, any third-party arrangements may also dilute the effectiveness of our marketing efforts and maylead to consumer confusion or dissatisfaction when they are offered the opportunity to work with the third party rather than us.If we do not comply with the rules, terms of service, and policies of MLSs, our access to and use of listings data may be restricted orterminated.We must comply with an MLS’s rules, terms of service, and policies to access and use its listings data. We belong to numerous MLSs, andeach has adopted its own rules, terms of service, and policies governing, among other things, how MLS data may be used and how listings datamust be displayed on our website and mobile application. These rules typically do not contemplate multi-jurisdictional online brokerages like oursand vary widely among markets. They also are in some cases inconsistent with the rules of other MLSs such that we are required to customize ourwebsite, mobile application, or service to accommodate differences between MLS rules. Complying with the rules of each MLS requires significant9Table of Contentsinvestment, including personnel, technology and development resources, and the exercise of considerable judgment. If we are deemed to benoncompliant with an MLS’s rules, we may face disciplinary sanctions in that MLS, which could include monetary fines, restricting or terminating ouraccess to that MLS’s data, or other disciplinary measures. The loss or degradation of this listings data could materially and adversely affect traffic toour website and mobile application, making us less relevant to consumers and restricting our ability to attract customers. It also could reduce agentand customer confidence in our services and harm our business.If we fail to comply with the requirements governing the licensing of our brokerage, mortgage, and title businesses in the jurisdictions inwhich we operate, then our ability to operate those businesses in those jurisdictions may be revoked.Redfin, as a brokerage, and our agents must comply with the requirements governing the licensing and conduct of real estate brokerageand brokerage-related businesses in the markets where we operate. Furthermore, we are also required to comply with the requirements governingthe licensing and conduct of mortgage and title and settlement businesses in the markets where we operate. Due to the geographic scope of ouroperations, we and our agents may not be in compliance with all of the required licenses at all times. Additionally, if we enter into new markets, wemay become subject to additional licensing requirements. If we or our agents fail to obtain or maintain the required licenses for conducting ourbrokerage, mortgage, and title businesses or fail to strictly adhere to associated regulations, the relevant government authorities may order us tosuspend relevant operations or impose fines or other penalties.Our recently implemented pricing change may result in loss of customers and unintended financial consequences.Prior to December 2019, we charged home sellers in most of our markets a 1% listing fee when using our brokerage services to sell theirhome. For our other markets, we charged home sellers a 1.5% listing fee. The listing fee paid by a home seller was not dependent on whether thehome seller also purchased a home using our brokerage services. Starting in December 2019, we changed our listing fee across all of our marketssuch that home sellers pay a 1% listing fee only if they both buy and sell a home with us within a year. Otherwise, a home seller will pay a 1.5%listing fee.This pricing change may result in fewer home sellers using our brokerage services to list their home. As a result, our market share maydecrease or grow at a slower rate or our real estate services revenue may grow at a slower rate.RedfinNow may overestimate the amount it should pay to purchase a home, and homes owned by it may significantly decline in valueprior to being sold.RedfinNow uses automated valuations and forecasts in concert with our real estate knowledge to assess what a home is worth and howmuch to pay for its purchase. This assessment includes estimates on time of possession, market conditions and proceeds on resale, renovationcosts, and holding costs. The assessment may not be accurate, and RedfinNow may pay too much for the home to realize our desired investmentreturn. Additionally, following its acquisition of a home, RedfinNow may need to decrease its anticipated resale price for the home if it discovers adefect in the home that was unknown at the time of acquisition. This adjustment to the price may also affect our investment return on the home.Homes that RedfinNow owns may also rapidly lose in value due to changing market conditions, natural disasters, or other forces outside ofour control. RedfinNow's geographic concentration in four states - California, Colorado, Nevada, and Texas - particularly exposes it to the factorsaffecting home value in those states that may not apply to the United States generally. As a result, we may be required to write down the inventoryvalue of homes and may not be able to resell homes for more than our costs of acquiring and renovating the homes, or at all.RedfinNow relies, in part, on third parties to renovate and repair homes before it resells the homes, and the cost or availability of third-party labor could adversely affect our holding period and investment return for homes.10Table of ContentsUpon purchasing a home, RedfinNow frequently needs to renovate or repair parts of the home prior to listing it for resale. RedfinNow relies,in part, on third-party contractors and sub-contractors to make these renovations and repairs. These third-party providers may not be able tocomplete the required renovations or repairs within RedfinNow's expected timeline or proposed budget. Furthermore, if the quality of a third-partyprovider's work does not meet RedfinNow's expectations, then RedfinNow may need to engage another third-party contractor or subcontractor,which may also adversely affect its timeline or budget for completing renovations or repairs.A longer than expected period for completing renovations or repairs could negatively impact RedfinNow's ability to sell a home within itsanticipated timeline. This prolonged timing exposes us to factors that adversely affect the home's resale value and may result in RedfinNow sellingthe home for a lower price than anticipated or not being able to sell the home at all. Meanwhile, incurring more than budgeted costs would adverselyaffect our investment return on purchased homes.If Redfin Mortgage were unable to sell the mortgage loans that it originates, then it will need to service the loans itself or hire a third-partyservicer, and either option could impose significant costs, time, and resources on Redfin Mortgage. Additionally, we may become moreexposed to adverse market conditions affecting mortgage loans.Redfin Mortgage intends to sell the mortgage loans that it originates to investors in the secondary mortgage market. Redfin Mortgage'sability to sell its originated loans in the secondary market depends largely on there being sufficient liquidity in the secondary market and itscompliance with contracts with investors who have agreed to purchase the loans. If Redfin Mortgage were unable to sell its originated loans, then itmay need to establish a servicing platform or hire a third party to service the loans. Redfin Mortgage does not currently have a servicing platform,and establishing such a platform may result in significant costs and require substantial time and resources from its management. Additionally,Redfin Mortgage may be unable to retain a third-party servicer on economically feasible terms. As a result, Redfin Mortgage's inability to sell itsoriginated loans may materially and adversely affect its operations and financial condition.Redfin Mortgage's inability to sell loans in the secondary market also exposes us to adverse market conditions affecting mortgage loans.For example, we may be required to write down the value of the loan, which reduces the amount of our current assets. Additionally, if a homeownerwere unable to make his or her mortgage payments, then we may be required to foreclose on the home securing the loan. In these situations, theproceeds from selling the home may be significantly less than the remaining amount of the loan due to Redfin Mortgage. Finally, if Redfin Mortgageborrowed under one of its warehouse credit facilities for the loan, then it may be required to immediately repay the borrowed amount, which reducesour cash on hand that is available for other corporate uses.Our decision to expand our service offerings into new markets may consume significant financial and other resources and may notachieve the desired results.We regularly evaluate expanding our brokerage and non-brokerage services into new markets. Any expansion may require significantexpenses and the time of our key personnel, particularly at the outset of the expansion process. Expansion may also subject us to new regulatoryenvironments, which could increase our costs as we evaluate compliance with the new regulatory regime. Notwithstanding the expenses and timedevoted to expansion into a new market, we may fail to achieve the financial and market share goals associated with the expansion.We experience variability in our financial results and operating metrics on a quarterly and annual basis and, as a result, our historicalperformance may not be a meaningful indicator of future performance.We historically have experienced, and expect to continue to experience, variability, on both a quarterly and annual basis, in our financialresults and operating metrics. As a result of such variability, our historical performance, including from recent quarters or years, may not be ameaningful indicator of future11Table of Contentsperformance and period-to-period comparisons also may not be meaningful. The variability may be due to the other risks described in this Item 1A,certain risks that are not currently material but may become material in the future, or risks currently unknown to us.Cybersecurity incidents could disrupt our business or result in the loss of critical and confidential information.Cybersecurity incidents directed at us or our third-party service providers can range from uncoordinated individual attempts to gainunauthorized access to information technology systems to sophisticated and targeted measures known as advanced persistent threats.Cybersecurity incidents are also constantly evolving, increasing the difficulty of detecting and successfully defending against them. In the ordinarycourse of our business, we and our third-party service providers collect and store sensitive data, including our proprietary business information andintellectual property and that of our customers and employees, including personally identifiable information. Additionally, we rely on third-parties andtheir security procedures for the secure storage, processing, maintenance, and transmission of information are critical to our operations. Despitemeasures designed to prevent, detect, address, and mitigate cybersecurity incidents, such incidents may occur to us or our third-party providersand, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption, or unavailability of critical dataand confidential or proprietary information (our own or that of third parties, including personally identifiable information of our customers andemployees) and the disruption of business operations. Any such compromises to our security, or that of our third-party providers, could causecustomers to lose trust and confidence in us and stop using our website and mobile applications. In addition, we may incur significant costs forremediation that may include liability for stolen assets or information, repair of system damage, and compensation to customers, employees, andbusiness partners. We may also be subject to government enforcement proceedings and legal claims by private parties.We process, transmit, and store personal information, and unauthorized access to, or the unintended release of, this information couldresult in a claim for damages, regulatory action, loss of business, or unfavorable publicity.We process, transmit, and store personal information to provide services to our customers and as an employer. As a result, we are subjectto certain contractual terms, as well as federal, state, and foreign laws and regulations designed to protect personal information. While we takemeasures to protect the security and privacy of this information, it is possible that our security controls over personal data and other practices wefollow may not prevent the unauthorized access to, or the unintended release of, personal information. If such unauthorized access or unintendedrelease occurred, we could suffer significant damage to our brand and reputation, customers could lose confidence in the security and reliability ofour services, and we could incur significant costs to address and fix these security incidents. These incidents could also lead to lawsuits andregulatory investigations and enforcement actions.We rely on third-party licensed technology, and the inability to maintain these licenses or errors in the software we license could result inincreased costs or reduced service levels.We employ certain third-party software obtained under licenses from other companies in our technology. Our reliance on this third-partysoftware may become costly if the licensor increases the price for the license or changes the terms of use and we cannot find commerciallyreasonable alternatives. Even if we were to find an alternative, integration of our technology with new third-party software may require substantialinvestment of our time and resources.Any undetected errors or defects in the third-party software we license could prevent the deployment or impair the functionality of ourtechnology, delay new service offerings, or result in a failure of our website or mobile application.We use open source software in some aspects of our technology and may fail to comply with the terms of one or more of these opensource licenses.12Table of ContentsOur technology incorporates software covered by open source licenses. The terms of various open source licenses have not beeninterpreted by U.S. courts, and if they were interpreted, such licenses could be construed in a manner that imposes unanticipated restrictions on ourtechnology. If portions of our proprietary software are determined to be subject to an open source license, we could be required to publicly releasethe affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in our use of such software, each ofwhich could reduce or eliminate the value of our technologies.Moreover, our processes for controlling our use of open source software may not be effective. If we do not comply with the terms of anopen source software license, we could be required to seek licenses from third parties to continue offering our services on terms that are noteconomically feasible, to re-engineer our technology to remove or replace the open source software, to discontinue the use of certain technology ifre-engineering could not be accomplished on a timely basis, to pay monetary damages, to make generally available the source code for ourproprietary technology, or to waive certain intellectual property rights.We may be unable to secure intellectual property protection for all of our technology and methodologies, enforce our intellectualproperty rights, or protect our other proprietary business information.Our success and ability to compete depends in part on our intellectual property and our other proprietary business information. To protectour proprietary rights, we rely on trademark, copyright, and patent law, trade-secret protection, and contractual provisions and restrictions. However,we may be unable to secure intellectual property protection for all of our technology and methodologies or the steps we take to enforce ourintellectual property rights may be inadequate. Furthermore, we may also be unable to protect our proprietary business information frommisappropriation.If we are unable to secure intellectual property rights, our competitors could use our intellectual property to market offerings similar to oursand we would have no recourse to enjoin or stop their actions. Additionally, any of our intellectual property rights may be challenged by others andinvalidated through administrative processes or litigation. Moreover, even if we secured our intellectual property rights, others may infringe on ourintellectual property and we may be unable to successfully enforce our rights against the infringers because we may be unaware of the infringementor our legal actions may not be successful. Finally, others may misappropriate our proprietary business information, and we may be unaware of themisappropriation or unable to enforce our legal rights in a cost-effective manner. If any of these events were to occur, our ability to competeeffectively would be impaired.The third-party networks and mobile infrastructure that we depend on may fail, and we may be unable to maintain and scale thetechnology underlying our offerings.We depend on the reliable performance of third-party networks and mobile infrastructure to provide our technology offerings to ourcustomers and agents. The proper operation of these networks and infrastructure is beyond our control, and if they fail, we may be unable to deliverour services to our customers or provide the necessary support for our agents.As the number of homebuyers and home sellers, agents, and listings shared on our website and mobile application and the extent andtypes of data grow, our need for additional network capacity and computing power will also grow. Operating our underlying technology systems isexpensive and complex, and we could experience operational failures. If we experience interruptions or failures in these systems for any reason, thesecurity and availability of our services and technologies could be affected.Our website is hosted at a single facility, the failure of which could interrupt our website and mobile application.Our website and mobile application are hosted at a single facility in Seattle, Washington. If this facility experiences outages or downtimesfor any reason, including human error, natural disaster, power loss, telecommunications failure, physical or electronic break-ins, terrorist attack, oract of war, we could13Table of Contentssuffer a significant interruption of our website and mobile application while we implement the disaster recovery procedures we have developed torestore the function of our website and mobile application on a cloud-based hosting service. This service interruption may be extended if wediscover previously unknown errors in our disaster recovery procedures.We are subject to a variety of federal, state and local laws, and our compliance with these laws, or the enforcement of our rights underthese laws, may increase our expenses, require management's resources, or force us to change our business practices.We are currently subject to a variety of, and may in the future become subject to additional, federal, state, and local laws. The laws include,but are not limited to, those relating to real estate, brokerage, title, mortgage, advertising, privacy and consumer protection, labor and employment,and intellectual property. These laws and their related regulations may evolve frequently and may be inconsistent from one jurisdiction to another.Additionally, certain of these laws and regulations were created for traditional real estate brokerages, and it is unclear how they may affect us givenour business model that is unlike traditional brokerages or certain of our services, such as Redfin Direct, that historically have not been offered bytraditional brokerages.These laws can be costly for us to comply with or enforce. Additionally, if we are unable to comply with and become liable for violations ofthese laws, or if courts or regulatory bodies provide unfavorable interpretations of existing regulations, our operations in affected markets maybecome prohibitively expensive, consume significant amounts of management's time, or need to be discontinued.Data protection legislation is also becoming increasingly common in the United States at both the federal and state level. For example, theCalifornia Consumer Privacy Act (the "CCPA"), took effect on January 1, 2020 and has the potential to impose additional onerous privacyrequirements on companies serving California consumers, including us. We will need to carefully consider the compliance mandates of theCalifornia law as well as similar state or federal laws or interpretations currently being proposed. Additionally, the Federal Trade Commission andmany state attorneys general are interpreting federal and state consumer protection laws to impose standards for the online collection, use,dissemination and security of data. The burdens imposed by the CCPA and other similar laws that may be enacted at the federal and state levelmay require us to modify our data processing practices and policies and to incur substantial expenditure to comply.We are subject to costs associated with defending and resolving proceedings brought by government entities and claims brought byprivate parties.We are from time to time involved in, and may in the future be subject to, government investigations or enforcement actions and privatethird-party claims arising from the laws to which we are subject or the contracts to which we are a party. Such investigations, actions, and claimsinclude, but are not limited to, matters relating to employment law (including misclassification), intellectual property, privacy and consumerprotection, the Real Estate Settlement Procedures Act of 1974, the Fair Housing Act of 1968 or other fair housing statutes, cybersecurity incidents,data breaches, and commercial or contractual disputes. They may also relate to ordinary-course brokerage disputes, including, but not limited to,failure to disclose property defects, failure to meet client legal obligations, commission disputes, personal injury or property damage claims, andvicarious liability based upon conduct of individuals or entities outside of our control, including partner agents and third-party contractor agents.Any such investigations, actions, or claims can be costly to defend or resolve, require significant time from management, or result innegative publicity. Furthermore, to the extent we are unsuccessful in defending an action or claim, we may be subject to civil or criminal penalties,including significant fines or damages, the loss of ability to operate in a jurisdiction, or the need to change certain business practices (includingredesigning, or obtaining a license for, our technology or modifying or ceasing to offer certain services).As described in Item 3, we are currently the subject of a claim alleging that we had misclassified our associate agents as independentcontractors instead of employees. While we have previously settled14Table of Contentssimilar complaints, there is no assurance that we will be able to settle this claim on similar terms or at all. Accordingly, this complaint may be costlyto resolve, require significant time from management, result in negative publicity, or require us to change certain business practices related to ourassociate agents. Furthermore, we may be subject to additional lawsuits or administrative proceedings for similar claims, which may have similarnegative effects on us.We have also, in the past, been the subject of complaints alleging that we had improperly classified certain of our employees as exemptfrom minimum wage and overtime laws. The legal tests for determining overtime exemptions consider many factors that vary from state to state andhave evolved based on case law, regulations, and legislative changes, as well as complicated factual analysis. We may be subject to additionalcomplaints or administrative proceedings regarding our employee classification.We may fail to maintain an effective system of disclosure controls or internal control over financial reporting as we grow our business.We have established, and intend to maintain, effective disclosure controls and internal control over financial reporting. However, as ourcurrent lines of business grow or if we enter into new lines business, we may need to develop new, or revise existing, controls. Any failure to developnew, or revise existing, controls could result in our failure to maintain effective disclosure controls or internal control over financial reporting. Anysuch failure could cause us to not meet our financial reporting obligations, require us to restate previously issued financial statements, or causeinvestors to lose confidence in our reported financial statements, even after we remedy the failure.Some of our potential losses may not be covered by insurance. We may not be able to obtain or maintain adequate insurance coverage.We maintain insurance to cover costs and losses from certain risk exposures in the ordinary course of our operations, but our insurancemay not cover one hundred percent of the costs and losses from all events. We are responsible for certain retentions and deductibles that vary bypolicy, and we may suffer losses that exceed our insurance coverage limits by a material amount. We may also incur costs or suffer losses arisingfrom events against which we have no insurance coverage. In addition, large-scale market trends or the occurrence of adverse events in ourbusiness may raise our cost of procuring insurance or limit the amount or type of insurance we are able to secure. We may not be able to maintainour current coverage, or obtain new coverage, in the future on commercially reasonable terms or at all. Incurring uninsured or underinsured costs orlosses could harm our business.Risks Related to Our IndebtednessWe may not have sufficient cash flow to make the payments required by our convertible senior notes, and a failure to make paymentswhen due may result in the entire principal amount of the notes becoming due prior to the notes' maturity, which may result in ourbankruptcy.We are required to pay interest on our convertible senior notes on a semi-annual basis. In addition, holders of our convertible senior noteshave the right to require us to repurchase their notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of theprincipal amount of the notes to be repurchased, plus accrued and unpaid interest. Furthermore, if the conditional conversion feature of ourconvertible senior notes is triggered, holders of our notes will be entitled to convert the notes at any time during specified periods at their option.Upon conversion, we will be required to make cash payments in respect of the notes being converted, unless we elect to deliver solely shares of ourcommon stock to settle such conversion (other than paying cash in lieu of delivering any fractional share).Our ability to make these payments depends on having sufficient cash on hand when the payments are due. Our cash availability, in turn,depends on our future performance, which is subject to the other risks described in this Item 1A. If we are unable to generate sufficient cash flow tomake the payments when due, then we may be required to adopt one or more alternatives, such as selling assets, refinancing the notes, or raisingadditional capital. However, we may not be able to engage in any of these activities or engage in these activities on desirable terms.15Table of ContentsOur failure to make payments when due may result in an event of default under the indenture governing our convertible senior notes andcause the entire $143,750,000 principal amount, plus accrued and unpaid interest, to become due immediately and prior to the maturity date. Anysuch acceleration of the principal amount could result in our bankruptcy. In a bankruptcy, the holders of our convertible senior notes would have aclaim to our assets that is senior to the claims of holders of our common stock.Our net working capital may be materially reduced if the conditional conversion feature of our convertible senior notes is triggered.Additionally, any conversion of our notes may dilute the ownership interest of our stockholders and depress the price of our commonstock.Prior to the close of business on the business day preceding April 15, 2023, our convertible senior notes have a convertible conversionfeature that allows holders of the notes to convert all or a portion of their notes during the times and upon any of the conditions described below:•during any calendar quarter commencing after the calendar quarter ending on December 31, 2018 (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 30consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than orequal to 130% of the conversion price of the notes 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 ofour notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our commonstock and the conversion rate of our notes on each such trading day;•if we call any or all of our notes for redemption, at any time prior to the close of business on the scheduled trading day prior to theredemption date; or•upon the occurrence of specified corporate events.Between April 15, 2023 and the close of business on the second scheduled trading day preceding July 15, 2023, holders may convert all or aportion of their notes without such conditions.In the event the conditional conversion feature of our convertible senior notes is triggered, then we could be required under accounting rulesto reclassify all or a portion of the outstanding principal of the notes as a current, rather than long-term, liability, even if holders do not elect toconvert their notes. Any such reclassification would result in a material reduction of our net working capital.Upon any conversion of our convertible senior notes, we have the option to pay or deliver, as the case may be, cash, shares of our commonstock, or a combination of cash and shares of our common stock. If we elect to settle our conversion obligation in shares of our common stock or acombination of cash and shares of our common stock, then the conversion of some or all of our convertible senior notes may dilute the ownershipinterests of our stockholders and adversely affect the trading price of our common stock. In addition, the existence of the notes may encourage shortselling by market participants because the conversion of the notes could be used to satisfy short positions.RedfinNow relies on a secured revolving credit facility to finance its purchase of certain homes. RedfinNow intends to rely on proceedsfrom the sale of financed homes to repay amounts owed under such facility, but in certain instances, such proceeds may be insufficientor unavailable to repay the amounts owed.Pursuant to a secured revolving credit facility with Goldman Sachs Bank USA ("Goldman Sachs"), RedfinNow Borrower, which is a whollyowned subsidiary of Redfin Corporation, may borrow money to partially fund purchases of homes for our properties business. RedfinNow Borrowerhas the option of repaying amounts owed with respect to a particular financed home upon the sale of such home and using16Table of Contentsthe proceeds from such sale. However, there is no assurance the sale proceeds will equal or exceed the amounts owed.Additionally, in certain instances, RedfinNow Borrower may be required to repay amounts owed with respect to a financed home prior to thesale of that home. For example, the amount that RedfinNow Borrower is eligible to borrow for a home, which we refer to as the advance rate,depends, in part, on how long it has owned that home. As RedfinNow Borrower owns a home past certain time periods, the advance rate decreasesand it becomes obligated to repay all or a portion of the borrowed funds. Additionally, a home must satisfy certain criteria to be eligible for financingunder the facility. If a financed home ceases to satisfy the criteria, then RedfinNow Borrower must immediately repay all amounts owed with respectto the home. If either of these scenarios occur, then RedfinNow Borrower will be unable to rely on the proceeds from the sale of the home forrepayment.In the situations described above, RedfinNow Borrower must use its cash on hand to repay the amounts owed. To the extent it does nothave sufficient cash and is unable to make the required repayments, then RedfinNow Borrower may default under the facility.Our inability to comply with the terms of RedfinNow's secured revolving credit facility may adversely affect our properties business and,in some instances, give the lenders recourse to Redfin Corporation when the value of the assets securing the facility are insufficient tocover the amounts owed to the lenders.Borrowings under our secured revolving credit facility are secured by RedfinNow Borrower's assets, including the financed homes, as wellas the equity interests in RedfinNow Borrower. To the extent RedfinNow Borrower is unable to make payments when due under the facility, or it orcertain other Redfin entities are unable to comply with the facility's ongoing representations and warranties or covenants (including financialcovenants of Redfin Corporation), then an event of default may occur. An event of default would require RedfinNow Borrower to immediately repayall amounts owned under the facility and cause RedfinNow Borrower to be unable to borrow from the facility. As a result, our properties business willneed to rely solely on our available cash to fund home purchases, and to the extent cash is unavailable, our properties business would be unable topurchase the homes required for its growth. Furthermore, an event of default may result in Goldman Sachs owning RedfinNow Borrower's equityinterests or its assets, including any financed homes and cash held by RedfinNow Borrower, and result in our properties business losing a portion ofits assets.While the lenders' recourse in most situations following an event of default is only to RedfinNow Borrower or its assets, Redfin Corporationhas guaranteed amounts owed under the facility and certain expenses in situations involving "bad acts" by a Redfin entity. To the extent a Redfinentity commits a "bad act," then Redfin Corporation may become obligated to pay such amounts owed or certain expenses.If Redfin Mortgage is unable to obtain sufficient financing through warehouse credit facilities to fund its origination of mortgage loans,then we may be unable to grow our mortgage origination business.Redfin Mortgage relies on borrowings from its warehouse credit facilities to fund substantially all of the mortgage loans that it originates.See Note 14 to our consolidated financial statements for the current terms of Redfin Mortgage's warehouse credit facilities. To grow its business,Redfin Mortgage depends, in part, on having sufficient borrowing capacity under its current facilities or obtaining additional borrowing capacityunder new facilities. If it were unable to receive the necessary capacity, or receive such capacity on acceptable terms, and did not have cash onhand available, then Redfin Mortgage may be unable to maintain or increase the amount of mortgage loans that it originates, which will adverselyaffect its growth.Redfin Mortgage has historically been unable to meet certain financial covenants contained in its warehouse credit facilities. While eachlender has historically waived these breaches of the financial covenants, there is no assurance that every lender will continue to do so in the eventof future covenant breaches. If a lender were to enforce its remedies for a future breach, which may include the right to seize pledged mortgageloans and obtain rights and income related to the loans, then Redfin Mortgage may lose17Table of Contentsa portion of its assets and will be unable to rely on the facility to fund its mortgage originations, which may adversely affect Redfin Mortgage'sbusiness.The cross-acceleration and cross-default provisions in the agreements governing our indebtedness may result in an immediateobligation to repay all of our outstanding indebtedness.The indenture governing our convertible senior notes and one of our warehouse credit facilities contain cross-acceleration provisions whileour secured revolving credit facility and two of our warehouse credit facilities contain cross-default provisions. These provisions could have theeffect of creating an event of default under an agreement for our indebtedness, despite our compliance with that agreement, due solely to an eventof default or failure to pay amounts owed under another agreement for our indebtedness. Accordingly, all or a significant portion of our outstandingindebtedness could become immediately payable due solely to our failure to comply with the terms of a single agreement governing ourindebtedness.Certain provisions in the agreements governing our indebtedness may delay or prevent an otherwise beneficial takeover attempt of us.Certain provisions in the agreements governing our indebtedness may make it more difficult or expensive for a third party to acquire us.These provisions may have the effect of delaying or preventing a takeover that would otherwise be beneficial to our stockholders.For example, the indenture for our convertible senior notes will require us to repurchase our convertible senior notes for cash upon theoccurrence of a fundamental change (as defined in the indenture) of us and, in certain circumstances, to increase the conversion rate for a holderthat converts its notes in connection with a make-whole fundamental change. A takeover of us may trigger the requirement that we repurchase ourconvertible senior notes and/or increase the conversion rate, which could make it more costly for a potential acquirer to engage in such takeover.Furthermore, under the loan agreement for our secured revolving credit facility, an event of default occurs upon a change in control (asdefined in the loan agreement), unless Goldman Sachs, as the administrative agent, consents to the change in control. Accordingly, a takeover mayrequire us and the third-party acquiror to obtain Goldman Sachs's consent.If the London Inter-Bank Offered Rate ("LIBOR") is discontinued, interest payments under our secured revolving credit facility and certainwarehouse credit facilities may be calculated using another reference rate.In July 2017, the United Kingdom Financial Conduct Authority ("FCA"), which regulates LIBOR, announced that the FCA intends to phaseout the use of LIBOR by the end of 2021. In response, the U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee,has proposed replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate ("SOFR"), which is a new index calculated by short-termrepurchase agreements and backed by U.S. Treasury securities. The market transition away from LIBOR towards SOFR is expected to becomplicated, and there is no guarantee that SOFR will become a widely accepted benchmark in place of LIBOR. LIBOR is used as a benchmarkrate throughout our secured revolving credit facility and certain of our warehouse credit facilities and some of these agreements do not providefallback language for circumstances in which LIBOR ceases to be published. The transition process may involve, among other things, increasedvolatility and illiquidity in markets for instruments that currently rely on LIBOR and may result in increased borrowing costs, the effectiveness ofrelated transactions such as hedges, uncertainty under our secured revolving credit facility and certain of our warehouse credit facilities, or difficultand costly processes to amend such documentation. There remains uncertainty regarding the future utilization of LIBOR and the nature of anyreplacement rate, and we are uncertain what impact a transition away from LIBOR may have on our business, financial results, and operations.Risks Relating to Ownership of Our Common Stock18Table of ContentsProvisions of Delaware or Washington law and our governing documents could make an acquisition of us, which may be beneficial toour stockholders, more difficult and may prevent attempts by our stockholders.We are governed by Section 203 of the Delaware General Corporation Law (the "DGCL"), which prohibits a person who owns at least 15%of our common stock from engaging in a "business combination" (as defined in the DGCL) with us for a period of three years after the date of thetransaction in which the person reached such ownership threshold, unless the business combination is approved in a prescribed manner andsubject to certain exceptions. Furthermore, Chapter 23B.19 of the Washington Business Corporation Act (the "WBCA") may apply to us if we qualifyas a "target corporation" under the WBCA. To the extent it applies, Chapter 23B.19 would prohibit us from engaging in a "significant businesstransaction" (as defined in the WBCA) with a person who owns at least 10% of our common stock for a period of five years following the date of thetransaction in which the person reached such ownership threshold, unless the significant business transaction is approved in a prescribed mannerand subject to certain exceptions. These provisions of Delaware or Washington law could, under certain circumstances, also depress the marketprice of our common stock.As discussed in the "Anti-Takeover Provisions" section of the Description of Common Stock filed as Exhibit 4.2 to this Annual Report (whichwe incorporate into this Item 1A by reference), certain provisions in our restated certificate of incorporation and restated bylaws may have an effectof delaying, deferring or preventing a change in control of us.Our restated certificate of incorporation designates the Court of Chancery of the State of Delaware and the U.S. federal district courts asthe exclusive forums for certain types of actions that may be initiated by our stockholders. These provisions may limit a stockholder'sability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers, or employees, which maydiscourage lawsuits with respect to such claims.Our restated certificate of incorporation provides that, unless we consent in writing to an alternative forum, the Court of Chancery of theState of Delaware (the "Court of Chancery") will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii)any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or employees to us or our stockholders, (iii) anyaction asserting a claim arising pursuant to any provision of the DGCL, our restated certificate of incorporation, or our restated bylaws, (iv) anyaction to interpret, apply, enforce or determine the validity of our restated certificate of incorporation or our restated bylaws, or (iv) any actionasserting a claim that is governed by the internal affairs doctrine. This exclusive forum provision does not apply to actions arising under theSecurities Exchange Act of 1934, or, as described below, the Securities Act of 1933.Our restated certificate of incorporation further provides that, unless we consent in writing to an alternative forum, the U.S. federal districtcourts will be the exclusive forum for any complaint asserting a cause of action arising under the Securities Act of 1933. However, the Court ofChancery has ruled that exclusive forum provisions for claims under the Securities Act of 1933 are not enforceable as a matter of Delaware law.This ruling is currently on appeal in the Delaware Supreme Court. Accordingly, this exclusive forum provision in our restated certificate ofincorporation is subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such provision. Regardless ofwhether this provision is enforceable, stockholders will not be deemed to have waived our compliance with the federal securities laws and the rulesand regulations thereunder.19Table of ContentsItem 1B. Unresolved Staff CommentsNone.Item 2. PropertiesNone.Item 3. Legal ProceedingsOn August 28, 2019, one of our former independent contractor licensed sales associates, which we call associate agents, filed a complaintagainst us in the Superior Court of California, County of San Francisco. The plaintiff initially pled the complaint as a class action and alleged that wemisclassified her as an independent contractor instead of an employee. The plaintiff also sought representative claims under California’s PrivateAttorney General Act ("PAGA"). On December 6, 2019, we filed a motion to compel arbitration and asserted that the plaintiff had agreed to arbitrateher claims and had waived all class claims. Following that filing, we and the plaintiff stipulated to allow the plaintiff to amend her complaint to dismissthe class action claim and assert only claims under PAGA. On January 14, 2020, pursuant to the parties’ stipulation, the court granted the plaintiffleave to file a first amended complaint, and she filed her first amended complaint on January 30, 2020. Following this stipulation, only the plaintiff'sclaims under PAGA will proceed. The plaintiff continues to seek unspecified penalties for alleged violations of PAGA.Item 4. Mine Safety DisclosuresNone.20Table of ContentsPART IIItem 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket Information, Holders of Record, and DividendsOur common stock is listed on The Nasdaq Global Select Market under the symbol “RDFN.”As of January 31, 2020, we had 151 holders of record of our common stock.We have no intention of paying cash dividends in the foreseeable future.Stock Performance GraphThe graph below compares the cumulative total return of a $100 investment in our common stock with the cumulative total return of thesame investment in the S&P 500 Index and the RDG Composite Index. The period shown commences on July 28, 2017, which was our commonstock's first day of trading after our initial public offering ("IPO"), and ends on December 31, 2019.Unregistered Sales of SecuritiesDuring the period covered by this Annual Report, we did not sell any equity securities that were not registered under the Securities Act of1933.Use of IPO Proceeds On July 27, 2017, the SEC declared effective the Registration Statement on Form S-1 (file number 333-219093) for our IPO. There hasbeen no change to the information provided under "Use of Proceeds" in Part II, Item 2 of our Quarterly Report on Form 10-Q for the quarter endedJune 30, 2017.21Table of ContentsPurchases of Equity SecuritiesDuring the quarter ended December 31, 2019, there were no purchases of our common stock by or on behalf of us or any of our affiliatedpurchasers, as such term is defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934.22Table of ContentsItem 6. Selected Financial DataThe selected financial data set forth below should be read in conjunction with the information contained in Items 7 and 8. As of and for Year Ended December 31, 2019(1)(2) 2018(2) 2017 2016 2015 (in thousands, except per share amounts)Statements of Operations Data Revenue$779,796 $486,920 $370,036 $267,196 $187,338Cost of revenue635,693 367,496 258,216 184,452 138,492Total operating expenses223,349 163,358 127,792 105,528 79,135Loss from operations(79,246) (43,934) (15,972) (22,784) (30,289)Net loss(80,805) (41,978) (15,002) (22,526) (30,236)Accretion of redeemable convertible preferred stock— — (175,915) (55,502) (102,224)Net loss attributable to common stock—basic and diluted(80,805) (41,978) (190,917) (78,028) (132,460)Net loss per share attributable to common stock—basic and diluted(0.88) (0.49) (4.47) (5.42) (9.87)Balance Sheet Data Cash, cash equivalents, and investments$335,686 $432,608 $208,342 $65,779 $87,341Inventory74,590 22,694 3,382 — —Working capital366,411 450,029 204,349 60,445 83,234Total assets596,213 542,821 281,955 133,477 125,054Convertible senior notes, net119,716 113,586 — — —Redeemable convertible preferred stock— — — 655,416 599,914Total stockholders’ equity (deficit)331,446 371,938 235,430 (563,734) (495,713)(1) 2019 amounts reflect our adoption of the new lease accounting standard, which resulted in the recording of right of use assets and corresponding lease liabilities. As of December 31, 2019, total assets increased$52,004 compared to the prior periods, which were not restated and reflect our historical accounting policies. See Note 1 to our consolidated financial statements for additional information.(2) 2019 and 2018 revenue reflect our adoption of a new revenue accounting standard, which we adopted using the modified retrospective method. This change did not have a material impact on our financialresults. We did not restate 2017, 2016, and 2015 revenue for the new standard, and they reflect our historical accounting policies.23Table of ContentsItem 7. Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis of our financial condition and results of operations should be read together with our consolidatedfinancial statements, the accompanying notes, and other information included in this Annual Report. In particular, the risk factors contained in Item1A may reflect trends, demands, commitments, events, or uncertainties that could materially impact our results of operations and liquidity and capitalresources.The following discussion contains forward-looking statements, such as statements regarding our future operating results and financialposition, our business strategy and plans, our market growth and trends, and our objectives for future operations. See "Note Regarding Forward-Looking Statements" for more information about relying on these forward-looking statements. The following discussion also contains informationusing industry publications. 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. OverviewWe help people buy and sell homes. Our primary business is a residential real estate brokerage, representing customers in over 90markets in the United States and Canada. 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 mortgage loans and offer title and settlement services; we alsobuy homes directly from homeowners who want an immediate sale, taking responsibility for selling the home while the original owner moves on.Our mission is to redefine real estate in the consumer’s favor.Key Business MetricsIn 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. Year Ended December 31, 2019 2018 2017Monthly average visitors (in thousands)33,473 27,261 22,623Real estate services transactions Brokerage53,235 42,954 35,038Partner11,939 11,608 10,755Total65,174 54,562 45,793Real estate services revenue per transaction Brokerage$9,326 $9,459 $9,429Partner2,267 2,229 1,971Aggregate8,033 7,921 7,677Aggregate home value of real estate services transactions (in millions)$30,532 $25,812 $21,280U.S. market share by value0.93% 0.81% 0.67%Revenue from top-10 Redfin markets as a percentage of real estate services revenue63% 67% 69%Average number of lead agents1,553 1,390 1,023Monthly Average Visitors24Table of ContentsThe number of, and growth in, visitors to our website and mobile application are important leading indicators of our business activitybecause these channels are the primary ways we meet customers. For a particular period, monthly average visitors refers to the average of thenumber of unique visitors to our website and mobile application for each of the months in that period. Monthly average visitors are 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 monthly visitors, which helps our growth.Given the lengthy process to buy or sell a home, a visitor during one month may not convert to a revenue-generating customer until manymonths later, if at all.When we refer to "monthly average visitors" for a particular period, we are referring to the average number of unique visitors to our websiteand our mobile applications for each of the months in that period, as measured by Google Analytics, a product that provides digital marketingintelligence. 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. GoogleAnalytics considers each unique cookie as a unique visitor. Due to third-party technological limitations, user software settings, or user behavior, it ispossible that Google Analytics may assign a unique cookie to different visits by the same person to our website or mobile application. In suchinstances, Google Analytics would count different visits by the same person as separate visits by unique visitors. Accordingly, reliance on thenumber of unique cookies counted by Google Analytics may overstate the actual number of unique persons who visit our website or our mobileapplications for a given month.Real Estate Services TransactionsWe record a brokerage real estate services transaction when one of our lead agents represented the homebuyer or home seller in thepurchase or sale, respectively, of a home. We record a partner real estate services transaction (i) when one of our partner agents represented thehomebuyer or home seller in the purchase or sale, respectively, of a home or (ii) since the third quarter of 2019 after we commenced a referralpartnership with Opendoor, when a Redfin customer sold his or her home to a third-party institutional buyer following our introduction of thatcustomer to the buyer. We include a single transaction twice when our lead agents or our partner agents serve both the homebuyer and the homeseller of the transaction. Additionally, when one of our lead agents represents RedfinNow in its sale of a home, we include that transaction as abrokerage real estate services transaction.Increasing the number of real estate services transactions is critical to increasing our revenue and, in turn, to achieving profitability. Realestate services transaction volume is influenced by, among other things, the pricing and quality of our services as well as market conditions thataffect home sales, such as local inventory levels and mortgage interest rates. Real estate services transaction volume is also affected by seasonalityand macroeconomic factors.Real Estate Services Revenue per TransactionReal estate services revenue per transaction, together with the number of real estate services transactions, is a factor in evaluatingrevenue 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 weserve, the geographic mix of our transactions, and the transactions we refer to partner agents and any third-party institutional buyer. We calculatereal estate services revenue per transaction by dividing brokerage, partner, or aggregate revenue, as applicable, by the corresponding number ofreal estate services transactions in any period.We generally generate more real estate services revenue per transaction from representing homebuyers than home sellers. However, webelieve that representing home sellers has unique strategic value, including the marketing power of yard signs and digital marketing campaigns,and the market effect of controlling listing inventory. To keep revenue per brokerage transaction about the same from year to year,25Table of Contentswe expect to reduce our commission refund to homebuyers if more of our brokerage transactions come from home sellers.From 2018 to 2019, the percentage of brokerage transactions from home sellers increased from slightly over 40% to approximately 44%.However, due to the nationwide pricing change we implemented in December 2019, we expect a minimal increase, no change, or possible decreasein this percentage from 2019 to 2020.Aggregate Home Value of Real Estate Services TransactionsThe aggregate home value of brokerage and partner real estate services transactions is an important indicator of the health of our business,because our revenue is largely based on a percentage of each home’s sale price. This metric is affected chiefly by the number of customers weserve, but also by changes in home values in the markets we serve. We compute this metric by summing the sale price of each home representedin a real estate services transaction. We include the value of a single transaction twice when our lead agents or our partner agents serve both thehomebuyer and home seller of the transaction.U.S. Market Share by ValueIncreasing our U.S. market share by value is critical to our ability to grow our business and achieve profitability over the long term. Webelieve there is a significant opportunity to increase our share in the markets we currently serve.We calculate the aggregate value of U.S. home sales by multiplying the total number of U.S. existing home sales by the mean sale price ofthese homes, each as reported by the National Association of REALTORS®. We calculate our market share by aggregating the home value ofbrokerage and partner real estate services transactions. Then, in order to account for both the sell- and buy-side components of each transaction,we divide that value by two-times the estimated aggregate value of U.S. home sales.Revenue from Top-10 Markets as a Percentage of Real Estate Services RevenueOur top-10 markets by real estate services revenue are the metropolitan areas of Boston, Chicago, Denver (including Boulder and ColoradoSprings), 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 todecline as a percentage of our total real estate services revenue over time.Average Number of Lead AgentsThe average number of lead agents, in combination with our other key metrics such as the number of brokerage transactions, is a basis forcalculating agent productivity and is one indicator of the potential future growth of our business. We systematically evaluate traffic to our website andmobile 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 inthe period.Components of Our Results of OperationsRevenueWe generate revenue primarily from commissions and fees charged on each real estate services transaction closed by our lead agents orpartner agents, and from the sale of homes.Real Estate Services Revenue26Table of ContentsBrokerage Revenue—Brokerage revenue includes our offer and listing services, where our lead agents represent home buyers and homesellers. 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 brokeragetransactions 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 ofany payments we make to customers. We recognize these fees as revenue on the closing of a transaction. Partner revenue is affected by thenumber of partner transactions closed, home-sale prices, commission rates, and the amount we refund to customers. If the portion of customers weintroduce to our own lead agents increases, we expect the portion of revenue closed by partner agents to decrease.Properties RevenueProperties Revenue—Properties revenue consists of revenue earned when we sell homes that were previously bought directly fromhomeowners. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home. RedfinNow is our primaryproperties offering.Other RevenueOther Revenue—Other services revenue includes fees earned from mortgage origination services, title settlement services, Walk Scoredata services, and advertising. Substantially all fees and revenue from other services are recognized when the service is provided.Intercompany EliminationsIntercompany Eliminations—Revenue earned from transactions between operating segments are eliminated in consolidating our financialstatements. Intercompany transactions primarily consist of services performed from our real estate services segment for our properties segment.Cost of Revenue and Gross Margin Cost of revenue consists primarily of personnel costs (including base pay, benefits, and stock-based compensation), transactionbonuses, home-touring and field expenses, listing expenses, home costs related to our properties segment, office and occupancy expenses, anddepreciation and amortization related to fixed assets and acquired intangible assets. Home costs related to our properties segment include homepurchase 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 andwill 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 estateservices segment and our relatively lower-gross-margin properties segment, real estate services revenue per transaction, agent and support-staffproductivity, personnel costs and transaction bonuses, and, for properties, the home purchase costs.Operating ExpensesTechnology and DevelopmentOur primary technology and development expenses are building software for our customers, lead agents, and support staff to work togetheron a transaction, and building a website and mobile application to meet customers looking to move. These expenses primarily include personnelcosts (including base pay,27Table of Contentsbenefits, 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. We expenseresearch and development costs as incurred and record them in technology and development expenses. Our technology and development expensegrew 41% year-over-year for the three months ended December 31, 2019, and we expect approximately the same amount of growth in thisexpense for the first six months of 2020.MarketingMarketing expenses consist primarily of media costs for online and offline advertising, as well as personnel costs (including base pay,benefits, and stock-based compensation). In 2019, we incurred approximately $36 million in offline advertising media costs, compared to around $12million for 2018. We expect approximately the same offline advertising media costs in 2020 as incurred in 2019.General and AdministrativeGeneral 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.Interest IncomeInterest income consists primarily of interest earned on our cash, cash equivalents and investments.Interest ExpenseInterest expense consists primarily of interest payable and the amortization of debt discounts and issuance cost related to our convertiblesenior notes, which we issued in July 2018. Interest is payable on the notes at the rate of 1.75% semiannually in arrears on January 15 and July 15.Beginning in August 2019, interest expense also includes interest on borrowings and the amortization of debt issuance costs related to oursecured revolving credit facility. Interest for the facility is payable weekly at a rate of one-month LIBOR (subject to a floor of 0.50%) plus 2.65%.Results of OperationsThe following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods.28Table of Contents Year Ended December 31, 2019 2018 2017 (in thousands)Revenue$779,796 $486,920 $370,036Cost of revenue(1)635,693 367,496 258,216Gross profit144,103 119,424 111,820Operating expenses: Technology and development(1)69,765 53,797 42,532Marketing(1)76,710 44,061 32,251General and administrative(1)76,874 65,500 53,009Total operating expenses223,349 163,358 127,792Loss from operations(79,246) (43,934) (15,972)Interest income7,146 5,416 882Interest expense(8,928) (3,681) —Other income, net223 221 88Net loss$(80,805) $(41,978) $(15,002)(1) Includes stock-based compensation as follows: Year Ended December 31, 2019 2018 2017 (in thousands)Cost of revenue$6,087 $5,567 $2,902Technology and development12,362 7,576 3,325Marketing1,418 662 487General and administrative7,947 6,633 4,387Total$27,814 $20,438 $11,101 Year Ended December 31, 2019 2018 2017 (as a percentage of revenue)Revenue100.0 % 100.0 % 100.0 %Cost of revenue(1)81.5 75.5 69.8Gross profit18.5 24.5 30.2Operating expenses: Technology and development(1)8.9 11.0 11.6Marketing(1)9.8 9.0 8.7General and administrative(1)9.9 13.5 14.3Total operating expenses28.6 33.5 34.6Loss from operations(10.1) (9.0) (4.4)Interest income0.9 1.1 0.3Interest expense(1.1) (0.8) —Other income, net— — —Net loss(10.3)% (8.7)% (4.1)%29Table of Contents(1) Includes stock-based compensation as follows: Year Ended December 31, 2019 2018 2017 (as a percentage of revenue)Cost of revenue0.8% 1.1% 0.8%Technology and development1.6 1.6 0.9Marketing0.2 0.1 0.1General and administrative1.0 1.4 1.2Total3.6% 4.2% 3.0%Comparison of the Years Ended December 31, 2019 and 2018Revenue Year Ended December 31, Change 2019 2018 Dollars Percentage (in thousands, except percentages)Real estate services revenue Brokerage revenue$496,480 $406,293 $90,187 22%Partner revenue27,060 25,875 1,185 5Total real estate services revenue523,540 432,168 91,372 21Properties revenue240,507 44,993 195,514 435Other revenue17,634 9,882 7,752 78Intercompany elimination(1,885) (123) (1,762) 1,433Total revenue$779,796 $486,920 $292,876 60Percentage of revenue Real estate services revenue Brokerage63.6 % 83.4 % Partner revenue3.5 5.3 Total real estate services revenue67.1 88.7 Properties revenue30.8 9.3 Other revenue2.3 2.0 Intercompany elimination(0.2) — Total revenue100.0 % 100.0 % In 2019, revenue increased by $292.9 million, or 60%, as compared with 2018. Brokerage revenue represented $90.2 million, or 31%, ofthe increase. Brokerage revenue grew 22% during the period, driven by a 24% increase in brokerage real estate transactions and a 1% decrease inreal estate services revenue per brokerage transaction. The increase in brokerage transactions was attributable to higher levels of customerawareness of Redfin and increasing customer demand for Redfin services. Properties revenue grew $195.5 million, or 435%, as compared with2018, driven by greater market presence and consumer awareness of RedfinNow, which resulted in a 407% increase in the number of homes sold.Other revenue increased $7.8 million, or 78%, as compared with 2018.30Table of ContentsCost of Revenue and Gross Margin Year Ended December 31, Change 2019 2018 Dollars Percentage (in thousands, except percentages)Cost of revenue Real estate services$373,150 $309,069 $64,081 21 %Properties245,189 46,613 198,576 426Other19,239 11,937 7,302 61Intercompany elimination(1,885) (123) (1,762) 1,433Total cost of revenue$635,693 $367,496 $268,197 73 Gross profit Real estate services$150,390 $123,099 $27,291 22 %Properties(4,682) (1,620) (3,062) 189Other(1,605) (2,055) 450 (22)Total gross profit$144,103 $119,424 $24,679 21 Gross margin (percentage of revenue) Real estate services28.7 % 28.5 % Properties(1.9) (3.6) Other(9.1) (20.8) Total gross margin18.5 24.5 In 2019, total cost of revenue increased by $268.2 million, or 73%, as compared with 2018. This increase in cost of revenue was primarilyattributable to a $180.8 million increase in home purchase costs and related capitalized improvements, due to selling more homes by our propertiesbusiness, a $50.3 million increase in personnel costs and transaction bonuses due to increased headcount and increased brokerage transactions,respectively, and a $13.7 million increase in home-touring and field costs.Total gross margin decreased 600 basis points for 2019 as compared with 2018, driven primarily by the relative growth of our propertiesbusiness compared to our real estate services and other businesses, partially offset by improvements in real estate services, properties and othergross margin.In 2019, real estate services gross margin increased 20 basis points as compared with 2018. This was primarily attributable to a 110 basis-point decrease in personnel costs and transaction bonuses as a percentage of revenue. This was partially offset by a 30 basis-point increase inhome-touring and field costs, a 30 basis-point increase in occupancy and office expenses, and a 20 basis-point increase in listing expenses, eachas a percentage of revenue.In 2019, properties gross margin increased 170 basis points as compared with 2018. This was primarily attributable to a 90 basis-pointdecrease in home purchase costs and related capitalized improvements, a 30 basis-point decrease in personnel costs, and a 30 basis-pointdecrease in listing expenses, each as a percentage of revenue.In 2019, other gross margin increased 1,170 basis points as compared with 2018. This was primarily attributable to a 340 basis-pointdecrease in personnel costs, a 310 basis-point decrease in operating expenses, a 290 basis-point decrease in office and occupancy expenses, anda 230 basis-point decrease in depreciation and amortization, each as a percentage of revenue.31Table of ContentsOperating Expenses Year Ended December 31, Change 2019 2018 Dollars Percentage (in thousands, except percentages)Technology and development$69,765 $53,797 $15,968 30%Marketing76,710 44,061 32,649 74General and administrative76,874 65,500 11,374 17Total operating expenses$223,349 $163,358 $59,991 37Percentage of revenue Technology and development8.9% 11.0% Marketing9.8 9.0 General and administrative9.9 13.5 Total operating expenses28.6% 33.5% In 2019, technology and development expenses increased by $16.0 million, or 30%, as compared with 2018. The increase was primarilyattributable to a $13.5 million increase in personnel costs due to increased headcount.In 2019, marketing expenses increased by $32.6 million, or 74%, as compared with 2018. The increase was primarily attributable to a $29.2million increase in marketing media costs as we expanded advertising.In 2019, general and administrative expenses increased by $11.4 million, or 17%, as compared with 2018. The increase was attributable toan $7.2 million increase in personnel costs, largely the result of increases in headcount to support continued growth, a $2.0 million increase inoutside services expenses, primarily Internet-based software services, and a $1.3 million increase in corporate events costs.Comparison of the Years Ended December 31, 2018 and 2017Revenue Year Ended December 31, Change 2018 2017 Dollars Percentage (in thousands, except percentages)Real estate services revenue Brokerage revenue$406,293 $330,372 $75,921 23%Partner revenue25,875 21,198 4,677 22Total real estate services revenue432,168 351,570 80,598 23Properties revenue44,993 10,491 34,502 329Other revenue9,882 7,975 1,907 24Intercompany elimination(123) — (123) N/ATotal revenue$486,920 $370,036 $116,884 32Percentage of revenue Real estate services revenue Brokerage revenue83.4 % 89.3% Partner revenue5.3 5.7 Total real estate services revenue88.7 95.0 Properties revenue9.3 2.8 Other revenue2.0 2.2 Intercompany elimination— — Total revenue100.0 % 100.0% 32Table of ContentsIn 2018, revenue increased by $116.9 million, or 32%, as compared with 2017. Brokerage revenue represented $75.9 million, or 65%, ofthe increase. Brokerage revenue grew 23% during the period, driven by a 23% increase in brokerage real estate transactions and a 0.3% increasein real estate services revenue per brokerage transaction. The increase in brokerage transactions was attributable to higher levels of customerawareness of Redfin and increasing customer demand for Redfin services. Properties revenue increased $34.5 million or 329% as compared with2017, driven by greater market presence and consumer awareness of RedfinNow, which resulted in a 267% increase in the number of homes sold.Other revenue increased $1.9 million or 24%, as compared with 2017.Cost of Revenue and Gross Margin Year Ended December 31, Change 2018 2017 Dollars Percentage (in thousands, except percentages)Cost of revenue Real estate services$309,069 $237,832 $71,237 30 %Properties46,613 10,384 36,229 349Other11,937 10,000 1,937 19Intercompany elimination(123) — (123) N/ATotal cost of revenue$367,496 $258,216 $109,280 42 Gross profit Real estate services$123,099 $113,738 $9,361 8 %Properties(1,620) 107 (1,727) N/AOther(2,055) (2,025) (30) (1)Total gross profit$119,424 $111,820 $7,604 7 Gross margin (percentage of revenue) Real estate services28.5 % 32.4 % Properties(3.6) 1.0 Other(20.8) (25.4) Total gross margin24.5 30.2 In 2018, total cost of revenue increased by $109.3 million, or 42%, as compared with 2017. This increase in cost of revenue was primarilyattributable to a $34.8 million increase in personnel costs due to increased lead agent and related support-staff headcount, a $32.6 million increasein home purchase costs and related capitalized improvements, due to selling more homes by our properties business, a $17.9 million increase intransaction bonuses, and a $12.6 million increase in home-touring and field costs.Total gross margin decreased 570 basis points for 2018 as compared with 2017, driven primarily by a decrease in real estate services grossmargin and the growth of our properties business.In 2018, real estate services gross margin decreased 390 basis points as compared with 2017. This was primarily attributable to a 210basis-point increase in personnel costs, a 60 basis-point increase in transaction bonuses, a 60 basis-point increase in home-touring and field costs,a 30 basis-point increase in operating costs, and a 25 basis-point increase in listing expenses, each as a percentage of revenue.In 2018, we decreased the number of customers introduced to our lead agents as compared with 2017, but did not see improvement incustomer close rate. That change resulted in us hiring more lead agents, which contributed significantly to the 210 basis-point increase in personnelcosts and stock-based compensation from 2017 to 2018.In 2018, properties gross margin decreased 460 basis points as compared with 2017. This was primarily attributable to a 280 basis-pointincrease in the home purchase costs and related capitalized33Table of Contentsimprovements, a 110 basis-point increase in personnel costs, and a 70 basis-point increase in transaction bonuses, each as a percentage ofrevenue.In 2018, other gross margin increased 460 basis points as compared with 2017. This was primarily attributable to a 230 basis-pointdecrease in operating expenses, a 170 basis-point decrease in depreciation and amortization, and a 90 basis-point decrease in office andoccupancy expenses, each as a percentage of revenue. This was partially offset by a 50 basis-point increase in personnel costs.Operating Expenses Year Ended December 31, Change 2018 2017 Dollars Percentage (in thousands, except percentages)Technology and development$53,797 $42,532 $11,265 26%Marketing44,061 32,251 11,810 37General and administrative65,500 53,009 12,491 24Total operating expenses$163,358 $127,792 $35,566 28Percentage of revenue Technology and development11.0% 11.6% Marketing9.0 8.7 General and administrative13.5 14.3 Total operating expenses33.5% 34.6% In 2018, technology and development expenses increased by $11.3 million, or 26%, as compared with 2017. The increase was primarilyattributable to a $10.3 million increase in personnel costs due to increased headcount and a $1.4 million increase in outside services includingcloud-based technology. These expenses were related to improving real estate services operations, and building new capabilities for RedfinMortgage and properties.In 2018, marketing expenses increased by $11.8 million, or 37%, as compared with 2017. The increase was primarily attributable to an$11.1 million increase in marketing media costs as we expanded advertising.In 2018, general and administrative expenses increased by $12.5 million, or 24%, as compared with 2017. The increase was attributable toa $8.1 million increase in personnel costs, largely the result of increases in headcount to support continued growth, a $3.2 million increase inoutside services expenses, driven by public-company compliance requirements, including the design, implementation, and assessment of theoperating effectiveness of internal control over our financial reporting and related audit.Quarterly Results of Operations and Key Business MetricsThe following tables set forth our unaudited quarterly statements of operations data for the most recent eight quarters, as well as thepercentage that each line item represents of our revenue for each quarter presented. The information for each quarter has been prepared on abasis consistent with our consolidated financial statements and reflect, in the opinion of management, all adjustments of a normal, recurring naturethat are necessary for a fair presentation of the financial information contained in those statements. The following quarterly financial data should beread in conjunction with our consolidated financial statements.34Table of ContentsQuarterly Results Three Months Ended Dec. 31,2019 Sep. 30,2019 Jun. 30,2019 Mar. 31,2019 Dec. 31,2018 Sep. 30,2018 Jun. 30,2018 Mar. 31,2018Revenue$233,191 $238,683 $197,780 $110,141 $124,129 $140,255 $142,642 $79,893Cost of revenue(1)193,565 185,306 149,434 107,388 97,920 97,950 97,429 74,197Gross profit39,626 53,377 48,346 2,753 26,209 42,305 45,213 5,696Operating expenses: Technology and development(1)19,345 18,801 16,063 15,556 13,692 14,310 13,033 12,762Marketing(1)8,099 8,361 27,050 33,201 8,054 8,236 14,435 13,336General and administrative(1)18,992 18,779 17,654 21,448 16,969 16,470 15,288 16,772Total46,436 45,941 60,767 70,205 38,715 39,016 42,756 42,870Income (loss) from operations(6,810) 7,436 (12,421) (67,452) (12,506) 3,289 2,457 (37,174)Interest income1,341 1,576 1,913 2,316 2,334 1,775 729 577Interest expense(2,365) (2,274) (2,153) (2,136) (2,071) (1,610) — —Other income, net51 44 36 92 21 21 21 158Net income (loss)$(7,783) $6,782 $(12,625) $(67,180) $(12,222) $3,475 $3,207 $(36,439)Net income (loss) per share—basic and diluted$(0.08) $0.07 $(0.14) $(0.74) $(0.14) $0.04 $0.04 $(0.44)(1) Includes stock-based compensation as follows: Three Months Ended Dec. 31,2019 Sep. 30,2019 Jun. 30,2019 Mar. 31,2019 Dec. 31,2018 Sep. 30,2018 Jun. 30,2018 Mar. 31,2018Cost of revenue$1,689 $1,605 $1,328 $1,465 $1,506 $1,370 $1,392 $1,300Technology and development3,701 3,320 2,685 2,656 2,241 2,135 1,726 1,473Marketing393 390 349 286 231 155 157 119General and administrative2,239 2,195 1,514 1,999 1,988 1,838 1,503 1,304Total$8,022 $7,510 $5,876 $6,406 $5,966 $5,498 $4,778 $4,196 Three Months Ended Dec. 31,2019 Sep. 30,2019 Jun. 30,2019 Mar. 31,2019 Dec. 31,2018 Sep. 30,2018 Jun. 30,2018 Mar. 31,2018 (as a percentage of revenue)Revenue100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0% 100.0 %Cost of revenue(1)83.0 77.6 75.6 97.5 78.9 69.8 68.3 92.9Gross profit17.0 22.4 24.4 2.5 21.1 30.2 31.7 7.1Operating expenses Technology and development(1)8.3 7.9 8.1 14.1 11.0 10.2 9.1 16.0Marketing(1)3.5 3.5 13.7 30.1 6.5 5.9 10.1 16.7General and administrative(1)8.1 7.9 8.9 19.5 13.7 11.7 10.7 21.0Total19.9 19.3 30.7 63.7 31.2 27.8 29.9 53.7Income (loss) from operations(2.9) 3.1 (6.3) (61.2) (10.1) 2.4 1.8 (46.6)Interest income0.6 0.7 1.0 2.1 1.9 1.3 0.5 0.7Interest expense(1.0) (1.0) (1.1) (1.9) (1.7) (1.1) — —Other income, net— — — 0.1 — — — 0.2Net income (loss)(3.3)% 2.8 % (6.4)% (61.0)% (9.9)% 2.6 % 2.3% (45.7)%(1) Includes stock-based compensation as follows:35Table of Contents Three Months Ended Dec. 31,2019 Sep. 30,2019 Jun. 30,2019 Mar. 31,2019 Dec. 31,2018 Sep. 30,2018 Jun. 30,2018 Mar. 31,2018Cost of revenue0.7% 0.7% 0.7% 1.3% 1.2% 1.0% 1.0% 1.6%Technology and development1.6 1.4 1.4 2.4 1.8 1.5 1.2 1.9Marketing0.2 0.2 0.2 0.3 0.2 0.1 0.1 0.1General and administrative1.0 0.9 0.8 1.8 1.6 1.3 1.1 1.7Total3.5% 3.2% 3.1% 5.8% 4.8% 3.9% 3.4% 5.3%Services revenue for the periods above has followed a seasonal pattern largely consistent with the residential real estate industry.Accordingly, services revenue in 2019 and 2018 increased sequentially from the first quarter to the second quarter. In 2019, services revenueincreased sequentially by 0.4% from the second quarter to the third quarter. In 2018, services revenue declined sequentially by 2% from the secondquarter to the third quarter, we believe as the result of less favorable market conditions compared to a typical year. Services revenue in the fourthquarters of 2019 and 2018 declined sequentially.Cost of services revenue has also reflected seasonality. Cost of services revenue in 2019 and 2018 increased sequentially from the firstquarter to the second quarter, and then declined sequentially in the third quarter. In the fourth quarters of 2019 and 2018, the cost of servicesrevenue declined sequentially due to lower real estate services transaction volume.Product revenue for the period above has risen from the first quarter through the fourth quarter for 2019 and 2018. This is largely the resultof greater market presence and consumer awareness of RedfinNow in 2019 and 2018. Cost of product revenue has largely followed the sequentialpattern of product revenue.Marketing expenses are influenced by seasonal factors and the timing of advertising campaigns. We have historically spent more onadvertising during the first half of the year than the second half of the year. Technology and development expenses are influenced period to periodby the timing of development project expenses, including the additional use of contract software developers as well as the utilization of interns, whotypically work with us during the third quarter.Quarterly Key Business Metrics Dec. 31, 2019 Sep. 30, 2019 Jun. 30, 2019 Mar. 31, 2019 Dec. 31, 2018 Sep. 30, 2018 Jun. 30, 2018 Mar. 31, 2018Monthly average visitors (in thousands)30,595 35,633 36,557 31,107 25,212 29,236 28,777 25,820Real estate services transactions Brokerage13,122 16,098 15,580 8,435 9,822 12,876 12,971 7,285Partner2,958 3,499 3,357 2,125 2,749 3,333 3,289 2,237Total16,080 19,597 18,937 10,560 12,571 16,209 16,260 9,522Real estate services revenue per transaction Brokerage$9,425 $9,075 $9,332 $9,640 $9,569 $9,227 $9,510 $9,628Partner2,369 2,295 2,218 2,153 2,232 2,237 2,281 2,137Aggregate8,127 7,865 8,071 8,134 7,964 7,790 8,048 7,869Aggregate home value of real estate services transactions(in millions)$7,588 $9,157 $8,986 $4,800 $5,825 $7,653 $7,910 $4,424U.S. market share by value0.94% 0.96% 0.94% 0.83% 0.81% 0.85% 0.83% 0.73%Revenue from top-10 Redfin markets as a percentage ofreal estate services revenue62% 63% 64% 64% 66% 66% 68% 66%Average number of lead agents1,526 1,579 1,603 1,503 1,419 1,397 1,415 1,327Similar to our revenue, monthly average visitors to our website and mobile application has typically followed a seasonal pattern, increasingsequentially in 2019 and 2018 from the first quarter to the second quarter. In 2019, monthly average visitors decreased 3% from the second quarterto the third quarter. In36Table of Contents2018 monthly average visitors increased 2% from the second quarter to the third quarter. Monthly average visitors declined sequentially during thefourth quarters of 2019 and 2018 following seasonality.Liquidity and Capital ResourcesAs of December 31, 2019, we had cash and cash equivalents of $234.7 million and investments of $101.0 million, which consist primarily ofoperating cash on deposit with financial institutions, money market instruments, and U.S. treasury securities.Also as of December 31, 2019, we had $143.8 million aggregate principal amount of convertible senior notes outstanding. The notes matureon July 15, 2023, unless earlier repurchased, redeemed or converted, and interest is payable in arrears on January 15 and July 15 of each year.As we continue to expand our properties business, we expect to incur significant additional cash outlay compared to historical periods due tocosts related to the business, such as the home purchase price, capitalized improvement costs, and home maintenance expenses. For the yearended December 31, 2019, we relied on a combination of our cash on hand and borrowings from a secured revolving credit facility to fund the homepurchase price. We relied solely on our cash on hand to fund capitalized improvement costs and home maintenance expenses. See Note 4 to ourconsolidated financial statements for more information on changes to inventory related to home purchases, additions to inventory from capitalizedimprovements, and relief of inventory from the sales of homes for our properties business. See Note 14 to our consolidated financial statements formore information regarding 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 saleof that loan. Historically, it has relied on warehouse credit facilities with different lenders to fund substantially the entire portion of the mortgage loansthat it originates. Once our mortgage business sells a loan in the secondary mortgage market, it uses the proceeds to reduce the outstandingbalance under the related facility. See Note 14 to our consolidated financial statements and the discussion under "Risks Related to OurIndebtedness" in Item 1A for more information regarding these warehouse credit facilities, including our mortgage business's failure to satisfy afinancial covenant under two facilities.We believe that our existing cash and cash equivalents and investments, together with cash we expect to generate from future operationsand borrowings from our properties business's secured revolving credit facility and our mortgage business's warehouse credit facilities, will providesufficient liquidity to meet our operational needs and fulfill our debt obligations. However, our liquidity assumptions may change or prove to beincorrect, and we could exhaust our available financial resources sooner than we currently expect. As a result, we may seek new sources of creditfinancing or elect to raise additional funds through equity, equity-linked, or debt financing arrangements. We cannot assure you that any additionalfinancing will be available to us on acceptable terms or at all.Cash FlowsThe following table summarizes our cash flows for the periods indicated: Year Ended December 31, 2019 2018 2017 (in thousands)Net cash provided by (used in) operating activities$(107,610) $(36,702) $5,355Net cash used in investing activities(115,912) (10,303) (10,364)Net cash provided by financing activities31,883 273,402 149,822Net Cash Provided By (Used In) Operating Activities37Table of ContentsOur operating cash flows result primarily from cash generated by commissions paid to us from our real estate services business and salesof homes from our properties business. Our primary uses of cash from operating activities include payments for personnel-related costs, includingemployee benefits and bonus programs, marketing and advertising activities, purchases of homes for our properties business, and outside servicescosts. Additionally, our mortgage business generates a significant amount operating cash flow activity from the origination and sale of loans held forsale.Net cash used in operating activities was $107.6 million for the year ended December 31, 2019, primarily attributable to a net loss of $80.8million, offset by $49.7 million of non-cash items related to stock- based compensation, depreciation and amortization expenses, amortization of debtdiscounts and issuances costs, and lease expense related to right-of-use assets. Changes in assets and liabilities increased cash used in operatingactivities by $76.5 million driven primarily by an increase of $51.9 million in inventory related to our properties business and a $17.1 million increasein net loans held for sale related to our mortgage business.Net cash used in operating activities was $36.7 million for the year ended December 31, 2018, primarily attributable to a net loss of $42.0million, offset by $28.9 million of non-cash items related to stock- based compensation, depreciation and amortization expenses, and amortization ofdebt discounts and issuances costs. Changes in assets and liabilities increased cash used in operating activities by $26.2 million driven primarily byan increase of $19.3 million in inventory related to our properties business. This was partially offset by a $4.2 million increase in accrued liabilitiesdue primarily to $3.3 million of payroll liabilities.Net cash provided by operating activities in 2017 consisted of $15.0 million of net losses, an $18.3 million positive impact from non-cashitems related stock based compensation and depreciation and amortization expenses, an $8.4 million reduction in miscellaneous receivables whenthe landlord for our Seattle headquarters office reimbursed us for tenant improvements, and a $4.9 million net increase in accrued expenses andaccounts payable due to the timing of when amounts came due. These benefits were partially offset by a $4.2 million increase in prepaid expenses,the introduction of $3.4 million in home purchases from testing our properties business, a $2.7 million increase in accounts receivable due to thecollection and timing of real estate services transactions that had closed, and $1.9 million in mortgage loans funded but not yet sold.Net Cash Used In Investing ActivitiesOur primary investing activities include the purchase of investments and property and equipment, primarily related to capitalized softwaredevelopment expenses and leasehold improvements.Net cash used in investing activities was $115.9 million for the year ended December 31, 2019, primarily attributable to $100.4 million innet investments in U.S. treasury securities, $7.9 million related to equipment, furnishings and leasehold improvements for new or expansion ofexisting office space, and $7.1 million of capitalized software development expenses.Net cash used in investing activities was $10.3 million for the year ended December 31, 2018, primarily attributable to $8.3 million ofpurchases of property and equipment, related to $5.3 million of capitalized software development expenses and $1.2 million of leaseholdimprovements, and a $2.0 million equity investment.Net cash used in investing activities in 2017 consisted of $12.1 million of fixed asset purchases, including $6.5 million of leaseholdimprovements, equipment and furnishings for our new Seattle headquarters office space and $4.4 million of capitalized software developmentexpenses. This was partially offset by a net $1.8 million from the sale and maturity of short-term investments as we liquidated all our short-terminvestments by the end of 2017.Net Cash Provided By Financing Activities38Table of ContentsOur primary financing activities have come from our initial public offering in August 2017, our follow-on offerings of common stock andconvertible senior notes in July 2018, and the sale of shares pursuant to stock option exercises and our 2017 Employee Stock Purchase Plan("ESPP"). Additionally, our mortgage business generates a significant amount of financing cash flow activity due to borrowings from and repaymentsto its warehouse credit facilities. In July 2019, a special purpose entity for our properties business entered into a secured revolving credit facility tosupport the financing of home purchases in our properties segment. For the year ended December 31, 2019, borrowings under the facility were notsignificant and accordingly, the facility had limited cash flow activity. However, we expect to utilize the facility to a greater extent during 2020, andaccordingly, expect cash flow activity resulting from the facility to increase during 2020.Net cash provided by financing activities was $31.9 million for the year ended December 31, 2019, primarily attributable to a $16.6 millionincrease in our net borrowings under warehouse credit facilities, and $16.1 million in proceeds from the sale of shares under our equitycompensation plans.Net cash provided by financing activities was $273.4 million for the year ended December 31, 2018, primarily attributable to net proceedsfrom our follow-on offerings of common stock and convertible senior notes. The net proceeds consisted of $107.6 million from the issuance ofcommon stock and $139.0 million from the issuance of notes.Net cash provided by financing activities in 2017 primarily consisted of $144.5 million in net proceeds from our initial public offering, $3.0million in proceeds from the sale of shares pursuant to stock options exercises and $2.0 million in net borrowings from warehouse credit facilities formortgage origination.Contractual ObligationsContractual obligations are cash amounts that we are obligated to pay as part of certain contracts that we have entered into during thenormal course of business. Below is a table that shows our contractual obligations as of December 31, 2019: Payments Due by Period Total Less than 1 Year 1-3 Years 3-5 Years More Than 5 Years (in thousands)Convertible senior notes$143,750 $— $— $143,750 $—Interest on convertible senior notes10,063 2,516 5,031 2,516 —Operating leases82,936 14,776 27,758 23,488 16,914Finance leases226 60 120 46 —Purchase obligations32,853 22,926 9,927 — —Total$269,828 $40,278 $42,836 $169,800 $16,914Payment of the principal amount of our convertible senior notes and any accrued and unpaid interest may be accelerated as a result of an"event of default" or "fundamental change," each as defined in the indenture governing the notes.Our operating and finance leases include direct lease obligations, excluding any taxes, insurance and other related expenses.Our purchase obligations primarily relate to the noncancelable portion of commitments related to our network infrastructure, our annualemployee meeting, and homes that we are under contract to purchase. We do not include in the table above obligations under contracts that we cancancel without significant penalty.Critical Accounting Policies and Estimates39Table of ContentsDiscussion and analysis of our financial condition and results of operations are based on our financial statements, which have beenprepared in accordance with generally accepted accounting principles in the United States of America ("GAAP"). The preparation of these financialstatements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and related disclosure ofcontingent assets and liabilities, revenue, and expenses at the date of the financial statements. Generally, we base our estimates on historicalexperience and on various other assumptions in accordance with GAAP that we believe to be reasonable under the circumstances. Actual resultsmay 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 andresults of operations because they require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates aboutthe effect of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and estimatesaddressed below. In addition, we have other key accounting policies and estimates that are described in Note 1 to our consolidated financialstatements.Revenue RecognitionOur key revenue components are brokerage revenue, partner revenue, property revenue, and other revenue. Of these, we consider themost critical of our revenue recognition policies relate to commissions and fees charged on brokerage transactions closed by our lead agents, andfrom the sale of homes. We recognize commission-based brokerage revenue upon closing of a brokerage transaction, less the amount of anycommission refunds, closing-cost reductions, or promotional offers that may result in a material right. We determined that brokerage revenueprimarily contains a single performance obligation that is satisfied upon the closing of a real estate services transaction, at which point the entiretransaction price is earned. We evaluate our brokerage contracts and promotional pricing to determine if there are any additional material rights andallocate 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 customerscontain 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.We have utilized the practical expedient in Accounting Standards Codification ("ASC") 606 and elected not to capitalize contract costs forcontracts 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.InventoryOur inventory represents homes purchased with the intent of resale and are accounted for under the specific identification method. Directhome acquisition and improvement costs are capitalized and tracked directly with each specific home. Homes are stated in inventory at cost and arereviewed on a home by home basis. When evidence exists that the net realizable value of a home is lower than its cost, we recognize thedifference as a loss in the period in which it occurs. In determining net realizable value, management must use judgment and estimates, includingassessment of readily available market value indicators such as the Redfin Estimate and other third-party home value indicators, assessment of acurrent listing or pending offer price if either are available, and the value of any improvements made to the home. If a home's estimated marketvalue is less than the inventory cost then the home is written down to net realizable value. While no significant adjustments were required to ourhome inventory as of and for the year ended December 31, 2019, material adjustments may be required in the future due to changing marketconditions, natural disasters, or other forces outside of our control.40Table of ContentsSee Note 4 to our consolidated financial statements for a breakdown of our inventory categories and summary of any net realizable write-downs.Recent Accounting StandardsFor information on recent accounting standards, see Note 1 to our consolidated financial statements.Off-Balance Sheet ArrangementsWe have no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K.Item 7A. Quantitative and Qualitative Disclosures About Market RiskOur primary operations are within the United States and in the first quarter of 2019 we launched limited operations in Canada. We areexposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.Interest Rate RiskOur investment policy allows us to maintain a portfolio of cash equivalents and investments in a variety of securities, including U.S. treasuryand agency issues, bank certificates of deposit that are 100% insured by the Federal Deposit Insurance Corporation, and SEC-registered moneymarket funds that consist of a minimum of $1 billion in assets and meet the above requirements. The goals of our investment policy are liquidity andcapital preservation. We do not enter into investments for trading or speculative purposes.As of December 31, 2019, we had cash and cash equivalents of $234.7 million and investments of $101.0 million. Our investments arecomprised of available-for-sale securities that consist primarily of U.S. treasury securities with maturities of two years or less. We believe that we donot 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-termnature and risk profile of our portfolio. Declines in interest rates, however, would reduce future investment income. A 100 basis-point decline ininterest rates, occurring during and sustained throughout any of the periods presented, would not have been material.We are exposed to interest rate risk on our mortgage loans held for sale and interest rate lock commitments ("IRLCs") associated with ourmortgage loan origination services. We manage this interest rate risk through the use of forward sales commitments on both a best effort wholeloans basis and on a mandatory basis. Forward sales commitments entered in to on a mandatory basis are done through the use of commitments tosell mortgage-backed securities. We do not enter into or hold derivatives for trading or speculative purposes. The fair value of our IRLCs andforward sales commitments are reflected in other current assets and accrued liabilities, as applicable, with changes in the fair value of thesecommitments recognized as revenue. The net fair value change for the periods presented were not material.See Note 3 to our consolidated financial statements for a summary of the fair value of our forward sales commitments and our IRLCs.Foreign Currency Exchange RiskAs our operations in Canada have been limited, and we do not maintain a significant balance of foreign currency, we do not currently facesignificant risk with respect to foreign currency exchange rates.41Table of ContentsItem 8. Financial Statements and Supplementary DataIndex to Consolidated Financial Statements PageReports of Independent Registered Public Accounting Firm43Consolidated Balance Sheets45Consolidated Statements of Comprehensive Loss46Consolidated Statements of Cash Flows47Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity/(Deficit)48Index to Notes to Consolidated Financial Statements4942Index to Consolidated Financial StatementsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the stockholders and the Board of Directors of Redfin CorporationOpinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Redfin Corporation and subsidiaries (the "Company") as of December 31, 2019and 2018, the related consolidated statements of operations, changes in redeemable convertible preferred stock and stockholders’ equity/(deficit),and cash flows, for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the "financialstatements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, inconformity with accounting principles generally accepted in the United States of America.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theCompany's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - IntegratedFramework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 12, 2020,expressed an unqualified opinion on the Company's internal control over financial reporting.Basis for OpinionThese financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'sfinancial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent withrespect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and ExchangeCommission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits includedperforming procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performingprocedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures inthe financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as wellas evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.Critical Audit MattersCritical audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to becommunicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved ourespecially challenging, subjective, or complex judgments. We determined that there are no critical audit matters./s/ Deloitte & Touche LLPSeattle, WashingtonFebruary 12, 2020We have served as the Company's auditor since 2013.43Index to Consolidated Financial StatementsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMTo the stockholders and the Board of Directors of Redfin CorporationOpinion on Internal Control over Financial ReportingWe have audited the internal control over financial reporting of Redfin Corporation and subsidiaries (the “Company”) as of December 31, 2019,based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of theTreadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reportingas of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), theconsolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 12, 2020,expressed an unqualified opinion on those financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over FinancialReporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a publicaccounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federalsecurities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating thedesign and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.Definition and Limitations of Internal Control over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Acompany’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate./s/ Deloitte & Touche LLPSeattle, WashingtonFebruary 12, 202044Index to Consolidated Financial StatementsRedfin Corporation and SubsidiariesConsolidated Balance Sheets(in thousands, except share and per share amounts) December 31, 2019 2018Assets Current assets Cash and cash equivalents$234,679 $432,608Restricted cash12,769 6,446Short-term investments70,029 —Accounts receivable, net19,223 15,363Inventory74,590 22,694Loans held for sale21,985 4,913Prepaid expenses14,822 11,916Other current assets3,496 2,307Total current assets451,593 496,247Property and equipment, net39,577 25,187Right-of-use assets, net52,004 —Long-term investments30,978 —Goodwill and intangibles, net11,504 11,992Other non-current assets10,557 9,395Total assets$596,213 $542,821Liabilities and stockholders' equity Current liabilities Accounts payable$2,122 $2,516Accrued liabilities37,979 30,837Other payables7,884 6,544Warehouse credit facilities21,302 4,733Secured revolving credit facility4,444 —Current lease liabilities11,408 —Current portion of deferred rent43 1,588Total current liabilities85,182 46,218Non-current lease liabilities59,869 —Deferred rent— 11,079Convertible senior notes, net119,716 113,586Total liabilities264,767 170,883Commitments and contingencies (Note 7) Stockholders’ equity Common stock—par value $0.001 per share; 500,000,000 shares authorized; 93,001,597 and 90,151,341shares issued and outstanding, respectively93 90Additional paid-in capital583,097 542,829Accumulated other comprehensive income42 —Accumulated deficit(251,786) (170,981)Total stockholders’ equity331,446 371,938Total liabilities and stockholders’ equity$596,213 $542,821The accompanying notes are an integral part of these consolidated financial statements.45Index to Consolidated Financial StatementsRedfin Corporation and SubsidiariesConsolidated Statements of Comprehensive Loss(in thousands, except share and per share amounts) Year Ended December 31, 2019 2018 2017Revenue Service$539,288 $441,927 $359,545Product240,508 44,993 10,491Total revenue779,796 486,920 370,036Cost of revenue Service390,504 320,883 247,832Product245,189 46,613 10,384Total cost of revenue635,693 367,496 258,216Gross profit144,103 119,424 111,820Operating expenses Technology and development69,765 53,797 42,532Marketing76,710 44,061 32,251General and administrative76,874 65,500 53,009Total operating expenses223,349 163,358 127,792Loss from operations(79,246) (43,934) (15,972)Interest income7,146 5,416 882Interest expense(8,928) (3,681) —Other income, net223 221 88Net loss$(80,805) $(41,978) $(15,002)Accretion of redeemable convertible preferred stock— — (175,915)Net loss attributable to common stock—basic and diluted$(80,805) $(41,978) $(190,917)Net loss per share attributable to common stock—basic and diluted$(0.88) $(0.49) $(4.47)Weighted average shares of common stock—basic and diluted91,583,533 85,669,039 42,722,114 Net loss$(80,805) $(41,978) $(190,917)Other comprehensive income: Foreign currency translation adjustments33 — —Unrealized gain on available-for-sale securities9 — —Total comprehensive loss$(80,763) $(41,978) $(190,917)The accompanying notes are an integral part of these consolidated financial statements.46Index to Consolidated Financial StatementsRedfin Corporation and SubsidiariesConsolidated Statements of Cash Flows(in thousands) Year Ended December 31, 2019 2018 2017Operating Activities Net loss$(80,805) $(41,978) $(15,002)Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization9,230 8,465 7,176Stock-based compensation27,814 20,438 11,101Amortization of debt discount and issuance costs6,385 2,584 —Non-cash lease expense6,940 — —Other(663) — —Change in assets and liabilities: Accounts receivable, net(3,861) (2,029) (2,709)Inventory(51,896) (19,312) (3,382)Prepaid expenses and other assets(3,539) (5,725) 4,450Accounts payable(394) 617 (252)Accrued liabilities and other payables7,459 4,509 5,115Lease liabilities(7,209) — —Deferred rent1 (1,249) 749Origination of loans held for sale(395,638) (86,023) (11,008)Proceeds from sale of loans originated as held for sale378,566 83,001 9,117Net cash (used in) provided by operating activities(107,610) (36,702) 5,355Investing activities Purchases of property and equipment(15,533) (8,303) (12,113)Purchases of investments(136,265) (2,000) (992)Sales of investments11,486 — 2,741Maturities of investments24,400 — —Net cash used in investing activities(115,912) (10,303) (10,364)Financing activities Proceeds from the issuance of shares resulting from employee equity plans16,107 23,407 3,003Tax payments related to net share settlements on restricted stock units(5,126) (1,426) —Borrowings from warehouse credit facilities388,586 83,842 10,746Repayments of warehouse credit facilities(372,017) (81,125) (8,730)Borrowings from secured revolving credit facility4,444 — —Other payables - deposits held in escrow883 2,158 273Proceeds from issuance of convertible notes, net of issuance costs— 138,953 —Proceeds from initial public offering, net of underwriting discounts— — 148,088Payment of initial public offering costs— — (3,558)Proceeds from follow on offering— 107,593 —Cash paid for debt issuance costs(922) — —Principal payments under finance lease obligations(72) — —Net cash provided by financing activities31,883 273,402 149,822Effect of exchange rate changes on cash and cash equivalents32 — —Net change in cash, cash equivalents, and restricted cash(191,607) 226,397 144,813Cash, cash equivalents, and restricted cash: Beginning of period439,055 212,658 67,845End of period$247,448 $439,055 $212,658 Supplemental disclosure of cash flow information Cash paid for interest2,460 — —Non-cash transactions Conversion of redeemable convertible preferred stock to common stock— — 831,331Accretion of redeemable convertible preferred stock— — (175,915)Stock-based compensation capitalized in property and equipment(1,280) (522) (268)Leasehold improvements paid directly by lessor(6,230) (1,980) (822)The accompanying notes are an integral part of these consolidated financial statements.47Index to Consolidated Financial StatementsRedfin Corporation and SubsidiariesConsolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Equity/(Deficit)(in thousands, except share amounts) Redeemable ConvertiblePreferred Stock Common Stock AdditionalPaid-inCapital AccumulatedDeficit AccumulatedOtherComprehensiveIncome TotalStockholders'Equity/(Deficit) Shares Amount Shares Amount Balance, January 1, 201755,422,002$655,41614,687,024$15$—$(563,749) $—$(563,734) Cumulative stock-based compensationadjustment— — — — 522 (522) — —Issuance of common stock related to initialpublic offering, net— — 10,615,650 10 148,078 — — 148,088Initial public offering costs— — — — (3,708) — — (3,708)Issuance of common stock pursuant toexercise of stock options— — 744,215 1 3,000 — — 3,001Stock-based compensation— — — — 11,369 — — 11,369Accretion of redeemable convertiblepreferred stock— 175,915 — — (8,690) (167,225) — (175,915)Conversion of redeemable convertiblepreferred stock to common stock(55,422,002) (831,331) 55,422,002 55 213,781 617,495 — 831,331Net loss— — — — — (15,002) — (15,002)Balance, December 31, 2017— $— 81,468,891 $81 $364,352 $(129,003) $— $235,430 Issuance of common stock pursuant toemployee stock purchase plan— — 425,228 1 6,587 — — 6,588Issuance of common stock pursuant toexercise of stock options— — 3,203,528 3 16,817 — — 16,820Issuance of common stock pursuant tosettlement of restricted stock units— — 306,079 — — — — —Common stock surrendered for employees'tax liability upon settlement of restrictedstock units— — (88,721) — (1,426) — — (1,426)Issuance of common stock related tofollow-on offering, net— — 4,836,336 5 107,588 — — 107,593Equity component of convertible seniornotes, net— — — — 27,951 — — 27,951Stock-based compensation— — — — 20,960 — — 20,960Net loss— — — — — (41,978) — (41,978)Balance, December 31, 2018— $— 90,151,341 $90 $542,829 $(170,981) $— $371,938 Issuance of common stock pursuant toemployee stock purchase plan— — 490,717 — 6,732 — — 6,732Issuance of common stock pursuant toexercise of stock options— — 1,666,162 2 9,568 — — 9,570Issuance of common stock pursuant tosettlement of restricted stock units— — 966,037 1 (1) — — —Common stock surrendered for employees'tax liability upon settlement of restrictedstock units— — (272,660) — (5,126) — — (5,126)Stock-based compensation— — — — 29,095 — — 29,095Other comprehensive income (loss)— — — — — — 42 42Net loss— — — — — (80,805) — (80,805)Balance, December 31, 2019— $— 93,001,597 $93 $583,097 $(251,786) $42 $331,446The accompanying notes are an integral part of these consolidated financial statements.48Index to Consolidated Financial StatementsIndex to Notes to Consolidated Financial Statements PageNote 1:Description of Business and Summary of Significant Accounting Policies50Note 2:Segment Reporting and Revenue58Note 3:Financial Instruments60Note 4:Inventory62Note 5:Property and Equipment62Note 6:Leases62Note 7:Commitments and Contingencies63Note 8:Acquired Intangible Assets64Note 9:Accrued Liabilities64Note 10:Other Payables64Note 11:Equity and Equity Compensation Plans65Note 12:Net Loss per Share Attributable to Common Stock67Note 13:Income Taxes68Note 14:Debt7049Index to NotesRedfin Corporation and SubsidiariesNotes to Consolidated Financial Statements(in thousands, except share and per share amounts)Note 1: Description of Business and Summary of Significant Accounting PoliciesDescription of Business—Redfin Corporation was incorporated in October 2002 and is headquartered in Seattle, Washington. Weoperate an online real estate marketplace and provide real estate services, including assisting individuals in the purchase or sale of their home. Wealso provides title and settlement services, originate and sell mortgages, and buy and sell homes. We have operations located in multiple statesacross the United States and certain provinces in Canada.Initial Public Offering—On August 2, 2017, we completed our IPO whereby 10,615,650 shares of common stock were sold at a price of$15.00 per share, which included 1,384,650 shares pursuant to the underwriters' option to purchase additional shares. We received net proceeds of$144,380 after deducting the underwriting discount and offering expenses directly attributable to the IPO. Upon the closing of the IPO, all shares ofthe outstanding redeemable convertible preferred stock automatically converted into 55,422,002 shares of common stock on a one-for-one basis.Basis of Presentation—The consolidated financial statements and accompanying notes have been prepared in accordance with generallyaccepted accounting principles in the United States of America (“GAAP”).Principles of Consolidation—The consolidated financial statements include the accounts of Redfin and its wholly owned subsidiaries,including those entities in which we have a variable interest and of which we are the primary beneficiary. Intercompany transactions and balanceshave been eliminated.Certain Significant Risks and Business Uncertainties—We are subject to the risks and challenges associated with companies at asimilar stage of development. These include dependence on key individuals, successful development and marketing of our offerings, andcompetition with larger companies with greater financial, technical, and marketing resources. Further, to achieve substantially higher revenue inorder to become profitable, we may require additional funds that may not be available or may not be on terms that are acceptable to us.We operate in the online real estate marketplace and, accordingly, can be affected by a variety of factors. For example, our managementbelieves that any of the following factors could have a significant negative effect on our future financial position, results of operations, and cashflows: negative macroeconomic factors affecting the health of the U.S. residential real estate industry, negative factors disproportionately affectingmarkets where the we derive most of our revenue, intense competition in the U.S. residential real estate industry, our inability to maintain or improveour technology offerings, our failure to obtain and provide comprehensive and accurate real estate listings, errors or inaccuracies in the businessdata that we rely on to make decisions, and our inability to attract homebuyers and home sellers to our website and mobile application.Use of Estimates—The preparation of consolidated financial statements, in conformity with GAAP, requires our management to makeestimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the respective periods. Ourestimates 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 leasepayments, recoverability of intangible assets with finite lives, fair value of our mortgage loans held for sale, fair value of reporting units for purposesof evaluating goodwill for impairment, and the fair value of the convertible feature related to our convertible senior notes (see Note 14). The amountsultimately realized from the affected assets or ultimately recognized as liabilities will depend on, among other factors, general business conditionsand could differ materially in the near term from the carrying amounts reflected in the consolidated financial statements.50Index to NotesCash and Cash Equivalents—We consider all highly liquid investments originally purchased by us with original maturities of three monthsor less at the date of purchase to be cash equivalents and classified as available-for-sale. Our cash equivalents consist primarily of money marketinstruments. We maintain cash and cash equivalent balances with financial institutions that exceed federally-insured limits.Restricted Cash and Other Payables—Restricted cash primarily consists of cash held in escrow on behalf of real estate buyers using ourtitle and settlement services. Since we do not have rights to the cash, a corresponding customer deposit liability in the same amount is recognizedin the consolidated balance sheets in other payables. When a real estate services transaction closes, the restricted cash transfers from escrow andthe corresponding deposit liability is reduced. In addition, we have other restricted cash that is specifically designated to repay borrowings underwarehouse credit facilities and the secured revolving credit facility.Investments—We have two types of investments: (i) available-for-sale investments that are available to support our operational needs andwhich are reported on the balance sheet as short-term and long-term investments and (ii) long-term equity investments accounted for under the costmethod, which are reported in other non-current assets.Available-for-saleOur short-term and long-term investments consist primarily of U.S. treasury securities, all of which are classified as available-for-sale.Available-for-sale debt securities are recorded at fair value, and unrealized holding gains and losses are recorded as a component of accumulatedother comprehensive income. Available-for-sale securities with maturities of one year or less and those identified by management at the time ofpurchase to be used to fund operations within one year are classified as short-term. All other available-for-sale securities are classified as long-term.We evaluate our available-for-sale securities, both ones classified as cash equivalents and as investments, for other-than-temporary impairment ona quarterly basis. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other than temporary. Wereview factors to determine whether a loss is other than temporary, such as the length and extent of the fair value decline, the financial conditionand near-term prospects of the issuer, and whether we have the intent to sell or will more likely than not be required to sell before the securities'anticipated recovery, which may be at maturity. Realized gains and losses are accounted for using the specific identification method. Purchases andsales are recorded on a trade date basis.Cost Method InvestmentsOur long-term equity investment consist of a purchased equity interest in a privately held company for approximately $2,000. Theinvestment is an equity security without a readily determinable fair value and is accounted for at cost minus any impairment, plus or minus changesresulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. We perform a qualitativeassessment to consider impairment indicators and evaluate whether the investment is impaired as of the end of each reporting period.Fair Value—We account for certain assets and liabilities at fair value. Fair value is defined as the exchange price that would be received foran asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observableinputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuationhierarchy for disclosures as follows:Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities.51Index to NotesLevel 2—Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted prices in markets that are notactive, or other inputs that are observable such as quoted prices for similar assets or liabilities in active markets, or can be corroborated byobservable market data.Level 3—Unobservable inputs that are supported by little or no market activity and require us to develop our own assumptions.The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fairvalue measurement. Our financial instruments consist of Level 1, Level 2, and Level 3 assets and (liabilities).Concentration of Credit Risk—Financial instruments that potentially subject us to concentrations of credit risk are primarily cash and cashequivalents and investments. We generally place our cash and cash equivalents and investments with major financial institutions we deem to be ofhigh-credit-quality in order to limit our credit exposure. We maintain our cash accounts with financial institutions where, at times, deposits exceedfederal insurance limits.Inventory—Our inventory represents homes purchased with the intent of resale and are accounted for under the specific identificationmethod. Direct home acquisition and improvement costs are capitalized and tracked directly with each specific home. Homes are stated in inventoryat cost and are reviewed on a home by home basis. If a home's estimated market value is less than the inventory cost then the home is writtendown to net realizable value.We classify inventory into three categories: homes for sale, homes not available for sale, and homes under improvement. Homes for salerepresent homes that are currently listed on the market for sale. Homes not available for sale are generally recently purchased homes that havebeen temporarily rented back by the prior owner and are not listed on the market for sale. The rental period is typically less than 30 days. Homes-under-improvement are homes that are in the process of being prepared to be listed for sale.Variable Interest Entities—In connection with establishing a secured revolving credit facility to support the financing of homes that itpurchases, RedfinNow formed a special purpose entity called RedfinNow Borrower, which is a wholly owned subsidiary of Redfin Corporation. Wehave determined that RedfinNow Borrower is a variable interest entity ("VIE") and that we are the primary beneficiary of the variable interest inRedfinNow Borrower based on our power to direct the activities that most significantly impact the economic outcomes of the entity through our rolein designing the entity and managing the homes purchased and sold by the entity. We have potentially significant variable interest in the entitybased upon our equity interest held in the VIE. As we have concluded that we are the primary beneficiary, we have included the accounts of the VIEin our consolidated financial statements. The lenders of the secured revolving credit facility do not have recourse against the general credit of theprimary beneficiary beyond the circumstances disclosed in Note 14. See Note 14 for a summary of the secured revolving credit facility, includingoutstanding borrowings associated with the VIE and related collateral.Loans Held for Sale—Redfin Mortgage, a wholly owned subsidiary of Redfin Corporation, began originating residential mortgage loans inMarch 2017. Such mortgage loans are intended to be sold in the secondary mortgage market within a short period of time following origination.Mortgage loans held for sale consist of single-family residential loans collateralized by the underlying home. Mortgage loans held for sale arerecorded at fair value based on either sale commitments or current market quotes for mortgage loans with similar characteristics.Other Current Assets—Other current assets consist primarily of miscellaneous non-trade receivables and interest rate lock commitmentsfrom mortgage origination operations (see Derivative Instruments below).52Index to NotesDerivative Instruments—Redfin Mortgage is party to IRLCs with customers resulting from mortgage origination operations. IRLCs forsingle family mortgage loans that Redfin Mortgage intends to sell are considered free-standing derivatives. All free-standing derivatives are requiredto be recorded on our consolidated balance sheets at fair value. Since Redfin Mortgage can terminate a loan commitment if the borrower does notcomply with the terms of the contract, and some loan commitments may expire without being drawn upon, these commitments do not necessarilyrepresent future cash requirements.Interest rate market risk, related to the residential mortgage loans held for sale and IRLCs, is offset using forward sales commitments. Wemanage 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 in to on a mandatory basis are done through the use of commitments to sell mortgage-backed securities. Wedo not enter into or hold derivatives for trading or speculative purposes. Changes in the fair value of IRLCs and forward sales commitments arerecognized as revenue, and the fair values are reflected in other current assets and accrued liabilities, as applicable. We estimate the fair value ofan interest rate lock commitment based on current market quotes for mortgage loans with similar characteristics, net of origination costs and feesadjusting for the probability that the mortgage loan will not fund according to the terms of commitment (referred to as a pull-through factor). The fairvalue measurements of our forward sales commitments use prices quoted directly to us from our counterparties.Property and Equipment—Property and equipment is recorded at cost and depreciated using the straight-line method over the estimateduseful lives. Depreciation and amortization is included in cost of revenue, technology and development, and general and administrative and isallocated based on estimated usage for each class of asset.Leasehold improvements are amortized over the shorter of the lease term or the estimated useful life of the related asset. Upon retirementor sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss isreflected in the consolidated statements of operations. Repair and maintenance costs are expensed as incurred.Costs incurred in the preliminary stages of website and software development are expensed as incurred. Once an application has reachedthe development stage, direct internal and external costs relating to upgrades or enhancements that meet the capitalization criteria are capitalized inproperty and equipment and amortized on a straight-line basis over their estimated useful lives. Maintenance and enhancement costs (includingthose costs in the post-implementation stages) are typically expensed as incurred, unless such costs relate to substantial upgrades andenhancements to the websites (or software) that result in added functionality, in which case the costs are capitalized as well.Capitalized software development activities placed in service are amortized over the expected useful lives of those releases. We viewcapitalized software costs as either internal use, or market and product expansion. Currently, internal use and expansion useful lives are estimatedat two to three years.Estimated useful lives of website and software development activities are reviewed annually or whenever events or changes incircumstances indicate that intangible assets may be impaired and adjusted as appropriate to reflect upcoming development activities that mayinclude significant upgrades or enhancements to the existing functionality.Intangible Assets—Intangible assets are finite lived and mainly consist of trade names, developed technology, and customer relationshipsand are amortized over their estimated useful lives of ten years. The useful lives were determined by estimating future cash flows generated by theacquired intangible assets. Amortization expense is included in cost of revenue.Impairment of Long-Lived Assets—Long-lived assets are reviewed for impairment whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured first by acomparison of the53Index to Notescarrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such asset were considered to beimpaired, an impairment loss would be recognized when the carrying amount of the asset exceeds the fair value of the asset. To date, no suchimpairment has occurred.Goodwill—Goodwill represents the excess of the purchase price over the fair value of the net tangible assets and identifiable intangibleassets acquired in a business combination. Goodwill is not amortized, but is subject to impairment testing. We assess the impairment of goodwill onan annual basis, during the fourth quarter, or whenever events or changes in circumstances indicate that goodwill may be impaired. We assessgoodwill for possible impairment by performing a qualitative assessment to determine whether it is more likely than not that the fair value of thereporting unit is less than its carrying amount. If we qualitatively determine that it is not more likely than the fair value of the reporting unit is lessthan its carrying amount, then no additional impairment steps are necessary.We performed a qualitative assessment and determined that it was not more likely than not that the fair value of our reporting unit for whichgoodwill has been assigned was less than its carrying amount. In evaluating whether it was more likely than not that the fair value of our reportingunit was less than its carrying amount we considered macroeconomic conditions, industry and market considerations, cost factors, overall financialperformance, other relevant entity-specific events, potential events affecting its reporting unit, and changes in the fair value of our common stock.The primary qualitative factors we have considered in our analysis are our overall financial performance and the fair value of the reporting unit forwhich goodwill was assigned, which was substantially in excess of its book value. The aggregate carrying value of goodwill was $9,186 atDecember 31, 2019 and 2018. There have been no accumulated impairments to goodwill.Other Non-current Assets—Other assets consists primarily of leased building security deposits and an equity investment accounted forunder the cost method.Leases—The extent of our lease commitments consists of operating leases for physical office locations with terms ranging from one to 11years and finance leases for vehicles with terms of four years. We have accounted for the portfolio of leases by disaggregation based on the natureand term of the lease. Generally, the leases require a fixed minimum rent with contractual minimum rent increases over the term of the lease.Leases with an initial term of twelve months or less are not recorded on the balance sheet, but rather lease expense from these leases isrecognized on a straight-line basis over the term of the lease.When available, the rate implicit in the lease to discount lease payments to present value would be used; however, none of our significantleases as of December 31, 2019 provide a readily determinable implicit rate. Therefore, we must estimate our incremental borrowing rate for eachportfolio of leases to discount the lease payments based on information available at lease commencement.We have evaluated the performance of existing leases in relation to our leasing strategy and have determined that most renewal optionswould not be reasonably certain to be exercised.The right of use asset and related lease liability are determined based on the lease component of the consideration in each lease contract.We have evaluated our lease portfolio for appropriate allocation of the consideration in the lease contracts between lease and nonleasecomponents based on standalone prices and determined the allocation per the contracts to be appropriate.Foreign Currency Translation—Our international operations generally use their local currency as their functional currency. Assets andliabilities are translated at exchange rates in effect at the balance sheet date. Income and expense accounts are translated at the average monthlyexchange rates during the year. Resulting translation adjustments are reported as a component of other comprehensive income and recorded inaccumulated other comprehensive income on our consolidated balance sheets.54Index to NotesIncome Taxes—Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assetsand liabilities for the expected future tax consequences of temporary differences between the consolidated financial statement and tax bases ofassets and liabilities at the applicable enacted tax rates. We establish a valuation allowance for deferred tax assets if it is more likely than not thatthese items will expire before we are able to realize their benefits or if future deductibility is uncertain.We believe that it is currently more likely than not that our deferred tax assets will not be realized and as such, have recorded a fullvaluation allowance for these assets. We evaluate the likelihood of the ability to realize deferred tax assets in future periods on a quarterly basis,and, when appropriate evidence indicates, will release the valuation allowance accordingly. The determination to provide a valuation allowance isdependent upon the assessment of whether it is more likely than not that sufficient taxable income will be generated to utilize the deferred taxassets. Based on the weight of the available evidence, which includes our historical operating losses, lack of taxable income, and accumulateddeficit, we have provided a full valuation allowance against the U.S. tax assets resulting from the tax losses and credits carried forward.Revenue Recognition—We generate revenue primarily from commissions and fees charged on each real estate services transactionclosed by our lead agents or partner agents, and from the sale of homes. Our key revenue components are brokerage revenue, partner revenue,property revenue, and other revenue.We have utilized the practical expedient in ASC 606 and elected not to capitalize contract costs for contracts with customers with durationsof less than one year. We do not have significant remaining performance obligations or contract balances.Revenue earned but not received is recorded as accrued revenue in accounts receivable on our consolidated balance sheets, net of anallowance for doubtful accounts. Accrued revenue consisting of commission revenue, is known and is clearing escrow, and therefore it is notestimated.Nature and Disaggregation of RevenueReal Estate ServicesBrokerage Revenue—Brokerage revenue includes our offer and listing services, where our lead agents represent home buyers and homesellers. 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. The transaction price is calculated by taking the agreed uponcommission rate and applying that to the home's selling price. Brokerage revenue primarily contains a single performance obligation that is satisfiedupon the closing of a real estate services transaction, at which point the entire transaction price is earned. We are not entitled to any commissionuntil the performance obligation is satisfied and are not owed any commission for unsuccessful transactions, even if services have been provided.We may offer promotional pricing which results in a material right to our customers and represents an additional performance obligation, in whichthe transaction price is allocated based on standalone selling prices. Our promotional pricing offers have not resulted in a material impact to timingof revenue recognition or contract liabilities with our customers for the periods presented.Partner Revenue—Partner revenue consists of fees paid to us from partner agents or under other referral agreements, less the amount ofany payments we make to customers. We recognize these fees as revenue on the closing of a transaction. The transaction price is a fixedpercentage of the partner agent's commission. The partner agent or other entity related to our referral agreements directly remits the referral feerevenue to us. We are not entitled to any referral fee revenue until the related referred real estate services transaction closes.Properties55Index to NotesProperties Revenue—Properties revenue consists of revenue earned when we sell homes that were previously bought directly fromhomeowners. Properties revenue is recorded at closing on a gross basis, representing the sales price of the home. Our contracts with customerscontain a single performance obligation that is satisfied upon a transaction closing. We do not offer warranties for sold homes, and there are nocontinuing performance obligations following the transaction close date.OtherOther Revenue—Other services revenue includes fees earned from mortgage origination services, title settlement services, Walk Scoredata services, and advertising. Substantially all fees and revenue from other services are recognized when the service is provided. Mortgagebanking services are not subject to the guidance in ASC 606 as the scope of the standard does not apply to revenue on contracts accounted forunder Transfers and Servicing (Topic 860) but are included in other services revenue to reconcile total revenue presented on the consolidatedstatements of operations to the disaggregation of revenue table below.Intercompany EliminationsIntercompany Eliminations—Revenue earned from transactions between operating segments are eliminated in consolidating our financialstatements. Intercompany transactions primarily consist of services performed from our real estate services segment for our properties segment.Accounts Receivable and Allowance for Doubtful Accounts—We establish an allowance for doubtful accounts after reviewing historicalexperience, age of accounts receivable balances and any other known conditions that may affect collectability. The majority of our transactions areprocessed through escrow and collectability is not a significant risk. Accounts receivable related to real estate services and properties transactionsrepresents closed transactions for which the cash has not yet been received.Cost of Revenue—Cost of revenue consists primarily of personnel costs (including base pay, benefits, and stock-based compensation),transaction bonuses, home-touring and field expenses, listing expenses, home costs related to our properties segment, office and occupancyexpenses, and depreciation and amortization related to fixed assets and acquired intangible assets. Home costs related to our properties segmentinclude home purchase costs, capitalized improvements, selling expenses directly attributable to the transaction, and home maintenance expenses.Technology and Development—Technology and development expenses primarily include personnel costs (including base pay, benefits,and stock-based compensation), data licenses, software and equipment, and infrastructure such as for data centers and hosted services. Theexpenses also include amortization of capitalized internal-use software and website and mobile application development costs. We expenseresearch and development costs as incurred and record them in technology and development expenses.Advertising and Advertising Production Costs—We expense advertising costs as they are incurred and production costs as of the firstdate the advertisement takes place. Advertising costs totaled $62,536, $33,457, and $21,902 in 2019, 2018, and 2017 respectively, and areincluded in marketing expenses. Advertising production costs totaled $2,029, $1,644, and $1,609 in 2019, 2018, and 2017, respectively, and areincluded in marketing expenses.Stock-based Compensation—We account for stock-based compensation by measuring and recognizing as compensation expense thefair value of all share-based payment awards made to employees, including stock options and restricted stock unit awards, and shares forecasted tobe issued pursuant to our ESPP, in each case based on estimated grant date fair values. Stock-based compensation expense is recognized overthe requisite service period on a straight-line basis. The Black-Scholes-Merton option-pricing model is used to determine the fair value for stockoptions and shares forecasted to be issued pursuant to our ESPP. For restricted stock unit awards and performance56Index to Notesstock unit awards we use the market value of our common stock on the date of grant to determine the fair value of the award.In valuing stock options and shares forecasted to be issued pursuant to our ESPP, we make assumptions about expected life, stock pricevolatility, risk-free interest rates and expected dividends.Expected Life—The expected term was estimated using the simplified method allowed under guidance from the U.S. Securities andExchange Commission as our historical share option exercise experience does not provide a reasonable basis upon which to estimate expectedterm.Volatility—The expected stock price volatility for our common stock was estimated by taking the average historical price volatility forindustry peers based on daily price observations. Industry peers consist of several public companies in the real estate brokerage and technologyindustries.Risk-Free Rate—The risk-free interest rate is based on the yields of U.S. Treasury securities with maturities similar to the expected term ofthe options for each option group.Dividend Yield—We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeablefuture. Consequently, an expected dividend yield of zero was used.Forfeiture Rate—Beginning on January 1, 2017, we adopted Accounting Standard Update ("ASU") 2016-09 and elected to account forforfeitures as they occur.Recently Adopted Accounting Pronouncements—In January 2019, we adopted ASU 2016-02, Leases (Topic 842), using the optionalalternative transition method under ASU 2018-11, Leases (Topic 842) Targeted Improvements. The optional alternative transition method appliesthe new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in theperiod of adoption. We evaluated our portfolio of leases upon adoption and determined a cumulative-effect adjustment to the opening balance ofretained earnings was not needed, as the portfolio of leases contained only operating leases.We elected the package of practical expedients permitted under the transition guidance within the standard, allowing us to carry forward thehistorical lease classification, carry forward the conclusions on whether current or expired contracts contain leases, and carry forward the accountingfor initial direct costs for existing leases. Additionally, we elected the practical expedient for use of hindsight to determine the lease term for existingleases whereby we evaluated the performance of existing leases in relation to our leasing strategy and determined that most renewal options wouldnot be reasonably certain to be exercised. This resulted in the shortening of lease terms for the existing leases.Adoption of the standard resulted in the recording of right of use assets and corresponding lease liabilities of $33,953 and $49,395,respectively, as of January 1, 2019, the difference of which is due to lease incentives. Further description of the impact of this pronouncement isincluded in Note 6.In January 2019, we adopted the guidance in the SEC's final rule under Release No. 33-10532, Disclosure Update and Simplification. InAugust 2018, the SEC issued the final rule amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated, orsuperseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders' equity for interim financialstatements. Under the amendments, an analysis of changes in each caption of stockholders' equity presented in the balance sheet must beprovided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of eachperiod for which a statement of comprehensive income is required to be filed.In August 2018, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance under ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is aService57Index to NotesContract. The ASU requires implementation costs incurred by customers in cloud computing arrangements (i.e., hosting arrangements) to becapitalized under the same premises of authoritative guidance for internal-use software, and deferred over the noncancelable term of the cloudcomputing arrangements plus any option renewal periods that are reasonably certain to be exercised by the customer or for which the exercise iscontrolled by the service provider. The ASU is effective for public entities for fiscal years beginning after December 15, 2019 and early adoption ispermitted. We elected to early adopt this standard in the third quarter of 2019 on a prospective basis, which did not result in a material effect on ourconsolidated financial statements.In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), which modifies the disclosures on fair valuemeasurements by removing the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair valuehierarchy and the policy for timing of such transfers. The ASU expands the disclosure requirements for Level 3 fair value measurements, primarilyfocused on changes in unrealized gains and losses included in other comprehensive income. The ASU is effective for public entities for fiscal yearsbeginning after December 15, 2019, with early adoption permitted. We have elected to early adopt this ASU and determined the adoption did notresult in a material impact to the disclosures included in Note 3.Recently Issued Accounting Pronouncements—In June 2016, the FASB issued authoritative guidance under ASU 2016-13, FinancialInstruments—Credit Losses (Topic 326), which modifies the measurement of credit losses on financial instruments. This guidance requires the useof an expected loss impairment model for instruments measured at amortized cost based on relevant information about past events, includinghistorical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. For available-for-sale debt securities, an entity is required to recognize credit losses through an allowance for credit losses rather than as an impairment. The ASUis effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The adoption of thisguidance requires a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance iseffective. We have completed an assessment of the impact of the new standard on our consolidated financial statements and do not expect amaterial impact.Note 2: Segment Reporting and RevenueIn operation of the business, our management, including our chief operating decision maker, who is also our Chief Executive Officer,evaluates the performance of our operating segments based on revenue and gross profit. We do not analyze discrete segment balance sheetinformation related to long-term assets, all of which are located in the United States. All other financial information is presented on a consolidatedbasis. We have five operating segments and two reportable segments, real estate services and properties.We generate revenue primarily from commissions and fees charged on real estate services transactions closed by our lead agents orpartner agents, and from the sale of homes. Our key revenue components are brokerage revenue, partner revenue, properties revenue, and otherrevenue.Information on each of the reportable and other segments and reconciliation to consolidated net loss is as follows:58Index to Notes Year Ended December 31, 2019 2018 2017Real estate services Brokerage revenue$496,480 $406,293 $330,372Partner revenue27,060 25,875 21,198Total real estate services revenue523,540 432,168 351,570Cost of revenue373,150 309,069 237,832Gross profit$150,390 $123,099 $113,738Properties Revenue240,507 44,993 10,491Cost of revenue245,189 46,613 10,384Gross profit$(4,682) $(1,620) $107Other Revenue17,634 9,882 7,975Cost of revenue19,239 11,937 10,000Gross profit$(1,605) $(2,055) $(2,025)Intercompany eliminations Revenue(1,885) (123) —Cost of revenue(1,885) (123) —Gross profit$— $— $—Consolidated Revenue779,796 486,920 370,036Cost of revenue635,693 367,496 258,216Gross profit$144,103 $119,424 $111,820Operating expenses223,349 163,358 127,792Interest income7,146 5,416 882Interest expense(8,928) (3,681) —Other income, net223 221 88 Net loss$(80,805) $(41,978) $(15,002)Revenue earned but not received is recorded as accounts receivable on our consolidated balance sheets, net of an allowance for doubtfulaccounts. Accounts receivable consists primarily of commission revenue and proceeds from the sale of homes and are known, and therefore it isnot estimated.The following table presents the detail of accounts receivable for the periods presented: Year Ended December 31, 2019 2018Accounts receivable$19,388 $15,529Less: Allowance for doubtful accounts(165) (166)Accounts receivable, net$19,223 $15,363The following table presents the activity in the allowance for doubtful accounts for the periods presented:59Index to Notes Year Ended December 31, 2019 2018 2017Balance, beginning of period$166 $160 $150Charges(15) 43 81Write-offs14 (37) (71)Balance, end of period$165 $166 $160Note 3: Financial InstrumentsA summary of assets and (liabilities) as of December 31, 2019 and 2018 related to our financial instruments, measured at fair value on arecurring basis and as reflected in our consolidated balance sheets, is set forth below: Balance as ofDecember 31, 2019 Quoted Prices inActive Markets forIdentical Assets (Level 1) SignificantOther ObservableInputs(Level 2) SignificantUnobservable Inputs(Level 3)Assets Cash equivalents Money market funds $221,442 $221,442 $— $—Short-term investments U.S. treasury securities 70,029 70,029 — —Loans held for sale 21,985 — 21,985 —Prepaid expenses and other current assets Forward sales commitments 4 — 4 —Interest rate lock commitments 496 — — 496Total prepaid expenses and other current assets 500 — 4 496Long-term investments U.S. treasury securities 30,978 30,978 — —Total assets $344,934 $322,449$21,989 $496Liabilities Accrued liabilities Forward sales commitments $57 $— $57 $—Interest rate lock commitments 58 — — 58Total liabilities $115 $— $57 $5860Index to Notes Balance as ofDecember 31, 2018 Quoted Prices inActive Markets forIdentical Assets (Level 1) SignificantOther ObservableInputs(Level 2) SignificantUnobservable Inputs(Level 3)Assets Cash equivalents Money market funds $425,776 $425,776 $— $—Loans held for sale 4,913 — 4,913 —Prepaid expenses and other current assets Interest rate lock commitments 254 — — 254Total prepaid expenses and other current assets 254 — — 254Total assets $430,943 $425,776 $4,913 $254Liabilities Accrued liabilities Forward sales commitments $141 $— $141 $—Total liabilities $141 $— $141 $—There was no significant activity within Level 3 financial instruments during the periods presented.See Note 14 for the carrying amount and estimated fair value of our convertible senior notes.Assets and liabilities recognized or disclosed at fair value on a nonrecurring basis include items such as property and equipment, goodwilland other intangible assets, cost method investments, and other assets. These assets are measured at fair value if determined to be impaired. Wedid not record any significant nonrecurring fair value measurements after initial recognition for the year ended December 31, 2019.The following table summarizes the cost or amortized cost, gross unrealized gains and losses, and estimated fair market value of our cash,money market funds, restricted cash and available-for-sale investments as of December 31, 2019 and 2018: December 31, 2019 Fair ValueHierarchy Cost orAmortizedCost UnrealizedGains UnrealizedLosses EstimatedFair Value Short-termInvestments Long-termInvestmentsCash N/A 13,237 — — 13,237 — —Money markets funds Level 1 221,442 — — 221,442 — —Restricted cash N/A 12,769 — — 12,769 — —U.S. treasury securities Level 1 100,998 31 (22) 101,007 70,029 30,978Total 348,446 31 (22) 348,455 70,029 30,978 December 31, 2018 Fair ValueHierarchy Cost orAmortizedCost UnrealizedGains UnrealizedLosses EstimatedFair Value Short-termInvestments Long-termInvestmentsCash N/A 6,832 — — 6,832 — —Money markets funds Level 1 425,776 — — 425,776 — —Restricted cash N/A 6,446 — — 6,446 — —Total 439,054 — — 439,054 — —61Index to NotesThere were no other than temporary impairments during the periods presented.Note 4: InventoryA summary of inventory as of December 31, 2019 and 2018 is as follows: December 31, 2019 2018Homes for sale$36,982 $12,649Homes not available for sale3,163 2,328Homes under improvement34,445 7,717Inventory$74,590 $22,694Inventory costs include direct home acquisition costs and any capitalized improvements, net of lower of cost or net realizable value write-downs applied on a specific home basis. As of December 31, 2019 and December 31, 2018, lower of cost or net realizable value write-downs were$143 and $190, respectively.The following is the inventory activity for the year ended December 31, 2019:Inventory as of December 31, 2018$22,694Purchases and capitalized improvements to inventory274,758Relief of inventory to cost of revenue(222,909)Lower of cost or net realizable value write-downs, net47Inventory as of December 31, 2019$74,590Note 5: Property and EquipmentA summary of property and equipment as of December 31, 2019 and 2018 is as follows: December 31, Useful Lives (years) 2019 2018Leasehold improvementsShorter of lease term oreconomic life $28,141 $19,285Website and software development costs2-3 27,602 19,948Computer and office equipment3 4,846 2,956Software3 595 595Furniture7 6,965 3,933Construction in progress 475 —Property and equipment, gross 68,624 46,717Accumulated depreciation and amortization (29,047) (21,530)Property and equipment, net $39,577 $25,187Depreciation and amortization expense for property and equipment amounted to $8,742, $7,977, and $6,688 for the years endedDecember 31, 2019, 2018, and 2017, respectively. We capitalized software development costs, including stock-based compensation, of $8,396,$5,796, and $4,887 during the years ended December 31, 2019, 2018, and 2017, respectively.Note 6: LeasesThe components of lease activity were as follows:62Index to NotesLease Cost Classification Year EndedDecember 31, 2019Operating lease cost: Operating lease cost(1) Cost of revenue $7,970Operating lease cost(1) Operating expenses 3,648Total operating lease cost $11,618Finance lease cost: Amortization of right-of-use assets Cost of revenue $20Interest on lease liabilities Cost of revenue 3Total finance lease cost $23(1) Includes lease expense with initial terms of twelve months or less of $2,180 for the year ended December 31, 2019.Maturity of Lease Liabilities Operating Leases Financing Leases2020 $14,776 $602021 14,252 602022 13,506 602023 12,541 462024 10,947 —Thereafter 16,914 —Total lease payments $82,936 $226Less: Interest and other(1) (11,865) (21)Present value of lease liabilities $71,071 $205(1) Interest and other consists of interest expense related to capitalized right of use operating lease liabilities of $10,132, interest expense related to capitalized right of use financing lease liabilities of $21,commitments related to operating leases that have not yet commenced, and operating leases with initial terms of twelve months or less.Lease Term and Discount Rate December 31, 2019Weighted average remaining operating lease term (years) 6.1Weighted average remaining finance lease term (years) 3.8Weighted average discount rate for operating leases 4.4%Weighted average discount rate for finance leases 5.4%Supplemental Cash Flow Information Year EndedDecember 31, 2019Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $9,868Operating cash flows from finance leases 3Financing cash flows from finance leases 14Right of use assets obtained in exchange for lease liabilities Operating leases $58,669 Finance leases 274Note 7: Commitments and ContingenciesLegal Proceedings—On August 28, 2019, one of our former associate agents filed a complaint against us in the Superior Court ofCalifornia, County of San Francisco alleging that we misclassified her as an independent contractor instead of an employee. Given the preliminarystage of this case and the claims and issues presented, we cannot estimate a range of reasonably possible losses.In addition to the matter discussed above, from time to time, we are involved in litigation, claims, and other proceedings arising in theordinary course of our business. Except for the matter discussed63Index to Notesabove, we do not believe that any of the pending litigation, claims, and other proceedings are material to our business.Leases and Other Commitments—We lease office space under noncancelable operating leases with terms ranging from one to 11 yearsand vehicles under noncancelable finance leases with terms of four years. Generally, the operating leases require a fixed minimum rent withcontractual minimum rent increases over the lease term. Other commitments relate to homes that are under contract to purchase through ourproperties business but that have not closed, and network infrastructure for our data operations.Future payments due under these agreements as of December 31, 2019 are as follows: Leases(1) Other Commitments2020$14,836 $26,048202114,312 4,779202213,566 5,148202312,587 —2024 and thereafter27,861 —Total future minimum payments$83,162 $35,975(1) The future minimum lease payments are presented on the same basis as the financial information presented in our consolidated financial statements and notes for the year ended December 31, 2018, as includedin our Annual Report on Form 10-K for such period.Note 8: Acquired Intangible AssetsThe following table presents details of our intangible assets subject to amortization as of December 31, 2019 and 2018. December 31, 2019 December 31, 2018 UsefulLive(years) Gross AccumulatedAmortization Net Gross AccumulatedAmortization NetTrade Names10 $1,040 $(546) $494 $1,040 $(442) $598Developed technology10 2,980 (1,564) 1,416 2,980 (1,266) 1,714Customer relationships10 860 (452) 408 860 (366) 494 $4,880 $(2,562) $2,318 $4,880 $(2,074) $2,806Amortization expense totaled $488 for each year ended December 31, 2019, and 2018. We will recognize the remaining amortizationexpense of $2,318 over a five-year period, with the first four years recognizing expense of $488 per year, and the fifth year recognizing expense of$366.Note 9: Accrued LiabilitiesThe following table presents the detail of accrued liabilities as of the dates presented: December 31, 2019 2018Accrued compensation and benefits$30,462 $22,862Miscellaneous accrued liabilities7,517 7,975Total accrued liabilities$37,979 $30,837Note 10: Other PayablesOther payables consists primarily of customer deposits for cash held in escrow on behalf of real estate buyers using our title and settlementservices. Since we do not have rights to the cash, the customer deposits are recorded as a liability with a corresponding asset in the same amountrecorded within restricted cash.64Index to NotesThe following table presents the detail of other payables as of the dates presented: December 31, 2019 2018Customer deposits$7,109 $6,226Miscellaneous payables775 318Total other payables$7,884 $6,544Note 11: Equity and Equity Compensation PlansCommon Stock—As of December 31, 2019 and 2018, our amended and restated certificate of incorporation authorized us to issue500,000,000 shares of common stock with a par value of $0.001 per share.Preferred Stock—As of December 31, 2019 and 2018, our amended and restated certificate of incorporation authorized us to issue10,000,000 shares of preferred stock at a par value of $0.001, of which no shares were outstanding.Amended and Restated 2004 Equity Incentive Plan—We granted stock options under our 2004 Equity Incentive Plan, as amended("2004 Plan"), until July 26, 2017, when we terminated it in connection with our IPO. Accordingly, no shares are available for future issuance underour 2004 Plan. Our 2004 Plan continues to govern outstanding equity awards granted thereunder. The term of each stock option under the plan isno more than 10 years, and each stock option generally vests over a four-year period.2017 Equity Incentive Plan—Our 2017 Equity Incentive Plan ("2017 EIP") became effective on July 26, 2017 and provides for issuance ofincentive and nonqualified common stock options and restricted stock units to employees, directors, officers, and consultants. The number of sharesof common stock initially reserved for issuance under our 2017 EIP was 7,898,159. The number of shares reserved for issuance under our 2017EIP will increase automatically on January 1 of each calendar year beginning on January 1, 2018, and continuing through January 1, 2028, by thenumber 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 anamount determined by our board of directors. The term of each stock option and restricted stock unit under the plan will not exceed 10 years, andeach award generally vests over a four-year period.We have reserved shares of common stock for future issuance under our 2017 EIP as follows: December 31, 2019 2018Stock options issued and outstanding7,792,181 9,435,349Restricted stock units outstanding5,023,412 3,264,702Shares available for future equity grants7,100,499 5,068,013Total shares reserved for future issuance19,916,092 17,768,0642017 Employee Stock Purchase Plan—Our ESPP was approved by the board of directors on July 27, 2017, and enables eligibleemployees to purchase shares of our common stock at a discount. Purchases will be accomplished through participation in discrete offeringperiods. We initially reserved 1,600,000 shares of common stock for issuance under our ESPP. The number of shares reserved for issuance underour 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 precedingDecember 31 or an amount determined by our board of directors. On each purchase date, eligible employees will purchase our common stock at aprice 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) thefair market value of our common stock on the purchase date.65Index to NotesWe have reserved shares of common stock for future issuance under our ESPP as follows: Year Ended December 31, 2019 2018Shares available for issuance at beginning of period2,890,973 2,414,688Shares issued during the period490,717 425,228 Total shares available for future issuance at end of period2,400,256 1,989,460The weighted-average grant date fair value and the assumptions used in calculating fair values of shares forecasted to be issued pursuantto our ESPP are as follows: For the Offering Periodbeginning July 1, 2019 For the Offering Period beginningJanuary 1, 2019Expected life 0.5 years 0.5 yearsVolatility 39.60% 42.25%Risk-free interest rate 2.10% 2.51%Dividend yield —% —%Weighted-average grant date fair value $4.59 $3.80Stock Options—The fair value of stock option awards was estimated at the grant date with the following weighted average assumptions: December 31, 2019 2018 2017Expected life 6.5 years — 7 yearsVolatility 33.76% —% 37.88%-40.97%Risk-free interest rate 2.12% —% 1.96%-2.26%Dividend yield —% —% —%Weighted-average grant date fair value $3.22 — $4.86The following table summarizes activity for stock options for the year ended December 31, 2019: Number OfOptions Weighted- AverageExercise Price Weighted AverageRemainingContractual Life(years) AggregateIntrinsic ValueOutstanding as of January 1, 20199,435,349 $6.48 6.06 $74,669Options granted150,000 27.50 — —Options exercised(1,666,162) 5.74 Options forfeited(116,398) 9.16 Options canceled(10,608) 8.75 Outstanding as of December 31, 20197,792,181 $7.00 5.28 $111,122Options exercisable as of December 31, 20197,043,042 $6.35 5.05 $104,141The grant date fair value of stock options is recorded as stock-based compensation over the vesting period. As of December 31, 2019,there was $3,573 of total unrecognized stock-based compensation related to stock options. These costs are expected to be recognized over aweighted-average period of 1.13 years. The total fair value of stock options vested during 2019, 2018, and 2017 was $4,747, $7,089, and $10,571,respectively. The total intrinsic value of stock options exercised during 2019, 2018, and 2017 was $20,811, $49,276, and $9,322, respectively.On June 1, 2019, we granted stock options subject to performance conditions, with a target of 150,000 shares and a maximum 300,000shares, to our Chief Executive Officer. The options have an exercise price of $27.50 per share and have the same performance and vestingconditions as the restricted66Index to Notesstock units subject to performance conditions that we granted in 2019 (the "2019 PSUs"). We granted no stock options in 2018.Restricted Stock Units—The following table summarizes activity for restricted stock units for the year ended December 31, 2019: Restricted StockUnits Weighted AverageGrant-Date FairValueOutstanding as of January 1, 20193,264,702 $19.68Granted3,184,465 18.19Vested(966,037) 19.95Forfeited or canceled(459,718) 19.65Outstanding as of December 31, 20195,023,412 $18.69The grant date fair value of restricted stock units is recorded as stock-based compensation over the vesting period. As of December 31,2019, there was $86,549 of total unrecognized stock-based compensation related to restricted stock units, which is expected to be recognized overa weighted-average period of 3.06 years.As of December 31, 2019, there were outstanding 314,999 restricted stock units subject to performance conditions ("PSUs") at 100% of thetarget level. Depending on our achievement of the performance conditions, the actual number of shares of common stock issuable upon vesting ofPSUs will range from 0% to 200% of the target amount. For each PSU recipient, the award will vest, subject to the recipient continuing to provideservice to us, upon our board of directors, or its compensation committee, certifying that we have achieved the PSU's related performanceconditions. Stock-based compensation expense for PSUs will be recognized when it is probable that the performance conditions will be achieved.For the year ended December 31, 2019, we recognized a net $284 of stock-based compensation expense for PSUs, which includes (i) anadjustment of ($610) related to PSUs granted in 2018 as the probability of achieving the performance conditions was determined to be not probableand (ii) a charge of $894 related to the 2019 PSUs.Compensation Cost—The following table details, for each period indicated, (i) our stock-based compensation net of forfeitures, and theamount capitalized in internally developed software and (ii) includes changes to the probability of achieving outstanding performance-based equityawards, each as included in our consolidated statements of operations: Year Ended December 31, 2019 2018 2017Cost of revenue$6,087 $5,567 $2,902Technology and development12,362 7,576 3,325Marketing1,418 662 487General and administrative7,947 6,633 4,387Total stock-based compensation$27,814 $20,438 $11,101We capitalize stock-based compensation related to work performed on internally developed software. There was $1,280, $522, and $268 ofstock-based compensation that was capitalized in the years ended December 31, 2019, 2018, and 2017, respectively. All capitalized stock-basedcompensation is related to employees in technology and development.Note 12: Net Loss per Share Attributable to Common StockNet loss per share attributable to common stock is computed by dividing the net loss attributable to common stock by the weighted-averagenumber of common shares outstanding. We have outstanding stock options, restricted stock units, options to purchase shares under our ESPP, andconvertible senior67Index to Notesnotes, which are considered in the calculation of diluted net income per share whenever doing so would be dilutive.As of December 31, 2019, we have one class of participating security, common stock, as all outstanding redeemable convertible preferredstock was converted to common stock on the date of our IPO, or August 2, 2017. Prior to August 2, 2017, we calculated basic and diluted net lossper share attributable to common stock in conformity with the two-class method required for companies with participating securities. Under the two-class method, net loss attributable to common stock was not allocated to the redeemable convertible preferred stock as the holders of redeemableconvertible preferred stock did not have a contractual obligation to share in losses.The following table sets forth the calculation of basic and diluted net loss per share attributable to common stock during the periodspresented: Year Ended December 31, 2019 2018 2017Numerator: Net loss$(80,805) $(41,978) $(15,002)Accretion of preferred stock— — (175,915)Net loss attributable to common stock—basic and diluted$(80,805) $(41,978) $(190,917) Denominator: Weighted average shares —basic and diluted91,583,533 85,669,039 42,722,114Net loss per share attributable to common stock—basic and diluted$(0.88) $(0.49) $(4.47)The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net loss per shareattributable to common stock for the periods presented because their effect would have been anti-dilutive. For the year ended December 31, 2017,shares of the redeemable convertible preferred stock were anti-dilutive. However, because the preferred stock converted into common stock on aone-for-one basis on August 2, 2017 upon the completion of our IPO, we included the preferred stock in the weighted average shares outstandingfor the year ended December 31, 2017. Year Ended December 31, 2019 2018 2017Stock options outstanding7,792,181 9,435,349 13,180,950Restricted stock units outstanding5,023,412 3,264,702 981,276Employee stock purchase plan— — —Total12,815,593 12,700,051 14,162,226We are required to consider the impact of our convertible senior notes on our diluted net income per share based on the treasury stockmethod as we have the ability, and intent, to settle any conversions of the notes solely in cash. The treasury stock method requires that the dilutiveeffect of common stock issuable upon conversion of the notes be computed in the periods in which we report net income. For the year endedDecember 31, 2019, there was no dilutive effect from the notes.Note 13: Income TaxesOur deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. The following table represents the significant components of ourdeferred tax assets and liabilities for the periods presented:68Index to Notes December 31, 2019 2018Deferred tax assets Net operating loss carryforwards$49,211 $31,311Credit carryforwards8,638 6,655Stock-based compensation5,142 4,073Compensation accruals2,297 1,873Lease liability18,404 —Accruals and reserves795 3,223Gross deferred tax assets84,487 47,135Valuation allowance(62,274) (38,010)Total deferred tax assets, net of valuation allowance22,213 9,125Deferred tax liabilities Intangible assets(605) (734)Prepaid expenses(1,688) (1,503)Convertible senior notes(5,359) (6,888)Right-of-use assets(13,579) —Fixed assets(982) —Total deferred tax liabilities(22,213) (9,125)Net deferred tax assets and liabilities$— $—The valuation allowance increased by $24,264 during the year ended December 31, 2019, increased by $8,192 during the year endedDecember 31, 2018, and decreased by $8,489 during the year ended December 31, 2017.The following table represents our net operating loss ("NOL") carryforwards as of December 31, 2019 and 2018: December 31, 2019 2018Federal$195,133 $125,850Various states10,421 6,180Foreign1,212 —Federal NOL carryforwards are available to offset federal taxable income and begin to expire in 2025, with NOL carryforwards of $109,484generated after 2017 available to offset future U.S. federal taxable income over an indefinite period. State NOL carryforwards are available to offsetfuture taxable income and begin to expire in 2019. NOL carryforward periods for the various states jurisdictions generally range from 5 to 20 years.Foreign NOL carryforward periods for foreign federal and provincial jurisdictions are generally 20 years. Additionally, net research and developmentcredit carryforwards of $8,638 and $6,655 are available as of December 31, 2019 and 2018, respectively, to reduce future tax liabilities. Theresearch and development credit carryforwards begin to expire in 2026.Current tax laws impose substantial restrictions on the utilization of research and development credits and NOL carryforwards in the eventof an ownership change, as defined by Internal Revenue Code Sections 382 and 383. Such an event may significantly limit our ability to utilize itsnet NOLs and research and development tax credit carryforwards. During 2017, we completed a Section 382 study. The study determined that weunderwent an ownership change in 2006. Due to the Section 382 limitation determined on the date of the change in control in 2006, the NOL andresearch and development credit carryforwards have been reduced by $1,506 and $32, respectively.The components of loss before benefit for income taxes for the years ended December 31, 2019, 2018, and 2017 were $(80,805),$(41,978), and $(15,002), respectively.69Index to NotesThe following table is a reconciliation of the U.S. federal income tax at statutory rate to our effective income tax rate: December 31, 2019 2018 2017U.S. federal income tax at statutory rate21.00 % 21.00 % 34.00 %State taxes (net of federal benefit)4.71 5.67 2.40Stock-based compensation1.20 7.51 (14.74)Permanent differences(0.97) (0.57) (0.29)Federal research and development credit2.45 4.26 7.08Change in valuation allowance(29.73) (37.33) (27.79)Other1.34 (0.54) (0.66)Change in valuation allowance for Tax Act impact— — 84.37Change in deferred balance before valuation allowance for Tax Reform impact— — (84.37)Effective income tax rate— % — % — %We did not record any tax benefits for the years ended December 31, 2019, 2018, and 2017. The difference between the U.S. federalincome tax at statutory rate of 21% for the years ended December 31, 2019 and 2018, 34% for the year ended December 31, 2017, and oureffective tax rate in all periods is primarily due to a full valuation allowance related to our U.S. deferred tax assets and the change in corporate taxrate effective for tax years beginning after December 31, 2017.We account for uncertainty in income taxes in accordance with ASC 740. We evaluate our tax positions in a two-step process, whereby wefirst determine whether it is more likely than not that a tax position will be sustained upon examination by the tax authority, including resolutions ofany related appeals or litigation processes, based on technical merit. If a tax position meets the more-likely-than-not recognition threshold it is thenmeasured to determine the amount of benefit to recognize in the financial statements. The tax position is measured as the largest amount of benefitthat is greater than 50% likely of being realized upon ultimate settlement.The following table summarizes the activity related to unrecognized tax benefits: December 31, 2019 2018Unrecognized benefit—beginning of year$1,663 $1,057Gross decreases—prior year tax positions(127) —Gross increases—current year tax positions623 606Unrecognized benefit—end of year$2,159 $1,663All of the unrecognized tax benefits as of December 31, 2019 and 2018 are accounted for as a reduction in our deferred tax assets. Due toour valuation allowance, none of the $2,159 and $1,663 of unrecognized tax benefits would affect our effective tax rate, if recognized. We do notbelieve it is reasonably possible that our unrecognized tax benefits will significantly change in the next twelve months.We recognize interest and penalties related to unrecognized tax benefits as income tax expense. There was no interest or penaltiesaccrued related to unrecognized tax benefits for each year ended December 31, 2019 and 2018 and no liability for accrued interest or penaltiesrelated to unrecognized tax benefits as of December 31, 2019.Our material income tax jurisdiction is the United States (federal). As a result of NOL carryforwards, we are subject to audit for all tax yearsfor federal purposes. All tax years remain subject to examination in various other jurisdictions that are not material to our consolidated financialstatements.Note 14: Debt70Index to NotesWarehouse Credit Facilities—To provide capital for the mortgage loans that it originates, Redfin Mortgage utilizes warehouse creditfacilities that are classified as current liabilities in our consolidated balance sheets. Borrowings under each warehouse credit facility are secured bythe related mortgage loan and rights and income related to the loans. The following table summarizes borrowings under these facilities as of theperiods presented:Lender Borrowing Capacity as ofDecember 31, 2019 Borrowings as ofDecember 31, 2019 Borrowings as of December31, 2018Western Alliance Bank $24,500 $8,489 $1,141Texas Capital Bank, N.A. 24,500 10,210 3,592Flagstar Bank, FSB 15,000 2,603 N/ATotal $64,000 $21,302 $4,733Borrowings under the facility with Western Alliance Bank ("Western Alliance") mature on June 15, 2020 and generally bear interest at a rateequal to the greater of (i) one-month LIBOR plus 2.00% or (ii) 3.50%. The weighted average interest rate on outstanding borrowings as ofDecember 31, 2019 and 2018 was 3.79% and 5.26%, respectively. The agreement governing the facility requires Redfin Mortgage to maintaincertain financial covenants. Additionally, Redfin Corporation has agreed to make capital contributions in an amount necessary for Redfin Mortgageto satisfy its adjusted tangible net worth financial covenant under the agreement. Redfin Mortgage is in default of this facility because it failed tosatisfy a financial covenant as of December 31, 2019, but Western Alliance has not enforced its remedy under the agreement of requiring RedfinMortgage to repurchase all outstanding loans held by the lender.Borrowings under the facility with Texas Capital Bank, N.A. ("Texas Capital") mature on May 6, 2020 and generally bear interest at a rateequal to the greater of (i) the rate of interest accruing on the outstanding principal balance of the loan minus 0.5% or (ii) 3.5%. The weightedaverage interest rate on outstanding borrowings as of December 31, 2019 and 2018 was 3.51% and 4.11%, respectively. The agreement governingthe facility requires Redfin Mortgage to maintain certain financial covenants. Additionally, Redfin Corporation has guaranteed Redfin Mortgage’sobligations under the agreement. Redfin Mortgage is in default of this facility because it failed to satisfy a financial covenant as of December 31,2019, but Texas Capital has not enforced its remedies under the agreement, which principally include the rights to (i) cease purchasing participationinterests in loans from Redfin Mortgage and (ii) sell all interests of Texas Capital or Redfin Mortgage in any loan subject to the agreement.Borrowings under the facility with Flagstar Bank, FSB ("Flagstar") generally bear interest at a rate equal to the greater of (i) one-monthLIBOR plus 2.00% or (ii) 3.00%. The weighted average interest rate on outstanding borrowings as of December 31, 2019 was 3.69%.The Flagstarfacility does not have a stated maturity date, but Flagstar may terminate the facility upon 30 days prior notice. Redfin Mortgage would be required topay all amounts owed to Flagstar upon the facility's termination.Secured Revolving Credit Facility—To provide capital for the homes that it purchases, RedfinNow has, through a special purpose entitycalled RedfinNow Borrower, entered into a secured revolving credit facility with Goldman Sachs. Borrowings under the facility are secured byRedfinNow Borrower's assets, including the financed homes, as well as the equity interests in RedfinNow Borrower. The following table summarizesborrowings under this facility as of the period presented:Lender Borrowing Capacity as ofDecember 31, 2019 Borrowings as of December 31,2019Goldman Sachs Bank USA $100,000 $4,444The facility matures on January 26, 2021, but we may extend the maturity date for an additional six months to repay outstandingborrowings. Goldman Sachs may, at its sole option, finance a portion of RedfinNow Borrower's acquisition costs of qualified homes that have beenpurchased. The portion financed71Index to Notesis based, in part, on how long the qualifying home has been owned by a Redfin entity. Borrowings under the facility generally bear interest at a rateof one-month LIBOR (subject to a floor of 0.50%) plus 2.65%. The weighted average interest rate on outstanding borrowings as of December 31,2019 was 4.45%.RedfinNow Borrower must repay all borrowings and accrued interest upon the termination of the facility, and it has the option to repay theborrowings, and the related interest, with respect to a specific financed home upon the sale of such home. In certain situations involving a financedhome remaining unsold after a certain time period or becoming ineligible for financing under the facility, RedfinNow Borrower may be obligated torepay 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 "badacts," Redfin Corporation has guaranteed repayment of amounts owed under the facility, in some situations, and indemnification of certain expensesincurred, in other situations.As of December 31, 2019, RedfinNow Borrower had $16,200 of total assets, of which $7,456 related to inventory and $5,663 in cash andcash equivalents.For the year ended December 31, 2019, we amortized $256 of the debt issuance costs and recognized $17 of interest expense.Convertible Senior Notes—On July 23, 2018, we issued $143,750 aggregate principal amount of convertible senior notes. The notes aresenior, unsecured obligations of Redfin Corporation and bear interest at a fixed rate of 1.75% per year, payable semi-annually in arrears on January15 and July 15. The effective interest rate of the liability portion of the debt is 7.25%. The notes mature on July 15, 2023, unless earlierrepurchased, redeemed or converted. As of December 31, 2019, no conversion events have occurred. We will settle conversions of the notes bypaying 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 ourelection. We have the ability, and intend, to settle any conversions solely in cash.The convertible senior notes consisted of the following: Year Ended December 31, 2019 2018Principal$143,750 $143,750 Less: debt discount, net of amortization(21,231) (26,636) Less: debt issuance costs, net of amortization(2,803) (3,528) Net carrying amount of the convertible senior notes$119,716 $113,586The total estimated fair value of the notes as of December 31, 2019 and 2018 was approximately $142,672 and $117,875, respectively,based on the closing trading price of the notes on last trading day for the period. The fair value has been classified as Level 2 within the fair valuehierarchy given the limited trading activity of the notes.The following table sets forth total interest expense recognized related to the convertible senior notes for the periods presented: Year Ended December 31, 2019 2018Amortization of debt discount$5,405 $2,280Amortization of debt issuance costs724 304Total amortization of debt issuance costs and accretion of equity portion6,129 2,584Contractual interest expense2,516 1,097 Total interest expense related to the convertible senior notes$8,645 $3,68172Table of ContentsItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our principal executive and principal financial officers, evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the period coveredby this Annual Report. Based on such evaluation, our principal executive and principal financial officers have concluded that as of such date, ourdisclosure controls and procedures were effective at the reasonable assurance level described below.Management's Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. Our management, with the participation of our principal executive and principal financial officers,evaluated the effectiveness of our internal control over financial reporting using the framework set forth by the Committee of SponsoringOrganizations of the Treadway Commission in Internal Control—Integrated Framework (2013). Based on this assessment, management concludedthat Redfin Corporation maintained effective internal control over financial reporting as of the end of the period covered by this Annual Report.Deloitte & Touche LLP, our independent registered public accounting firm, has issued an attestation report on our internal control over financialreporting, and this attestation report appears in Item 8.Changes in Internal Control Over Financing ReportingIn connection with the evaluation required by Rule 13a-15(d) under the Securities Exchange Act of 1934, there were no changes in ourinternal control over financial reporting that occurred during the quarter ended December 31, 2019 that materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.Inherent Limitations on Effectiveness of ControlsOur management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent ordetect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, within our company have been detected. The design of any system ofcontrols is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effectivecontrol system, misstatements due to error or fraud may occur and not be detected.Item 9B. Other InformationNone.73Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required by this Item is incorporated by reference to our proxy statement to be filed in connection with our 2020 AnnualMeeting of Stockholders by April 29, 2020.Item 11. Executive CompensationThe information required by this Item is incorporated by reference to our proxy statement to be filed in connection with our 2020 AnnualMeeting of Stockholders by April 29, 2020.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this Item is incorporated by reference to our proxy statement to be filed in connection with our 2020 AnnualMeeting of Stockholders by April 29, 2020.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required by this Item is incorporated by reference to our proxy statement to be filed in connection with our 2020 AnnualMeeting of Stockholders by April 29, 2020.Item 14. Principal Accounting Fees and ServicesThe information required by this Item is incorporated by reference to our proxy statement to be filed in connection with our 2020 AnnualMeeting of Stockholders by April 29, 2020.74Table of ContentsPART IVItem 15. Exhibits, Financial Statement SchedulesThe financial statements and financial statement schedules required to be filed as part of this Annual Report are included under Item 8.The exhibits required to be filed as part of this Annual Report are listed below. Exhibits 10.1 through 10.14 constitute management contractsor compensatory plans or arrangements. Notwithstanding any language to the contrary, Exhibits 32.1, 32.2, 101, and 104 shall not be deemed to befiled as part of this Annual Report for purposes of Section 18 of the Securities Exchange Act of 1934. Incorporated by Reference ExhibitNumber Exhibit Description Filing Exhibit Filing Date FiledHerewith3.1 Restated Certificate of Incorporation 10-Q 3.1 Sept. 8,2017 3.2 Restated Bylaws 10-Q 3.2 Sept. 8,2017 4.1 Form of Common Stock Certificate S-1/A 4.1 July 26,2017 4.2 Description of Common Stock X4.3 Indenture, dated as of July 23, 2018, between Redfin Corporation and Wells Fargo Bank,National Association 8-K 4.1 July 23,2018 4.4 Form of Senior Convertible Note 8-K 4.1 July 23,2018 10.1 Amended and Restated 2004 Equity Incentive Plan and forms of award agreements thereunder S-1 10.2 June 30,2017 10.2 2017 Equity Incentive Plan and forms of award agreements thereunder 10-K 10.3 Feb. 22,2018 10.3 Form of Restricted Stock Unit Award Notice and Restricted Stock Unit Award Agreement underthe 2017 Equity Incentive Plan (February 2019) 10-Q 10.1 May 8, 2019 10.4 Form of Notice of Performance-Based Restricted Stock Unit Award and Performance-BasedRestricted Stock Unit Award Agreement under the 2017 Equity Incentive Plan (June 2018) 8-K 10.1 June 6, 2018 10.5 Form of Performance-Based Stock Option Notice and Award Agreement (June 2019) 8-K 10.1 June 6, 2019 10.6 Form of Restricted Stock Unit Notice and Award Agreement for Non-Employee Directors (May2019) 10-Q 10.2 Aug. 1, 2019 10.7 Form of Indemnification Agreement S-1/A 10.1 July 17,2017 10.8 Form of Change in Control Severance Agreement S-1/A 10.12 July 17,2017 10.9 Amended and Restated Offer Letter by and between Redfin Corporation and Glenn Kelman,dated June 27, 2017 S-1 10.4 June 30,2017 10.10 Amended and Restated Offer Letter by and between Redfin Corporation and Bridget Frey, datedJune 27, 2017 S-1 10.5 June 30,2017 10.11 Amended and Restated Offer Letter by and between Redfin Corporation and Scott Nagel, datedJune 27, 2017 S-1 10.6 June 30,2017 10.12 Amended and Restated Offer Letter by and between Redfin Corporation and Chris Nielsen, datedJune 27, 2017 10-K 10.6 Feb. 22,2018 10.13 Offer Letter by and between Redfin Corporation and Christian Taubman, dated October 13, 2019 X10.14 Amended and Restated Offer Letter by and between Redfin Corporation and Adam Wiener,dated June 27, 2017 10-K 10.10 Feb. 14,2019 10.15† Loan and Security Agreement, among Goldman Sachs Bank USA, as administrative agent,Goldman Sachs Bank USA and the persons from time to time party hereto as lenders, andRedfinNow Borrower LLC, as borrower, dated as of July 26, 2019 10-Q 10.1 Nov. 6, 2019 10.16 Amendment No. 1 to Loan and Security Agreement, made as of September 17, 2019, by andamong RedfinNow Borrower LLC, RedfinNow Pledgor LLC, Redfin Corporation, the Lendersparty hereto, and Goldman Sachs Bank USA, as Administrative Agent 10-Q 10.2 Nov. 6, 2019 21.1 List of Subsidiaries X23.1 Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm X24.1 Power of Attorney X31.1 Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) X31.2 Certification of Principal Financial Officer, pursuant to Rule 13a-14(a) X32.1 Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350 X32.2 Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350 X101 Interactive Data Files X104 Cover page interactive data file, submitted using inline XBRL (contained in Exhibit 101) X† Portions of this exhibit have been omitted because the information is both not material and would likely cause competitive harm to us if publicly disclosed.Item 16. Form 10-K SummaryNone.75Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. Redfin Corporation (Registrant) February 12, 2020By/s/ Glenn Kelman (Date) Glenn KelmanPresident and Chief Executive Officer KNOW ALL PERSONS BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints GlennKelman and Chris Nielsen, and each of them, as his or her true and lawful attorneys-in-fact and agents with full power of substitution, for him or herin any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto andother documents in connection therewith, with the U.S. Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, andeach of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith,as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact andagents, or any of them, or his or her or their substitute or substitutes, may lawfully do or cause to be done or by virtue hereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated:Name Title Date /s/ Glenn Kelman President, Chief Executive Officer and Director(Principal Executive Officer) February 12, 2020Glenn Kelman /s/ Chris Nielsen Chief Financial Officer (Principal Financial andAccounting Officer) February 12, 2020Chris Nielsen /s/ Robert Mylod, Jr. Chairman of the Board of Directors February 12, 2020Robert Mylod, Jr. /s/ Robert Bass Director February 12, 2020Robert Bass /s/ Julie Bornstein Director February 12, 2020Julie Bornstein /s/ Austin Ligon Director February 12, 2020Austin Ligon /s/ David Lissy Director February 12, 2020David Lissy /s/ James Slavet Director February 12, 2020James Slavet /s/ Selina Tobaccowala Director February 12, 2020Selina Tobaccowala Below is a description of Redfin Corporation's common stock, $0.001 par value per share. Our board of directors is authorized, subject toDelaware law and without further stockholder approval, to issue preferred stock in one or more series. To the extent we issue preferred stock, therights of our common stock may be materially limited or qualified by the rights of our preferred stock, as described below.Dividend RightsSubject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of our common stock are entitledto receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends and then only at the timesand in the amounts that our board of directors may determine.Voting RightsHolders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders.The vote required to elect directors is a plurality of the votes of the shares present in person or represented by proxy at the meeting andentitled to vote on the election of directors.In addition to any vote required by law, the vote required to amend our restated certificate of incorporation or our restated bylaws is theaffirmative vote of the holders of at least two-thirds of the then-outstanding shares of our common stock entitled to vote generally in the election ofdirectors. However, if two-thirds of our total number of authorized directors has approved such amendment, then only the affirmative vote of theholders of at least a majority of the then-outstanding shares of our common stock entitled to vote generally in the election of directors shall berequired to effect such amendment. To the extent we have shares of preferred stock outstanding and such preferred stock is entitled to votegenerally in the election of directors, then the vote required to amend our restated certificate of incorporation or our restated bylaws will be based onthe applicable threshold (i.e., majority or two-thirds) of the voting power of the then-outstanding shares of our capital stock, voting together as asingle class. Furthermore, amendment of our restated certificate of incorporation or our restated bylaws may require the affirmative vote of holdersof our preferred stock, voting as a separate class or classes.Unless otherwise provided by applicable law or regulation, the vote required for every matter other than those described above is theaffirmative vote of the holders of a majority of the then-outstanding shares of our common stock entitled to vote on such matter that are (1) present inperson or represented by proxy at the meeting and (2) voted for or against the matter. To the extent we have shares of preferred stock outstandingand such preferred stock is entitled to vote on the matter, then the holders of our preferred stock may have the right to vote together with ourcommon stock or as separate class or classes. In either case, the vote required is the affirmative vote of the holders of a majority of the votingpower of the shares that are (1) present in person or represented by proxy at the meeting and (2) voted for or against the matter.Board Classification and Cumulative VotingWe have a classified board of directors that is divided into three classes with staggered three-year terms. Only one class of directors will beelected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. We donot permit cumulative voting for the election of directors.Liquidation Rights 1Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to our stockholders would be distributable ratablyamong the holders of our common stock and any participating preferred stock outstanding at that time, subject to prior satisfaction of all outstandingdebt and liabilities and the preferential rights of and the payment of liquidation preferences, if any, on any outstanding shares of preferred stock.Anti-Takeover ProvisionsThe following provisions in our restated certificate of incorporation and/or our restated bylaws could have the effect of delaying, deferring, orpreventing a change in control of our company:•Board of Directors. The provisions below increase the difficulty for a potential acquiror to gain control of a majority of our board of directors.◦Our board of directors is classified into three classes of directors, such that only one-third of our directors will stand for election ateach annual meeting of stockholders.◦Stockholders may remove directors only for cause and only by the affirmative vote of the holders of at least two-thirds of the then-outstanding shares of our outstanding common stock.◦Subject to limited exceptions, only our board of directors may fill vacant directorships, including newly created seats.◦Only our board of directors may set the number of directors constituting our board of directors.•Stockholder Action. The provisions below increase the difficulty for a stockholder to obtain stockholder approval for a potential change incontrol of our company.◦Our stockholders must take action at a duly called annual or special meeting of stockholders and cannot take action by writtenconsent.◦Only our Chairperson of the Board, Chief Executive Officer, President, or board of directors may call a special meeting ofstockholders. Only the business set forth in our notice of a special meeting shall be conducted at such special meeting.◦A stockholder must comply with the advance notice and procedural provisions set forth in our restated bylaws to bring businessbefore an annual meeting of stockholders or to nominate a candidate for election as director at an annual or special meeting ofstockholders.•Preferred Stock. Our board of directors has the authority, subject to Delaware law and without further stockholder approval, to issue up to10,000,000 shares of preferred stock with rights and preferences, including voting rights, designated from time to time by our board ofdirectors. This authority enables our board of directors to introduce a class of capital stock with voting rights that increase the difficulty for apotential acquiror to gain control of a majority of our board of directors or to obtain stockholder approval for a potential change in control ofour company.•Amending Anti-Takeover Provisions. Unless approved by our board of directors, any amendment of the above provisions requires theaffirmative vote of the holders of at least two-thirds of the voting power of all of the then-outstanding shares of our capital stock entitled tovote generally in the election of directors, voting together as a single class.2Redfin Corporation Employment Offer LetterSeptember 10, 2019Christian Taubman[***][***][***]p. [***]Dear Christian:Congratulations! We’re writing to extend you an offer to work at Redfin!Redfin Corporation (“Redfin”) is pleased to offer you a fulltime position with our organization as the Chief Product Officer at our Redfin office located at 1099Stewart St #600, Seattle, WA 98101.We look forward to your first day of work on Monday, October 14. This date is subject to change depending on our ability to complete your background check, and scheduleyour training. We will notify you if there is a change to your start date.Your title, assignment, compensation, and the nature of your responsibilities may change from time to time at Redfin’s discretion. You will also be expected to comply withRedfin’s rules, policies and procedures, which may be modified from time to time. The terms of this offer are detailed below.Compensation: Your gross salary annualized over one year will be $300,000, subject to appropriate tax withholdings and deductions, and payable in accordance with Redfin’snormal payroll cycle. You are classified as an exempt employee and your salary is intended to compensate you for all hours worked. Increases are based on your and Redfin’sperformance and are not guaranteed. This is a full-time position.Executive Bonus: Executive Bonus: Subject to the terms and conditions of Redfin’s Bonus Compensation Policy, you may be eligible to earn a bonus up to $100,000, based onRedfin’s performance against its goals; any bonus you earn will be payable on an annual basis in the first quarter following the close of the year. Your potential bonus will bepro-rated for the first year you work, based on your actual start date and the number of days you worked in the year. Redfin’s Bonus Compensation Policy is subject to changeas further described therein.Starting Bonus: Starting Bonus: Redfin will pay you $400,000 as a signing bonus, subject to standard withholding and payroll taxes, paid in two installments. The firstinstallment of $200,000 will be paid on the first payroll following your start date. If for any reason your employment is terminated prior to the one-year anniversary of yourstart date, you will be responsible for reimbursing Redfin for the first installment of $200,000 in full.The second installment of $200,000 will be paid on pay date following the one-year anniversary of your start date. If for any reason your employment is terminated after theone-year anniversary of your start date and prior to the three-year anniversary of your start date, you will be responsible for reimbursing Redfin for the second installment of$200,000 in full.Restricted Stock Units (RSUs): Subject to approval of Redfin’s Board of Directors, you will be granted an amount of Restricted Stock Units that have an aggregate marketvalue of $900,000 on the approval date based on the average closing price of Redfin’s common stock for the thirty trading days immediately prior to the approval date. 25% ofthe RSUs will vest on the one-year anniversary of the RSUs’ vesting commencement date, subject to your continued employment through such anniversary. The remainingRSUs will vest in 12 equal amounts on a quarterly basis over the three years following such anniversary, subject to your continued employment through each vesting date. Redfin RSUs have four vesting commencement dates per year (one fixed date per quarter).The vesting commencement date for your RSUs will be the first vesting commencement date on or following your start date. Your RSUs will be subject to Redfin’s 2017Equity Incentive Plan, including vesting requirements. No right to any Redfin common stock is earned or accrued until such time that vesting occurs.Performance-Based Restricted Stock Units (PSUs): Subject to approval of Redfin’s Board of Directors, you will be granted that number of Performance-Based RestrictedStock Units (PSUs) that have a target aggregate fair market value of $425,000 on the date of grant based on the average closing price of Redfin’s common stock on the NasdaqGlobal Select Market for the thirty trading days immediately prior to such grant date. PSUs will vest, at an amount ranging from 25% to 200% of the target amount, only to theextent that the Board certifies that Redfin has achieved the aggregate gross profit metrics for the three-year period from 2019 to 2021, as established by the Board. To the extentRedfin doesn’t achieve the minimum aggregate gross profit thresholds, no PSUs will vest. Your PSU grant will be subject to the terms and conditions of Redfin’s 2017 EquityIncentive Plan and the Performance-Based Restricted Stock Unit Award Agreement, including vesting requirements. No right to any Redfin common stock is earned or accrueduntil such time that vesting occurs.401 K: Redfin offers auto-enrollment into our 401(k) plan administered by Transamerica for regular full-time and part-time employees. You may opt out of the plan or makeyour own elections within the first two months after your start date. If you take no action, you will be auto enrolled into the Plan on the first of the month following two monthsof service. The initial auto-enrollment is 3% of gross pay (including bonuses and all other pay) per pay period on a pre-tax basis and will increase by 1% at the beginning ofeach year, up to a maximum of 6%. Your contributions will be automatically invested into the Vanguard® Target Retirement Target Date Fund designated for your age andanticipated retirement date. Once enrolled, you may change your contribution amounts, investment choices, and default increases at any time. The plan offers a range ofinvestment options and we encourage you to select the funds you feel are best for you. Assistance with fund selection and contribution options is available through our Plan’sconsultants, ClearPoint Financial, at 888.557.6471 or coaching@clearpoint401k.com. If you wish to opt out of 401(k) auto-enrollment, you must do so within the first twomonths of employment. You may complete this opt out, or enroll and make your own investment choices, online through www.ta-retirement.com. Part-time seasonal ortemporary employees are not auto enrolled and are eligible to participate after 1000 worked hours. To enroll and make your own investment choices visit www.ta-retirement.com. This is an intentionally brief summary of enrollment in the 401(k) Plan. Additional information will be provided prior to eligibility.At-Will Employment: The employment relationship between you and Redfin will be at-will. This means that the employment relationship is for no specific term and may beterminated by either you or Redfin at any time for any or no reason, with or without advance notice. This letter and the Employee Assignment, Arbitration and ConfidentialityAgreement (“Proprietary Information Agreement”) supersede any previous arrangements, both oral and written, expressed or implied, regarding the nature of your employmentwith Redfin. The at-will employment relationship cannot be changed or modified orally, and may only be modified by a formal written employment contract signed by you andthe CEO of Redfin, expressly modifying the at-will employment relationship.Benefits & Other Redfin Policies: During your employment, you may be eligible for employee benefits consistent with Redfin’s practices and in accordance with the terms ofapplicable benefit plans as they currently exist and subject to any future modifications in Redfin’s discretion. If you accept employment with Redfin you agree to follow Redfin’srules and policies. Please understand that Redfin reserves the right to modify, supplement, and discontinue all policies, rules, benefit plans and programs at any time and in itssole discretion.Work Status, Background Check & Proprietary Information Agreement: This offer is contingent upon:•Verification of your right to work in the United States, as demonstrated by your completion of Form I-9 upon hire and your submission of acceptable documentation(as noted on Form I-9) within 72 hours of commencing work. Redfin is not obligated to sponsor and/or successfully obtain citizenship for any employee under atemporary visa or applying for residency in the United States.•Satisfactory completion of a background investigation.•The protection of confidential and proprietary information relating to Redfin’s business and operations is and will continue to be of central importance to Redfin. Forthis reason, your agreement to the terms and conditions set forth in the enclosed Proprietary Information Agreement, which includes provisions relating to non-solicitation and non-competition, is a condition of employment with Redfin.This offer of employment is contingent upon all the terms above and is valid until 5:00 p.m., September 13, 2019.Non-Resident/Non-Citizen Status: Redfin is not obligated to sponsor and/or successfully obtain citizenship for any employee operating under a temporary visa or applying forresidency in the United States. For the purposes of federal immigration law, youwill be required to provide to the Company documentary evidence of your identity and eligibility for employment in the United States.If the understandings stated in this letter are agreeable to you, please sign below, keep one copy and return the original to me. Please also sign and return one copy of theProprietary Information Agreement, included with this correspondence.If you need additional time to consider this letter and the attached Proprietary Information Agreement, please ask. We are very pleased to welcome you to Redfin.We believe that you will thrive here at Redfin, and look forward to building a great business together.Sincerely,Redfin CorporationAccepted:/s/ Christian Taubman 10/13/2019Christian Taubman DateSubsidiaries of Redfin CorporationName of Subsidiary Doing Business As(If Different than Legal Name) JurisdictionForward Settlement Solutions, Inc. Title Forward DelawareForward Settlement Solutions of Texas, LLC Title Forward TexasRDFN Ventures, Inc. RedfinNow DelawareRedfin Home Services LLC DelawareRedfin Insurance Services LLC DelawareRedfin Mortgage, LLC DelawareRedfin Subsidiary Holding Corporation DelawareRedfin Unlimited Liability Company British Columbia, CanadaRedfinNow Borrower LLC DelawareRedfinNow Pledgor LLC DelawareWalk Score Management, LLC WashingtonCONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in Registration Statement Nos. 333-219561, 333-223163, and 333-229679 on Form S-8 of our reportsdated February 12, 2020, relating to the financial statements of Redfin Corporation and the effectiveness of Redfin Corporation’s internal controlover financial reporting, appearing in this Annual Report on Form 10-K of Redfin Corporation for the year ended December 31, 2019./s/ Deloitte & Touche LLPSeattle, WashingtonFebruary 12, 2020CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934I, Glenn Kelman, certify that:1. I have reviewed this Annual Report on Form 10-K of Redfin Corporation;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting.Date: February 12, 2020/s/ Glenn Kelman Glenn Kelman Chief Executive Officer (Principal Executive Officer) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934I, Chris Nielsen, certify that:1. I have reviewed this Annual Report on Form 10-K of Redfin Corporation;2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periodcovered by this report;3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)and 15d-15(f)) for the registrant and have:(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by otherswithin those entities, particularly during the period in which this report is being prepared;(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions aboutthe effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant'smost recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant'sinternal control over financial reporting.Date: February 12, 2020/s/ Chris Nielsen Chris Nielsen Chief Financial Officer (Principal Financial Officer) CERTIFICATION OF CHIEF EXECUTIVE OFFICERPURSUANT TO 18 U.S.C. SECTION 1350I, Glenn Kelman, Chief Executive Officer of Redfin Corporation (the “Company”), certify pursuant to 18 U.S.C. Section 1350 that, to myknowledge, the Annual Report on Form 10-K of the Company for the year ended December 31, 2019 (the “Report”) fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairlypresents, in all material respects, the financial condition and results of operations of the Company.Date: February 12, 2020/s/ Glenn Kelman Glenn Kelman Chief Executive Officer CERTIFICATION OF CHIEF FINANCIAL OFFICERPURSUANT TO 18 U.S.C. SECTION 1350I, Chris Nielsen, Chief Financial Officer of Redfin Corporation (the “Company”), certify pursuant to 18 U.S.C. Section 1350 that, to myknowledge, the Annual Report on Form 10-K of the Company for the year ended December 31, 2019 (the “Report”) fully complies with therequirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairlypresents, in all material respects, the financial condition and results of operations of the Company.Date: February 12, 2020/s/ Chris Nielsen Chris Nielsen Chief Financial Officer 

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