Attached files
| file | filename |
|---|---|
| EX-3.2 - EXHIBIT 3.2 - Redfin Corp | a32restatedbylaws.htm |
| EX-32.2 - EXHIBIT 32.2 - Redfin Corp | a322certificationofprincip.htm |
| EX-32.1 - EXHIBIT 32.1 - Redfin Corp | a321certificateofprincipal.htm |
| EX-31.2 - EXHIBIT 31.2 - Redfin Corp | a312certificateofprincipal.htm |
| EX-31.1 - EXHIBIT 31.1 - Redfin Corp | a311certificateofprincipal.htm |
| EX-3.1 - EXHIBIT 3.1 - Redfin Corp | a31restatedcertificateofin.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 001-38160
REDFIN CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 74-3064240 | |
(State of Incorporation) | (I.R.S. Employer Identification No.) | |
1099 Stewart Street, Suite 600 | ||
Seattle, Washington | 98101 | |
(Address of Principal Executive Offices) | (Zip Code) | |
(206) 576-8333
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ | (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | ||
Emerging growth company | ☒ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 31, 2017, there were 81,326,178 shares of the registrant’s common stock outstanding.
Redfin Corporation
Quarterly Report on Form 10-Q
For the Three Months Ended June 30, 2017
TABLE OF CONTENTS
Page | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 6. | ||
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements. All statements contained in this prospectus other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, market growth and trends, and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “could,” “would,” “project,” “plan,” “potentially,” “preliminary,” “likely,” and similar expressions are intended to identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties, and assumptions, including those described under Part II. Item 1A. “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the effect of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties, and assumptions, the future events and trends discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely on forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, performance, or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update any of these forward-looking statements for any reason after the date of this prospectus or to conform these statements to actual results or revised expectations.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Redfin Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share amounts, unaudited)
December 31, | June 30, | Pro Forma, June 30, | |||||||||
2016 | 2017 | 2017 | |||||||||
Assets: | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 64,030 | $ | 54,210 | |||||||
Restricted cash | 3,815 | 11,848 | |||||||||
Short-term investments | 1,749 | 1,504 | |||||||||
Prepaid expenses | 4,388 | 2,546 | |||||||||
Accrued revenue, net of allowance for doubtful accounts of $150 at December 31, 2016 and June 30, 2017 | 10,625 | 14,509 | |||||||||
Other current assets | 8,781 | 2,298 | |||||||||
Loans held for sale | — | 545 | |||||||||
Total current assets | 93,388 | 87,460 | |||||||||
Property and equipment, net | 19,226 | 22,137 | |||||||||
Intangible assets, net | 3,782 | 3,538 | |||||||||
Goodwill | 9,186 | 9,186 | |||||||||
Deferred offering costs | 720 | 2,299 | |||||||||
Other assets | 7,175 | 6,798 | |||||||||
Total assets: | $ | 133,477 | $ | 131,418 | |||||||
Liabilities, redeemable convertible preferred stock and stockholders' equity (deficit): | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 5,385 | $ | 3,081 | |||||||
Accrued liabilities | 22,253 | 30,248 | |||||||||
Other payables | 3,793 | 11,607 | |||||||||
Loan facility | — | 529 | |||||||||
Current portion of deferred rent | 1,512 | 1,092 | |||||||||
Total current liabilities | 32,943 | 46,557 | |||||||||
Deferred rent, net of current portion | 8,852 | 10,473 | |||||||||
Total liabilities | 41,795 | 57,030 | |||||||||
Commitments and contingencies (Note 10) | |||||||||||
Redeemable convertible preferred stock—par value $0.001 per share; 166,266,114 shares authorized; 55,422,002 issued and outstanding; and aggregate liquidation preference of $167,488 | 655,416 | 791,106 | $ | — | |||||||
Stockholders’ equity (deficit) | |||||||||||
Common stock—par value $0.001 per share; 290,081,638 and 290,081,638 shares authorized, respectively; 14,687,024 and 14,988,646 shares issued and outstanding, respectively | 15 | 15 | 70 | ||||||||
Additional paid-in capital | — | — | 212,081 | ||||||||
Accumulated deficit | (563,749 | ) | (716,733 | ) | (137,763 | ) | |||||
Total stockholders’ equity (deficit) | (563,734 | ) | (716,718 | ) | $ | 74,388 | |||||
Total liabilities, redeemable convertible preferred stock and stockholders’ equity: | $ | 133,477 | $ | 131,418 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Redfin Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(in thousands, except share and per share amounts, unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||||||
Revenue | $ | 77,714 | $ | 104,935 | $ | 119,349 | $ | 164,802 | |||||||
Cost of revenue | 50,303 | 67,975 | 88,808 | 121,467 | |||||||||||
Gross profit | 27,411 | 36,960 | 30,541 | 43,335 | |||||||||||
Operating expenses: | |||||||||||||||
Technology and development | 8,060 | 10,090 | 15,958 | 19,762 | |||||||||||
Marketing | 8,486 | 10,132 | 17,697 | 20,591 | |||||||||||
General and administrative | 9,526 | 12,466 | 19,912 | 26,833 | |||||||||||
Total operating expenses | 26,072 | 32,688 | 53,567 | 67,186 | |||||||||||
Income (loss) from operations | 1,339 | 4,272 | (23,026 | ) | (23,851 | ) | |||||||||
Interest income and other income, net: | |||||||||||||||
Interest income | 49 | 32 | 96 | 76 | |||||||||||
Other income, net | — | — | 37 | 13 | |||||||||||
Total interest income and other income, net | 49 | 32 | 133 | 89 | |||||||||||
Net income (loss) | $ | 1,388 | $ | 4,304 | $ | (22,893 | ) | $ | (23,762 | ) | |||||
Accretion of redeemable convertible preferred stock | 65,082 | (110,921 | ) | 59,869 | (135,690 | ) | |||||||||
Undistributed earnings attributable to participating securities | (52,805 | ) | — | (29,397 | ) | — | |||||||||
Net income (loss) attributable to common stock—basic | $ | 13,665 | $ | (106,617 | ) | $ | 7,579 | $ | (159,452 | ) | |||||
Net income (loss) attributable to common stock—diluted | $ | 1,388 | $ | (106,617 | ) | $ | (22,893 | ) | $ | (159,452 | ) | ||||
Net income (loss) per share attributable to common stock—basic | $ | 0.95 | $ | (7.15 | ) | $ | 0.53 | $ | (10.74 | ) | |||||
Net income (loss) per share attributable to common stock—diluted | $ | 0.02 | $ | (7.15 | ) | $ | (0.33 | ) | $ | (10.74 | ) | ||||
Weighted average shares used to compute net income (loss) per share attributable to common stock—basic | 14,340,333 | 14,913,234 | 14,288,550 | 14,840,759 | |||||||||||
Weighted average shares used to compute net income (loss) per share attributable to common stock—diluted | 74,080,026 | 14,913,234 | 69,710,552 | 14,840,759 | |||||||||||
Pro forma net income (loss) per share attributable to common stock—basic and diluted | $ | 0.06 | $ | (0.34 | ) | ||||||||||
Pro forma weighted-average shares used to compute net income (loss) per share attributable to common stock—basic and diluted | 70,335,236 | 70,262,761 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Redfin Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands, unaudited)
Six Months Ended June 30, | |||||||
2016 | 2017 | ||||||
Operating Activities | |||||||
Net income (loss) | $ | (22,893 | ) | $ | (23,762 | ) | |
Adjustments to reconcile net income (loss) to net cash used in operating activities: | |||||||
Depreciation and amortization | 2,935 | 3,539 | |||||
Stock-based compensation. | 3,734 | 5,320 | |||||
Change in assets and liabilities: | |||||||
Restricted cash | (8,610 | ) | (8,032 | ) | |||
Prepaid expenses | 4,523 | 1,842 | |||||
Accrued revenue | (7,168 | ) | (3,885 | ) | |||
Other current assets | (10 | ) | 6,482 | ||||
Other long-term assets | (5,816 | ) | 377 | ||||
Accounts payable | 332 | 901 | |||||
Accrued expenses | 5,859 | 8,481 | |||||
Other payables | 8,609 | 7,814 | |||||
Deferred lease liability | (157 | ) | 1,097 | ||||
Origination of loans held for sale | — | (3,022 | ) | ||||
Proceeds from sale of loans originated as held for sale | — | 2,477 | |||||
Net cash used in operating activities | (18,662 | ) | (371 | ) | |||
Investing activities | |||||||
Maturities of short-term investments | 1,644 | 1,239 | |||||
Purchases of short-term investments | (1,644 | ) | (992 | ) | |||
Purchases of property and equipment | (2,660 | ) | (9,435 | ) | |||
Net cash used in investing activities | (2,660 | ) | (9,188 | ) | |||
Financing activities | |||||||
Proceeds from exercise of stock options | 462 | 1,017 | |||||
Payment of deferred initial public offering costs | — | (1,807 | ) | ||||
Borrowings from warehouse credit facilities | — | 2,932 | |||||
Repayments of warehouse credit facilities | — | (2,403 | ) | ||||
Net cash provided by (used in) financing activities | 462 | (261 | ) | ||||
Net change in cash and cash equivalents | (20,860 | ) | (9,820 | ) | |||
Cash and cash equivalents: | |||||||
Beginning of period | 85,597 | 64,030 | |||||
End of period | $ | 64,737 | $ | 54,210 | |||
Supplemental disclosure of non-cash investing and financing activities | |||||||
Accretion of redeemable convertible preferred stock | $ | 59,869 | $ | (135,690 | ) | ||
Stock-based compensation capitalized in property and equipment | $ | (39 | ) | $ | (131 | ) | |
Deferred initial public offering cost accruals | $ | — | $ | (343 | ) | ||
Leasehold improvements paid directly by lessor | $ | — | $ | (104 | ) | ||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Redfin Corporation and Subsidiaries
Condensed Consolidated Statements of Changes in Redeemable Convertible Preferred Stock and Stockholders’ Deficit
(in thousands, except for shares)
Redeemable Convertible Preferred Stock | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders' Deficit | ||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||
Balance, January 1, 2016 | 55,422,002 | $ | 599,915 | 14,059,601 | $ | 14 | $ | — | $ | (495,727 | ) | $ | (495,713 | ) | ||||||||||||
Exercise of stock options | — | — | 627,423 | 1 | 1,494 | — | 1,495 | |||||||||||||||||||
Stock-based compensation | — | — | — | — | 8,512 | — | 8,512 | |||||||||||||||||||
Accretion of redeemable convertible preferred stock | — | 55,501 | — | — | (10,006 | ) | (45,496 | ) | (55,502 | ) | ||||||||||||||||
Net income (loss) | — | — | — | — | — | (22,526 | ) | (22,526 | ) | |||||||||||||||||
Balance, December 31, 2016 | 55,422,002 | $ | 655,416 | 14,687,024 | $ | 15 | $ | — | $ | (563,749 | ) | $ | (563,734 | ) | ||||||||||||
Cumulative stock-based compensation adjustment | — | — | — | — | 522 | (522 | ) | — | ||||||||||||||||||
Exercise of stock options | — | — | 301,622 | — | 1,017 | — | 1,017 | |||||||||||||||||||
Stock-based compensation | — | — | — | — | 5,451 | — | 5,451 | |||||||||||||||||||
Accretion of redeemable convertible preferred stock | — | 135,690 | — | — | (6,990 | ) | (128,700 | ) | (135,690 | ) | ||||||||||||||||
Net income (loss) | — | — | — | — | — | (23,762 | ) | (23,762 | ) | |||||||||||||||||
Balance, June 30, 2017 | 55,422,002 | $ | 791,106 | 14,988,646 | $ | 15 | $ | — | $ | (716,733 | ) | $ | (716,718 | ) | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Notes to Consolidated Financial Statements (unaudited)
Note 1: Description of Business and Summary of Significant Accounting Policies:
Description of Business—Redfin Corporation (“Redfin” or the “Company”) was incorporated in October 2002 and is headquartered in Seattle, Washington. The Company operates an online real estate marketplace and provides real estate services, including assisting individuals to purchase or sell their residential property. The Company’s wholly owned subsidiaries also provide title and settlement services and originate mortgages. The Company has operations located in multiple states nationwide.
Basis of Presentation—The condensed consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Certain information and disclosures normally included in consolidated financial statements presented in accordance with GAAP have been condensed or omitted. Accordingly, these condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes for the year ended December 31, 2016 included in our Prospectus dated July 28, 2017, filed with the SEC on July 28, 2017 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as ameded ("Prospectus"). The Company had no components of other comprehensive income (loss) during any of the years presented, as such, a consolidated statement of comprehensive income (loss) is not presented. All amounts are presented in thousands, except share and per share data.
The unaudited condensed consolidated interim financial statements, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly our financial position as of June 30, 2017, our results of operations for the three and six month periods ended June 30, 2017 and 2016, and our cash flows for the six month periods ended June 30, 2017 and 2016. The results of the three and six month periods ended June 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any interim period or for any other future year.
Principles of Consolidation—The unaudited condensed consolidated interim financial statements include the accounts of Redfin and its wholly owned subsidiaries. Intercompany transactions and balances have been eliminated.
Certain Significant Risks and Business Uncertainties—The Company is subject to the risks and challenges associated with companies at a similar stage of development. These include dependence on key individuals, successful development and marketing of its offerings, and competition with larger companies with greater financial, technical, and marketing resources. Further, during the period required to achieve substantially higher revenue in order to become profitable, the Company may require additional funds that may not be readily available or may not be on terms that are acceptable to the Company.
The Company operates in the online real estate marketplace and, accordingly, can be affected by a variety of factors. For example, management of the Company believes that any of the following factors could have a significant negative effect on the Company’s future financial position, results of operations, and cash flows: unanticipated fluctuations in operating results due to seasonality and cyclicality in the real estate industry, changes in home sale prices and transaction volumes, the Company’s ability to increase market share, competition and U.S. economic conditions.
Reverse Stock Split—On July 8, 2017, the Company’s board of directors approved an amendment to the Company's certificate of incorporation to effect a reverse split of shares of the issued and outstanding common stock and redeemable convertible preferred stock at a 3-to-1 ratio. The reverse stock split was approved by the Company’s stockholders and effected on July 10, 2017. The par value of the common stock and the par value of the redeemable convertible preferred stock were not adjusted as a result of the reverse stock split. All issued and outstanding shares of common stock and redeemable
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convertible preferred stock, dividend rates, conversion rates, options to purchase common stock, exercise prices, and the related per-share amounts contained in these consolidated financial statements have been retroactively adjusted to reflect this reverse stock split for all periods presented.
Use of Estimates—The preparation of the unaudited condensed consolidated interim financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and results of operations during the respective periods. Management’s more significant estimates include, but are not limited to, valuation of deferred income taxes, stock-based compensation, fair value of common stock and redeemable convertible preferred stock, capitalization of website development costs, recoverability of intangible assets with finite lives, and the fair value of reporting units for purposes of evaluating goodwill for impairment. Management bases its estimates on historical experience, and on various other market-specific relevant assumptions that management believes to be reasonable, under the circumstances. The amounts ultimately realized from the affected assets or ultimately recognized as liabilities will depend on, among other factors, general business conditions and could differ materially in the near term from the carrying amounts reflected in the consolidated financial statements.
Unaudited Pro Forma Consolidated Balance Sheet Data and Pro Forma Net Income (Loss) per Share Attributable to Common Stock—The pro forma information has been prepared assuming that, upon the completion of the public offering, all of the Company’s redeemable convertible preferred stock outstanding will automatically convert into shares of common stock, based on the provisions in the Company’s Amended and Restated Certificate of Incorporation. The Company prepared the pro forma basic and diluted net income (loss) per share attributable to common stock for the three and six months ended June 30, 2017, assuming the automatic conversion of the redeemable convertible preferred stock as if the initial public offering had been completed on January 1, 2017. On August 2, 2017 the Company completed an initial public offering ("IPO").
Significant Accounting Policies—There have been no material changes to our significant accounting policies and estimates during the six months ended June 30, 2017, from the significant accounting policies described in the Prospectus.
Deferred Offering Costs—Deferred offering costs, including legal, accounting and other fees and costs relating to our planned initial public offering, are capitalized and included as a noncurrent asset in the consolidated balance sheets. The deferred offering costs will be offset against initial public offering proceeds upon the closing of the initial public offering within equity. There were $720 and $2,299 of capitalized deferred offering costs as of December 31, 2016, and June 30, 2017, respectively.
Other Current Assets—In April 2017, the Company received $8,470 from the landlord of the Company's new corporate headquarters for reimbursable leasehold improvement costs. The Company had previously recorded a receivable for this amount. The receipt of reimbursable leasehold improvements is classified as a cash inflow of cash in the operating section in the Company's consolidated statement of cash flows for the six months ended June 30, 2017. Additionally, in January 2017, RDFN Ventures, Inc. (“Redfin Now”), a wholly owned subsidiary of the Company, began purchasing properties with the intent of resale. Direct property acquisition and improvement costs are capitalized and tracked directly with each specific property. These are stated at cost unless the utility of the properties is no longer as great as their cost, in which case it is written down to “market”. As of December 31, 2016 and June 30, 2017 there were $0 and $1,582 respectively, in home inventories included in other current assets. Of the $1,582 in home inventories at June 30, 2017, $365 were subject to active listings and $1,217 were in process and being made ready for sale.
Recently Adopted Accounting Pronouncements—In January 2017, the Financial Accounting Standard Board (“FASB”) issued guidance simplifying the test for goodwill impairment. Step 2 from the goodwill impairment test is no longer required, instead requiring an entity to recognize a goodwill impairment charge for the amount by which the goodwill carrying amount exceeds the reporting unit’s fair value. This guidance is effective for interim and annual goodwill impairment tests in fiscal years beginning
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after December 15, 2019, and early adoption is permitted. This guidance must be applied on a prospective basis. The Company adopted this guidance for interim and annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company performs its goodwill assessment annually on October 1 of each year or as events merit. The Company does not expect the adoption of this guidance to impact the Company’s financial position, results of operations or cash flows.
In March 2016, the FASB issued guidance on several aspects of the accounting for share-based payment transactions, including the income tax consequences, impact of forfeitures, classification of awards as either equity or liabilities and classification on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company adopted this guidance on January 1, 2017 using the modified retrospective approach through a cumulative-effect adjustment of $552 to beginning accumulated deficit, and the Company elected to account for forfeitures as they occur beginning on January 1, 2017. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows.
In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. This standard requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has prospectively adopted this guidance as of January 1, 2016. The adoption of this guidance had no effect on the Company’s financial position.
Recently Issued Accounting Pronouncements—In November 2016, the FASB issued guidance on the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance is effective for interim and annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The adoption of this guidance requires a retrospective transition method to each period presented. The Company expects to adopt this guidance on January 1, 2018. The Company is currently evaluating the effect the adoption of this guidance will have on the Company’s cash flows.
In August 2016, the FASB issued guidance on the classification of certain cash receipts and cash payments in the statement of cash flows. This new standard will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2017, which means that it will be effective for the Company in its fiscal year beginning January 1, 2018. The new standard will require adoption on a retrospective basis unless it is impracticable to apply, in which case the Company would be required to apply the amendments prospectively as of the earliest date practicable. The Company is currently evaluating the effect the adoption of this guidance will have on the Company’s statement of cash flows.
In February 2016, the FASB issued guidance on leases. This standard requires the recognition of a right-of-use asset and lease liability on the balance sheet for all leases. This standard also requires more detailed disclosures to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, and early adoption is permitted. The Company expects to adopt this guidance on January 1, 2019. The Company believes adoption of this standard will have a significant effect on its financial position.
In May 2014, the FASB issued guidance on revenue recognition. This guidance provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance also requires more detailed disclosures to enable users of financial
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statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The original effective date of this guidance was for interim and annual reporting periods beginning after December 15, 2016, early adoption is not permitted, and the guidance must be applied retrospectively or modified retrospectively. In July 2015, the FASB approved an optional one-year deferral of the effective date. As a result, the Company expects to adopt this guidance on January 1, 2018. In 2016, the FASB issued final amendments to clarify the implementation guidance for principal versus agent considerations, identifying performance obligations and the accounting for licenses of intellectual property. The Company expects to adopt this guidance on January 1, 2018. While the Company does not expect the adoption of this standard to have a significant effect on the Company’s financial position, results of operations and cash flows, the Company continues to evaluate its current arrangements with customers and related performance obligations therein and when such performance obligations are satisfied. Additionally the Company continues to evaluate the enhanced disclosure requirements under the new standard.
Note 2: Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, short-term investments, accrued revenue, restricted cash, accounts payable, certain accrued liabilities, and redeemable convertible preferred stock. The fair value of the Company’s financial instruments approximates their recorded values due to their short period to maturity. Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:
Level I—Unadjusted quoted prices in active markets for identical assets or liabilities.
Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level III—Unobservable inputs that are supported by little or no market activity, requiring the Company to develop its 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 fair value measurement. The Company’s financial instruments consist of Level I and Level II assets and liabilities. Level I assets include highly liquid money market funds that are included in cash and cash equivalents and Level II assets include certificates of deposit that are included as short-term investments, interest rate lock commitments ("IRLCs") and forward sales commitments, included in other current assets and other current liabilities. The certificates of deposit are measured by observable market data for substantially the full term of the assets or liabilities.
Interest rate lock commitments and forward sales commitments are measured by observable marketplace prices. The Company’s redeemable convertible preferred stock is categorized as Level III. Redeemable convertible preferred stock is valued at each reporting date based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such financial instruments.
The Company’s redeemable convertible preferred stock is measured at fair value using a weighted average of the probability weighted expected return method (“PWERM”), the income approach, and the market approach. Specifically, the income and market approach models are weighted in relation
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to the probability of a private company scenario, whereas the PWERM method is weighted in relation to the probability of future exit scenarios.
The income approach incorporates the use of the discounted cash flow method, whereas the market approach incorporates the use of the guideline public company method. Application of the discounted cash flow method requires estimating the annual cash flows that the business enterprise is expected to generate in the future with the application of a discount rate and terminal value. In the guideline public company method, valuation multiples, including total invested capital, are calculated based on financial statements and stock price data from selected guideline publicly traded companies. A comparative analysis is then performed for factors including, but not limited to size, profitability and growth to determine fair value.
Under the PWERM, value is determined based upon an analysis of future values for the enterprise under different potential outcomes (e.g., sale, merger, an IPO, dissolution). The value determined for the enterprise is allocated then allocated to each class of stock based upon the assumption that each class will look to maximize its value. The values determined for each class of stock under each scenario are weighted by the probability of each scenario and then discounted to a present value.
Any change in the fair value is recognized as accretion expense (income) and included as an adjustment to net loss to arrive at net income (loss) attributable to common stock on the condensed consolidated statements of operations. Summary of changes in fair value are reflected in the condensed consolidated balance sheets, condensed consolidated statements of changes in redeemable convertible preferred stock and stockholders' deficit, and Note 6. The Company did not perform full valuation for the redeemable convertible preferred stock during the three months ended June 30, 2017, but rather determined the value of the redeemable convertible preferred stock as of June 30, 2017 by interpolating between the value as of March 31, 2017 and the value of the common stock at the price offered in the initial public offering.
Significant unobservable inputs used in the determination of fair value of the Company’s redeemable convertible preferred stock included the following:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||
2016 | 2017 | 2016 | 2017 | ||||
Valuation methodology: | |||||||
Income approach (private company) | 15.0% | N/A | 15.0% | 12.5% | |||
Market approach (private company) | 15.0% | N/A | 15.0% | 12.5% | |||
PWERM (IPO) | 52.5% | N/A | 52.5% | 60.0% | |||
PWERM (M&A) | 17.5% | N/A | 17.5% | 15.0% | |||
IPO revenue multiple | 3.0x-4.0x | N/A | 3.0x-4.5x | 2.8x-3.0x | |||
Forecasted revenue growth rate | 28.0%-40.0% | N/A | 28.0%-40.9% | 31.1%-40.0x | |||
Discount rate | 20.0% | N/A | 20.0%-25.0% | 20.0% | |||
A summary of assets, (liabilities), and (mezzanine equity) at December 31, 2016 and June 30, 2017, related to our financial instruments, measured at fair value on a recurring basis, is set forth below:
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Fair Value | |||||||
Financial Instrument | Fair Value Hierarchy | December 31, 2016 | June 30, 2017 | ||||
Money market funds (included in cash and cash equivalents) | Level I | 46,357 | 22,930 | ||||
Certificates of deposit (included in short-term investments) | Level II | 1,749 | 1,504 | ||||
Interest rate lock commitments | Level II | — | 2 | ||||
Redeemable convertible preferred stock (mezzanine equity) | Level III | (655,416 | ) | (791,106 | ) | ||
Note 3: Property and Equipment:
A summary of property and equipment at December 31, 2016 and June 30, 2017 is as follows:
December 31, 2016 | June 30, 2017 | ||||
Useful Lives | |||||
(years) | |||||
Leasehold improvements | Shorter of lease term or economic life | $4,911 | $15,350 | ||
Website and software development costs | 1-3 | 10,114 | 12,146 | ||
Computer and office equipment | 3 | 2,846 | 3,350 | ||
Software | 3 | 1,367 | 1,367 | ||
Furniture | 7 | 2,406 | 2,836 | ||
Construction in progress | 10,856 | — | |||
32,500 | 35,049 | ||||
Accumulated depreciation and amortization | (13,274) | (12,912) | |||
Property and equipment, net | $19,226 | $22,137 | |||
Depreciation and amortization expense for property and equipment amounted to $1,382 and $1,512 for the three months ended June 30, 2016 and 2017, respectively, and $2,691 and $3,295 for the six months ended June 30, 2016 and 2017, respectively.
Note 4: Acquired Intangible Assets:
The following table presents the detail of intangible assets subject to amortization as of the dates presented:
December 31, 2016 | June 30, 2017 | ||||||||||||||||||||||||
Useful Live (years) | Gross | Accumulated Amortization | Net | Gross | Accumulated Amortization | Net | |||||||||||||||||||
Trade Names | 10 | $ | 1,040 | $ | (234 | ) | $ | 806 | $ | 1,040 | $ | (286 | ) | $ | 754 | ||||||||||
Developed technology | 10 | 2,980 | (670 | ) | 2,310 | 2,980 | (820 | ) | 2,160 | ||||||||||||||||
Customer relationships | 10 | 860 | (194 | ) | 666 | 860 | (237 | ) | 624 | ||||||||||||||||
$ | 4,880 | $ | (1,098 | ) | $ | 3,782 | $ | 4,880 | $ | (1,343 | ) | $ | 3,538 | ||||||||||||
Acquired intangible assets are amortized using the straight-line method over their estimated useful life, which approximates the expected use of these assets. Amortization expense amounted to $122 and $122 for the three months ended June 30, 2016 and 2017, respectively and $244 and $244 for the six months ended June 30, 2016 and 2017, respectively. Amortization expense of $2,440 will be recognized over the next five years, or $488 per year.
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Note 5: Operating Segments:
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to make operating decisions, allocate resources and in assessing performance. The Company has five operating segments and one reportable segment, real estate. Real estate revenue is derived from commissions and fees charged on real estate transactions closed by us or partner agents. Other revenue consists of fees charged for title and settlement services, mortgage banking operations, marketing services provided to homebuilders by the Company’s builder services group, Walk Score licensing and advertising fees, homes sold through Redfin Now, and other services. The Company’s CODM is its Chief Executive Officer. The CODM evaluates the performance of the Company’s operating segments based on revenue and gross profit. The Company does not analyze discrete segment balance sheet information related to long-term assets, all of which are located in the United States. All other financial information is presented on a consolidated basis.
Information on each of the reportable and other segments and reconciliation to consolidated net income (loss) is as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||||||
Real estate | |||||||||||||||
Revenue | $ | 75,649 | $ | 100,658 | $ | 116,006 | $ | 159,030 | |||||||
Cost of revenue | 48,293 | 63,436 | 85,022 | 114,592 | |||||||||||
Gross profit | $ | 27,356 | $ | 37,222 | $ | 30,984 | $ | 44,438 | |||||||
Other | |||||||||||||||
Revenue | $ | 2,065 | $ | 4,277 | $ | 3,343 | $ | 5,772 | |||||||
Cost of revenue | 2,010 | 4,539 | 3,786 | 6,875 | |||||||||||
Gross profit | $ | 55 | $ | (262 | ) | $ | (443 | ) | $ | (1,103 | ) | ||||
Consolidated | |||||||||||||||
Revenue | $ | 77,714 | $ | 104,935 | $ | 119,349 | $ | 164,802 | |||||||
Cost of revenue | 50,303 | 67,975 | 88,808 | 121,467 | |||||||||||
Gross profit | $ | 27,411 | $ | 36,960 | $ | 30,541 | $ | 43,335 | |||||||
Operating expenses | 26,072 | 32,688 | 53,567 | 67,186 | |||||||||||
Net income (loss) | $ | 1,388 | $ | 4,304 | $ | (22,893 | ) | $ | (23,762 | ) | |||||
Real estate revenue consisted of the following:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||||||
Real estate revenue | |||||||||||||||
Brokerage revenue | $ | 71,401 | $ | 95,069 | $ | 109,388 | $ | 149,540 | |||||||
Partner revenue | 4,248 | 5,589 | 6,618 | 9,490 | |||||||||||
Total real estate revenue | $ | 75,649 | $ | 100,658 | $ | 116,006 | $ | 159,030 | |||||||
Note 6: Redeemable Convertible Preferred Stock and Stockholders’ Deficit:
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Redeemable Convertible Preferred Stock—Redeemable convertible preferred stock is issuable in one or more series, each with such designations, rights, qualifications, limitations, and restrictions as the board of directors of the Company may determine at the time of issuance. As of December 31, 2016 and June 30, 2017, the Company had outstanding redeemable convertible preferred stock as follows:
As of December 31, 2016 | |||||||||
Shares Authorized | Shares Issued and Outstanding | Aggregate Liquidation Preference | Proceeds, Net of Issuance Costs | ||||||
Series A-1 | 4,378,284 | 1,459,427 | 500,000 | 462,000 | |||||
Series A-2 | 109,552 | 36,517 | 11,000 | 11,000 | |||||
Series A-3 | 9,099,610 | 3,033,202 | 259,000 | 241,000 | |||||
Series B | 36,338,577 | 12,112,853 | 7,998,000 | 7,952,000 | |||||
Series C | 33,388,982 | 11,129,656 | 12,000,000 | 11,950,000 | |||||
Series D | 28,574,005 | 9,524,665 | 10,269,000 | 10,201,000 | |||||
Series E | 12,041,148 | 4,013,712 | 14,924,000 | 14,841,000 | |||||
Series F | 20,808,580 | 6,936,186 | 50,536,000 | 50,453,000 | |||||
Series G | 21,527,376 | 7,175,784 | 70,991,000 | 68,062,000 | |||||
Total | 166,266,114 | 55,422,002 | 167,488,000 | 164,173,000 | |||||
As of June 30, 2017 | |||||||||||
Shares Authorized | Shares Issued and Outstanding | Aggregate Liquidation Preference | Proceeds, Net of Issuance Costs | ||||||||
Series A-1 | 4,378,284 | 1,459,427 | 500,000 | 462,000 | |||||||
Series A-2 | 109,552 | 36,517 | 11,000 | 11,000 | |||||||
Series A-3 | 9,099,610 | 3,033,202 | 259,000 | 241,000 | |||||||
Series B | 36,338,577 | 12,112,853 | 7,998,000 | 7,952,000 | |||||||
Series C | 33,388,982 | 11,129,656 | 12,000,000 | 11,950,000 | |||||||
Series D | 28,574,005 | 9,524,665 | 10,269,000 | 10,201,000 | |||||||
Series E | 12,041,148 | 4,013,712 | 14,924,000 | 14,841,000 | |||||||
Series F | 20,808,580 | 6,936,186 | 50,536,000 | 50,453,000 | |||||||
Series G | 21,527,376 | 7,175,784 | 70,991,000 | 68,062,000 | |||||||
Total | 166,266,114 | 55,422,002 | 167,488,000 | 164,173,000 | |||||||
The terms of all redeemable convertible preferred stock are summarized below:
Conversion—Each share of redeemable convertible preferred stock is convertible at the option of the holder into such number of common stock as is determined by dividing the original issue price by the conversion price in effect at the time of conversion. The original issue prices, adjusted for the reverse split, are as follows: $0.3426 for Series A-1 preferred, $0.2913 for Series A-2 preferred, $0.0855 for Series A-3 preferred, $0.6603 for Series B preferred, $1.0782 for Series C preferred, $1.0782 for Series D preferred, $3.7182 for Series E preferred, $7.2858 for Series F preferred, and $9.8931 for Series G preferred. Under the terms of the Company’s Amended and Restated Certificate of Incorporation, redeemable convertible preferred stock shall be automatically converted into shares of common stock upon the occurrence of specific events, including a firm commitment underwritten public offering with aggregate net proceeds of not less than $50,000.
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Liquidation Preference—In the event of a voluntary or involuntary liquidation, dissolution, or winding-up of the Company, the holders of redeemable convertible preferred stock will be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of common stock, an amount per share equal to the greater of (1) the original issue price (as adjusted for stock splits, stock dividends, reclassifications, and the like) for each share of redeemable convertible preferred stock held by them, plus declared but unpaid dividends, and (2) the amount such holder would have received if, immediately prior to such event, such holder had converted such share of redeemable convertible preferred stock into common stock. After payment of all preferential amounts, the remaining assets shall be distributed ratably among all holders of common stock on a pro rata basis based on the number of shares of common stock outstanding held by each such holder.
Redemption—At any time after December 15, 2021, the holders of not less than 67% of outstanding redeemable convertible preferred stock may request the Company to redeem all the outstanding shares of redeemable convertible preferred stock by paying in cash a sum per share with respect to each share of redeemable convertible preferred stock equal to the greater of (1) the original issue price of each share of preferred stock plus all declared but unpaid dividends or (2) the fair market value of each share of redeemable convertible preferred stock as determined by an appraisal performed by an independent third party approved by holders of at least 67% of the then outstanding shares of redeemable convertible preferred stock and the Company.
Accretion represents the (increase) or decrease in the redemption value of the Company’s redeemable convertible preferred stock. For the three and six months ended June 30, 2016, the fair value of the redeemable convertible preferred stock declined, resulting in accretion income. The recognized accretion related to the increase or decrease in the redemption value of the redeemable convertible preferred stock is reclassed upon the successful completion of an initial public offering, which occurred subsequent to the period ended June 30, 2017. On August 2, 2017 the Company completed an IPO.
The following table presents the accretion income/(expense) of the redeemable convertible preferred stock to its redemption value recorded within the consolidated statements of changes in redeemable convertible preferred stock and stockholders’ deficit during the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||||||
Series A-1 | $ | 1,620 | $ | (3,085 | ) | $ | 1,535 | $ | (3,785 | ) | |||||
Series A-2 | 41 | (77 | ) | 38 | (95 | ) | |||||||||
Series A-3 | 3,275 | (6,478 | ) | 3,192 | (7,843 | ) | |||||||||
Series B | 13,443 | (25,601 | ) | 13,111 | (31,052 | ) | |||||||||
Series C | 12,352 | (23,523 | ) | 11,707 | (28,531 | ) | |||||||||
Series D | 10,571 | (20,131 | ) | 10,019 | (24,417 | ) | |||||||||
Series E | 4,695 | (8,130 | ) | 4,342 | (9,936 | ) | |||||||||
Series F | 8,322 | (12,522 | ) | 7,292 | (15,643 | ) | |||||||||
Series G | 10,763 | (11,374 | ) | 8,633 | (14,388 | ) | |||||||||
Total | $ | 65,082 | $ | (110,921 | ) | $ | 59,869 | $ | (135,690 | ) | |||||
Voting—The holder of each share of redeemable convertible preferred stock has the right to one vote for each full share of common stock into which its respective shares of redeemable convertible preferred stock would be convertible on the record date for the vote.
Dividends—The holders of redeemable convertible preferred stock are entitled to receive noncumulative dividends out of any funds legally available, prior and in preference to any declaration or payment of any dividends to holders of common stock. Dividends are payable when, as and if declared by
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the board of directors at a rate of $0.0273 per share for Series A-1 preferred, $0.0234 per share for Series A-2 preferred, $0.0069 per share for Series A-3 preferred, $0.0528 per share for Series B preferred, $0.0864 per share for Series C preferred and Series D preferred, $0.2976 per share for Series E preferred, $0.5829 per share for Series F preferred, and $0.7914 per share Series G preferred, per year (as adjusted for stock splits, stock dividends, reclassifications and the like). The holders of the redeemable convertible preferred stock also shall be entitled to participate pro rata in any dividends or other distributions paid on the common stock on an as-if-converted basis.
Common Stock—At December 31, 2016 and June 30, 2017, the Company was authorized to issue 290,081,638 shares of common stock with a par value of $0.001 per share.
The Company has reserved shares of common stock, on an as-converted basis, for future issuance as follows:
December 31, | June 30, | ||||
2016 | 2017 | ||||
Redeemable convertible preferred stock outstanding | 55,422,002 | 55,422,002 | |||
Stock options issued and outstanding | 13,291,684 | 13,782,401 | |||
Shares available for future equity grants | 4,941,504 | 4,148,810 | |||
Total | 73,655,190 | 73,353,213 | |||
Note 7: Stock-based Compensation:
On November 5, 2004, the Company adopted the 2004 Equity Incentive Plan (as amended to date, the “Plan”), which provides for the issuance of incentive and nonqualified common stock options to employees, directors, officers, and consultants of the Company. Subsequent to adoption, the Company amended the Plan to increase the number of shares of common stock reserved for issuance to 29,883,863. The term of each option shall be no more than 10 years. The options generally vest over a four-year period.
The grant-date fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The inputs used below are subjective and generally require significant analysis and judgment to develop. The Company has not declared or paid any cash dividends and does not currently expect to do so in the future. The risk-free interest rate used in the Black-Scholes-Merton option-pricing model is based on the implied yield currently available in U.S. Treasury securities at maturity with an equivalent term. Expected volatility is based on an average volatility of stock prices for a group of real estate and technology industry peers. The Company uses the “simplified method” to calculate expected life due to the lack of historical exercise data, which assumes a ratable rate of exercise over the contractual life to estimate the expected term for employee options. The expected term of options represents the period that the stock-based awards are expected to be outstanding for the remaining unexercised shares. The range of assumptions for the three and six months ended June 30, 2016 and 2017, are provided in the following table:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||
2016 | 2017 | 2016 | 2017 | ||||
Expected life | 7 years | 7 years | 7 years | 7 years | |||
Volatility | 39.81% | 40.97% | 39.81%-41.36% | 37.88%-40.97% | |||
Risk-free interest rate | 1.51% | 1.96% | 1.51%-1.66% | 1.96%-2.26% | |||
Dividend yield | —% | —% | —% | —% | |||
Weighted-average grant date fair value | 3.96 | 4.89 | 3.99 | 4.86 | |||
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The following table presents information regarding options granted, exercised, forfeited, or cancelled for the periods presented:
Number Of Options | Weighted- Average Exercise Price | Weighted Average Remaining Contractual Life (years) | Aggregate Intrinsic Value | ||||||||
Outstanding at December 31, 2016 | 13,291,684 | $ | 5.85 | 7.74 | $ | 61,774 | |||||
Options granted | 1,137,046 | 10.78 | |||||||||
Options exercised | (301,622) | 3.37 | 2,294 | ||||||||
Options forfeited or canceled | (344,707) | 8.01 | |||||||||
Outstanding at June 30, 2017 | 13,782,401 | 6.26 | 7.46 | 65,065 | |||||||
Options exercisable at June 30, 2017 | 7,827,279 | $ | 4.38 | 6.34 | $ | 51,683 | |||||
The following table presents the detail of stock-based compensation amounts included in the Company’s consolidated statements of operations for the periods indicated below:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||||||
Cost of revenue | $ | 525 | $ | 699 | $ | 1,043 | $ | 1,414 | |||||||
Technology and development | 559 | 751 | 1,098 | 1,482 | |||||||||||
Marketing | 112 | 123 | 221 | 242 | |||||||||||
General and administrative | 718 | 1,065 | 1,372 | 2,182 | |||||||||||
Total stock-based compensation | $ | 1,914 | $ | 2,638 | $ | 3,734 | $ | 5,320 | |||||||
There was $24,166 of total unrecognized stock-based compensation related to unvested stock option arrangements granted under the Plan as June 30, 2017.
Note 8: Net Income (Loss) per Share Attributable to Common Stock:
Net income (loss) per share attributable to common stock is computed by dividing the net income (loss) attributable to common stock by the weighted-average number of common shares outstanding. The Company has outstanding stock options and redeemable convertible preferred stock, which are included in the calculation of diluted net income (loss) attributable to common stock per share whenever doing so would be dilutive.
The Company calculates basic and diluted net income (loss) per share attributable to common stock in conformity with the two-class method required for companies with participating securities. The Company considers all series of redeemable convertible preferred stock to be participating securities. Under the two-class method, net loss attributable to common stock is not allocated to the redeemable convertible preferred stock as the holders of redeemable convertible preferred stock do not have a contractual obligation to share in losses.
Diluted net income (loss) per share attributable to common stock is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. For purposes of this calculation, redeemable convertible preferred stock and options to purchase common stock are considered anti-dilutive securities for all periods ended June 30, 2017. For the periods ended June 30, 2016 the inclusion of the Company's redeemable convertible preferred stock was dilutive. For the periods ended June 30, 2016 the fair value of the redeemable convertible preferred stock declined, resulting in accretion income. The if-converted method of calculating earnings per share resulted in undistributed earnings attributable to participating securities, and conversion of redeemable convertible
preferred stock occurring at the beginning of the period. The undistributed earnings attributable to participating securities do not represent a distribution to existing stockholders' paid out of offering proceeds. Options were excluded in the calculation of weighted average shares used to compute diluted income (loss) for all periods presented except the three months ended June 30, 2016.
The following table sets forth the calculation of basic and diluted net income (loss) per share attributable to common stock during the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||||||
Numerator: | |||||||||||||||
Net income (loss) | $ | 1,388 | $ | 4,304 | $ | (22,893 | ) | $ | (23,762 | ) | |||||
Accretion of redeemable convertible preferred stock | 65,082 | (110,921 | ) | 59,869 | (135,690 | ) | |||||||||
Undistributed earnings attributable to participating securities | (52,805 | ) | — | (29,397 | ) | — | |||||||||
Net income (loss) attributable to common stock—basic | 13,665 | (106,617 | ) | 7,579 | (159,452 | ) | |||||||||
Net income (loss) attributable to common stock—diluted | 1,388 | (106,617 | ) | (22,893 | ) | (159,452 | ) | ||||||||
Denominator: | |||||||||||||||
Weighted average shares used to compute net income (loss) per share attributable to common stock—basic | 14,340,333 | 14,913,234 | 14,288,550 | 14,840,759 | |||||||||||
Weighted average shares used to compute net income (loss) per share attributable to common stock—diluted | 74,080,026 | 14,913,234 | 69,710,552 | 14,840,759 | |||||||||||
Net income (loss) per share attributable to common stock—basic | $ | 0.95 | $ | (7.15 | ) | $ | 0.53 | $ | (10.74 | ) | |||||
Net income (loss) per share attributable to common stock—diluted | $ | 0.02 | $ | (7.15 | ) | $ | (0.33 | ) | $ | (10.74 | ) | ||||
(1) A reconciliation of net income (loss) attributable to common stock—basic to net income (loss) attributable to common stock—diluted is as follows: | |||||||||||||||
Net income (loss) attributable to common stock—basic | $ | 13,665 | $ | 7,579 | |||||||||||
Add-back: Accretion due to application of if-converted | (65,082 | ) | (59,869 | ) | |||||||||||
Add-back: Undistributed earnings attributable to participating securities due to application of if-converted | 52,805 | 29,397 | |||||||||||||
Net income (loss) attributable to common stock—diluted | $ | 1,388 | $ | (22,893 | ) | ||||||||||
The following outstanding shares of common stock equivalents were excluded from the computation of the diluted net income (loss) per share attributable to common stock for the periods presented because their effect would have been anti-dilutive:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||
2016 | 2017 | 2016 | 2017 | ||||||
Redeemable convertible preferred stock | — | 55,422,002 | — | 55,422,002 | |||||
Options outstanding | 4,205,443 | 13,782,401 | 11,614,015 | 13,782,401 | |||||
Total | 4,205,443 | 69,204,403 | 11,614,015 | 69,204,403 | |||||
Note 9: Income Taxes:
The Company’s effective tax rate for the three and six-month periods ended June 30, 2016 and 2017 was 0% as a result of the Company recording a full valuation allowance against the deferred tax assets.
In determining the realizability of the net U.S. federal and state deferred tax assets, the Company considers numerous factors including historical profitability, estimated future taxable income, prudent and feasible tax planning strategies and the industry in which it operates. Management reassesses the realization of the deferred tax assets each reporting period, which resulted in a valuation allowance against the full amount of the Company’s U.S. deferred tax assets for the three- and six-month periods ended June 30, 2016 and 2017. To the extent that the financial results of the U.S. operations improve in the future and the deferred tax assets become realizable, the Company will reduce the valuation allowance through earnings.
Under Section 382 of the Internal Revenue Code of 1986, as amended, substantial changes in the Company's ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. Any such annual limitation may significantly reduce the utilization of the net operating losses before they expire. A Section 382 limitation study performed as of March 31, 2017 determined there was an ownership change in 2006 and $1,538 of the 2006 net operating loss is unavailable.
Net operating loss carryforwards are available to offset federal taxable income and begin to expire in 2025. Net operating loss carryforwards for states range from 5 to 20 years. As of December 31, 2016 the Company has accumulated approximately $84,973 of federal tax losses and $4,133 (tax effected) of state tax losses.
The Company’s material income tax jurisdiction is the United States (federal). As a result of net operating loss carryforwards, the Company is subject to audit for tax years 2005 and forward for federal purposes. There are tax years which remain subject to examination in various other jurisdictions that are not material to the Company’s financial statements.
Note 10: Commitments and Contingencies:
Legal Proceedings—Third-party licensed sales associates filed three lawsuits against the Company in the Superior Court of the State of California in 2013 and 2014. Two of the actions, which are pled as “class actions,” were removed to and are now pending in the Northern District of California. One of these cases also includes representative claims under California’s Private Attorney General Act, Labor Code section 2698 et. seq (“PAGA”). The third action is pending in the Los Angeles County Superior Court and asserts representative claims under PAGA. All three complaints alleged that the Company had misclassified current and former third-party licensed sales associates in California as independent contractors.
In March 2017, the Company entered into an agreement in principle to settle these lawsuits with an aggregate payment of $1,800 and in June 2017, the Company entered into a definitive agreement to settle the lawsuits. The Company has recorded an accrual for $1,800 as of December 31, 2016 and June 30, 2017. The settlement agreement does not contain any admission of liability, wrongdoing, or responsibility by any of the parties. The proposed settlement class contemplated by the agreement includes all current and former third party licensed sales associates engaged by the Company in California from January 16, 2009, through April 29, 2017. This settlement agreement is subject to court approval. As part of the settlement process, on August 18, 2017, the parties filed a Second Amended Complaint in Los Angeles County Superior Court to consolidate all of the cases, and all other lawsuits and arbitrations regarding these claims have been stayed pending the outcome of efforts to obtain final settlement approval.
The claims vary from case to case, but generally seek compensation for unpaid wages, overtime, and failure to provide meal and rest periods, as well as reimbursement of business expenses.
As with all class action and representative litigation, these cases are inherently complex and subject to many uncertainties. In the event the settlement is not approved, the actions may continue and
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a class may be certified. If that happens, there can be no assurance the plaintiffs will not seek substantial damage awards, penalties, attorneys’ fees, or other remedies. The Company believes it has complied with all applicable laws and regulations and that it properly classified the third-party licensed sales associates as independent contractors.
In addition, from time to time, the Company is involved in litigation, claims and other proceedings arising in the ordinary course of business. Such litigation and other proceedings may include, but are not limited to, actions relating to employment law, intellectual property, the Real Estate Settlement Procedures Act of 1974, the Fair Housing Act of 1968, or other consumer protection statute claims, commercial or contractual arrangements, brokerage- or real estate related-disputes, ordinary- course brokerage disputes like the failure to disclose property defects, and vicarious liability based upon conduct of individuals or entities outside of the Company’s control, including partner agents and third-party contractor agents. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. Often these cases raise complex factual and legal issues, which are subject to risks and uncertainties and could require significant management time and resources.
Facility Leases and Other Commitments—The Company leases its office space under noncancelable operating leases with terms ranging from one to 11 years. The leases require a fixed minimum rent with contractual minimum rent increases over the lease term, and certain leases include escalation provisions. Rent expense totaled $1,159 and $1,679 for the three months ended June 30, 2016 and 2017, respectively, and $2,224 and $4,325 for the six months ended June 30, 2016 and 2017, respectively. Other commitments primarily relate to network infrastructure for the Company’s data operations and commitments for the Company’s annual employee meeting. Also included are homes that we are under contract to purchase through Redfin Now but that have not closed. Future minimum payments due under these agreements as of December 31, 2016 and June 30, 2017 are as follows:
Facility Leases | Other Commitments | ||||||||||||||
December 31, 2016 | June 30, 2017 | December 31, 2016 | June 30, 2017 | ||||||||||||
2017 | $ | 4,803 | $ | 2,974 | $ | 2,123 | $ | 3,251 | |||||||
2018 | 6,227 | 6,641 | 848 | 889 | |||||||||||
2019 | 6,652 | 7,041 | — | — | |||||||||||
2020 | 5,563 | 5,943 | — | — | |||||||||||
2021 and thereafter | 32,262 | 32,577 | — | — | |||||||||||
Total minimum lease payments | $ | 55,507 | $ | 55,176 | $ | 2,971 | $ | 4,140 | |||||||
Mortgage Warehouse and Master Repurchase Agreements—In December 2016, Redfin Mortgage entered into a Mortgage Warehouse Agreement with Texas Capital Bank, National Association (“Texas Capital”) and in June 2017 Redfin Mortgage entered into a Master Repurchase Agreement with Western Alliance Bank. Pursuant to the Mortgage Warehouse Agreement and Master Repurchase Agreement, Texas Capital and Western Alliance Bank both agree to fund loans originated by Redfin Mortgage, in its discretion, up to $10,000 each in the aggregate and to take a security interest in such loans. The per annum interest rate payable to Texas Capital is a fixed rate equal to the rate of interest accruing on the outstanding principal balance of the loan, minus 1.5%, or 3.0%, whichever is higher. The per annum interest rate payable to Western Alliance Bank is a fixed rate equal to the LIBOR rate plus 3.00%, or 3.75%, whichever is higher. For each loan in which Texas Capital elects to purchase a participation interest, it will acquire an undivided 97% participation interest, by paying as the purchase price an amount equal to the participation interest multiplied by the principal balance of the loan. For each loan in which Western Alliance Bank elects to purchase, it will acquire an undivided 98% participation interest, by paying as the purchase price an amount equal to the participation interest multiplied by the principal balance of the loan. If a loan is not sold to a correspondent lender, Texas Capital and Western Alliance Bank's participation interests in the loans are to be repurchased in whole or in part by Redfin
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Mortgage. The Company has guaranteed Redfin Mortgage’s obligations under the Mortgage Warehouse and Master Repurchase Agreements.
The Mortgage Warehouse Agreement and Master Repurchase Agreements require each of the Company and Redfin Mortgage to maintain certain financial covenants and to provide periodic financial and compliance reports. Redfin Mortgage failed to satisfy certain financial covenants under both agreements as of June 30, 2017, but has not received a notice of default related to such failure from either Texas Capital or Western Alliance Bank. As of December 31, 2016 and June 30, 2017, there were $0 and $529, respectively, outstanding under the Mortgage Warehouse Agreement and no amounts drawn as of June 30, 2017 on the Master Repurchase Agreement.
Note 11: Accrued Liabilities:
The following table presents the detail of accrued liabilities as of the dates presented:
December 31, | June 30, | ||||||
2016 | 2017 | ||||||
Accrued compensation and benefits | $ | 16,659 | $ | 21,427 | |||
Legal fees and settlements | 2,795 | 2,381 | |||||
Miscellaneous accrued liabilities | 2,799 | 6,440 | |||||
Total accrued liabilities: | $ | 22,253 | $ | 30,248 | |||
Note 12: Retirement Plan:
The Company adopted a 401(k) profit sharing plan effective January 2005. The plan covers eligible employees as of their hire date. The 401(k) component of the plan allows employees to elect to defer from 1% to 100% of their eligible compensation up to the federal limit per year. Company- matching and profit-sharing contributions are discretionary and are determined annually by Company management and approved by the board of directors. No matching or profit-sharing contributions were declared for the three months ended June 30, 2016 and 2017 or for the six months ended June 30, 2016 and 2017.
Note 13: Subsequent Events:
2017 Equity Incentive Plan and 2017 Employee Stock Purchase Plan—On July 12, 2017, the board of directors approved the 2017 Equity Incentive Plan (“2017 EIP”) and the 2017 Employee Stock Purchase Plan (“2017 ESPP”). As of July 27, 2017, the maximum number of shares of common stock available for future issuance under the Company’s stock-based compensation plans is 9,459,659 shares, consisting of the following:
• | 4,159,659 shares of common stock under the Amended and Restated 2004 Equity Incentive Plan, as of July 27, 2017, which shares were added to the shares reserved under the 2017 EIP in connection with the IPO; |
• | 3,700,000 shares of common stock under the 2017 EIP; and |
• | 1,600,000 shares of common stock under the 2017 ESPP. |
For a period of 10 years, the 2017 EIP and 2017 ESPP provide for automatic annual increases in the number of shares available for future issuance on the first day of each fiscal year beginning in 2018.
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Initial Public Offering—On August 2, 2017, the Company completed an 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 allotment. The Company received net proceeds of $144,143 after deducting underwriting discounts and offering expenses directly attributable to the IPO. Upon the closing of the IPO, all shares of the outstanding redeemable convertible preferred stock automatically converted into 55,422,002 shares of common stock on a one-for-one basis.
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ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements, the accompanying notes, other financial information included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus filed with the Securities and Exchange Commission, or SEC, pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on July 28, 2017. The following discussion contains forward-looking statements that involve risks and uncertainties such as our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forwardlooking statements below.The following discussion also contains information using industry publications that generally state that the information contained therein has been obtained from sources believed to be reliable, but such information may not be accurate or complete. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied on therein. We are not aware of any misstatements regarding the industry, survey or research data provided herein, our estimates involve risks and uncertainties and are subject to change based upon various factors. Factors that could cause or contribute to those differences in our actual results and factors that may affect industry, survey or research data include, but are not limited to, those discussed below and those discussed elsewhere in this Quarterly Report on Form 10-Q, particularly in the sections “Special Note Regarding Forward-Looking Statements” above and Part II, Item 1A. “Risk Factors” below.
In the below discussion, we use the term basis points to refer to units of one‑hundredth of one percent.
Overview
Redfin is a technology-powered, residential real estate brokerage. We represent people buying and selling homes in over 80 markets throughout the United States. Our mission is to redefine real estate in the consumer’s favor. In a commission-driven industry, we put the customer first. We do this by pairing our own agents with our own technology to create a service that is faster, better, and costs less.
On August 2, 2017, we completed our initial public offering, or IPO, in which we issued and sold 10,615,650 shares of our common stock (including 1,384,650 shares pursuant to the underwriters' option to purchase additional shares) at a public offering price of $15.00 per share. The aggregate gross proceeds were approximately $159.2 million. We received approximately $144.1 million in net proceeds after deducting approximately $11.1 million of underwriting discounts and commissions and approximately $3.9 million in estimated offering costs. Upon the closing of the IPO, all of the outstanding shares of our redeemable convertible preferred stock automatically converted into 55,422,002 shares of common stock on a one-for-one basis. Subsequent to the closing of the IPO, there are no shares of preferred stock outstanding.
Key Business Metrics
In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, develop financial forecasts, and make strategic decisions.
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Jun. 30, 2015 | Sep. 30, 2015 | Dec. 31, 2015 | Mar. 31, 2016 | Jun. 30, 2016 | Sep. 30, 2016 | Dec. 31, 2016 | Mar. 31, 2017 | Jun. 30, 2017 | |||||||||||||||||||||||||||
Monthly average visitors (in thousands) | 12,381 | 13,060 | 11,142 | 13,987 | 17,021 | 17,795 | 16,058 | 20,162 | 24,400 | ||||||||||||||||||||||||||
Real estate transactions: | |||||||||||||||||||||||||||||||||||
Brokerage | 5,465 | 5,653 | 4,510 | 4,005 | 7,497 | 7,934 | 6,432 | 5,692 | 10,221 | ||||||||||||||||||||||||||
Partner | 2,456 | 2,718 | 2,273 | 1,936 | 2,602 | 2,663 | 2,281 | 2,041 | 2,874 | ||||||||||||||||||||||||||
Total | 7,921 | 8,371 | 6,783 | 5,941 | 10,099 | 10,597 | 8,713 | 7,733 | 13,095 | ||||||||||||||||||||||||||
Real estate revenue per real estate transaction: | |||||||||||||||||||||||||||||||||||
Brokerage | $ | 9,243 | $ | 9,343 | $ | 9,242 | $ | 9,485 | $ | 9,524 | $ | 9,333 | $ | 9,428 | $ | 9,570 | $ | 9,301 | |||||||||||||||||
Partner | 1,164 | 1,191 | 1,177 | 1,224 | 1,633 | 1,932 | 1,991 | 1,911 | 1,945 | ||||||||||||||||||||||||||
Aggregate | 6,738 | 6,696 | 6,539 | 6,793 | 7,491 | 7,474 | 7,481 | 7,548 | 7,687 | ||||||||||||||||||||||||||
Aggregate home value of real estate transactions (in millions) | 3,601 | 3,837 | 2,984 | 2,599 | 4,684 | 4,898 | 4,018 | 3,470 | 6,119 | ||||||||||||||||||||||||||
U.S. market share by value | 0.44 | % | 0.46 | % | 0.46 | % | 0.48 | % | 0.53 | % | 0.57 | % | 0.56 | % | 0.58 | % | 0.64 | % | |||||||||||||||||
Revenue from top-10 Redfin markets as a percentage of real estate revenue | 78 | % | 76 | % | 73 | % | 71 | % | 74 | % | 72 | % | 71 | % | 68 | % | 69 | % | |||||||||||||||||
Average number of lead agents | 568 | 621 | 667 | 743 | 756 | 756 | 796 | 935 | 1,010 | ||||||||||||||||||||||||||
Monthly Average Visitors
The number of, and growth in, visitors to our website and mobile application are important leading indicators of our business activity because these channels are the primary ways we meet and serve customers. For a particular period, monthly average visitors refers to the average of the number of unique visitors to our website and mobile application for each of the months in that period. Monthly average visitors are influenced by market conditions that affect interest in buying or selling homes, the level and success of our marketing programs, and seasonality. We believe we can continue to increase monthly visitors, which helps our growth.
Given the lengthy process to buy or sell a home, a visitor during one month may not convert to a revenue-generating customer until many months later, if at all.
When we refer to "monthly average visitors" for a particular period, we are referring to the average number of unique visitors to our website and mobile application for each of the months in that period, as measured by Google Analytics, a product that provides digital marketing intelligence. Visitors are tracked by Google Analytics using cookies, with a unique cookie being assigned to each browser or mobile application on a device. For any given month, we count all of the unique cookies that visited our website or either our iOS or Android mobile application during that month; each such unique cookie is a unique visitor. If a person accesses our mobile application using different devices within a given month each such mobile device is counted as a separate visitor for that month. If the same person accesses our website using an anonymous browser, or clears or resets cookies on their device, each access with a new cookie is counted as a new unique visitor for that month.
Real Estate Transactions
Increasing the number of real estate transactions in which we or our partner agents represent homebuyers and home sellers is critical to increasing our revenue and, in turn, to achieving profitability. Real estate transactions are influenced by pricing for our services as well as market conditions that affect home sales, such as local inventory levels and mortgage interest rates. Real estate transactions are also
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affected by seasonality and macroeconomic factors. We include a single transaction twice when we or our partner agents serve both the homebuyer and the home seller of a transaction.
Real Estate Revenue per Real Estate Transaction
Real estate revenue per real estate transaction, together with the number of real estate transactions, is a factor in evaluating business growth and determining pricing. Changes in revenue per real estate transaction can be affected by our pricing, the mix of transactions for homebuyers and home sellers, changes in the value of homes in the markets we serve, the geographic mix of our transactions, and the transactions we refer to partner agents. We generally generate more real estate revenue per brokerage transaction from representing homebuyers than home sellers.
We calculate real estate revenue per real estate transaction by dividing brokerage, partner, or aggregate revenue, as applicable, by the corresponding number of real estate transactions in any period.
Aggregate Home Value of Real Estate Transactions
The aggregate home value of real estate transactions completed by our lead agents and of the real estate transactions we refer to partner agents is an important indicator of the health of our business because our revenue is largely based on a percentage of each home’s sale price. This metric is affected by changes in home values in the markets we serve and by changes in the number of customers who use our services as well as seasonality and macroeconomic factors. We include the value of a single transaction twice when we or our partner agents serve both the homebuyer and home seller of a transaction.
U.S. Market Share by Value
Increasing our U.S. market share by value is critical to our ability to grow our business and achieve profitability over the long term. We believe there is a significant opportunity to increase our share in the markets we currently serve.
We calculate the aggregate value of U.S. home sales by multiplying the total number of U.S. home sales by the mean sale price of these sales, each as reported by the National Association of Realtors. We calculate our market share by aggregating the home value of real estate transactions conducted by our lead agents or our partner agents. Then, in order to account for both the sell- and buy-side components of each transaction, we divide that value by two-times the estimated aggregate value of U.S. home sales.
Revenue from Top-10 Markets as a Percentage of Real Estate Revenue
Our top-10 markets by real estate revenue are the metropolitan areas of Boston, Chicago, Los Angeles, Maryland, Orange County, Portland, San Diego, San Francisco, Seattle, and Virginia. We plan to continue to diversify our growth and to increase our market share in our newer markets. We expect our revenue from top-10 markets to decline as a percentage of our real estate revenue over time.
Average Number of Lead Agents
The average number of lead agents, in combination with our other key metrics such as the number of brokerage transactions, is a basis for calculating agent productivity and is one indicator of the potential future growth of our business. We systematically evaluate traffic to our website and mobile application and customer activity to anticipate changes in customer demand to determine when and where to hire lead agents.
We calculate the average number of lead agents by taking the average of the number of lead agents at the end of each month included in the period.
Components of Our Results of Operations
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Revenue
We generate revenue primarily from commissions and fees charged on real estate transactions closed by us or partner agents, as well as from other services we provide.
Real Estate Revenue
Brokerage Revenue. Brokerage revenue consists of commissions earned on real estate transactions closed by our lead agents. We recognize commission-based revenue on the closing of a transaction, less the amount of any commission refund or any closing-cost reduction, commission discount, or transaction-fee adjustment. Brokerage revenue is affected by the number of real estate transactions we close, the mix of brokerage transactions, home-sale prices, commission rates, and the amount we give to customers.
Partner Revenue. Partner revenue consists of fees partner agents pay us when they close referred transactions, less the amount of any payments we make to customers. We recognize these fees as revenue on the closing of a transaction. Partner revenue is affected by the number of partner transactions closed, home sale prices, commission rates, and the amount we give to customers.
Other Revenue
Other revenue consists of fees charged for title and settlement services, mortgage banking operations, marketing services provided to home builders by our builder services group, licensing and analytics fees from our Walk Score service, homes sold by Redfin Now, and other services. Revenue is recognized when the service is provided. Redfin Now is our experimental new service where we buy homes directly from home sellers and resell them to homebuyers. Revenue earned from homes previously purchased by Redfin Now is recorded at closing on a gross basis, representing the sales price of the home.
Cost of Revenue and Gross Margin
Cost of revenue consists primarily of personnel costs (including base pay and benefits), stock- based compensation, transaction bonuses, home touring and field expenses, listing expenses, business expenses, facilities expenses, and, for Redfin Now, the cost of homes including the purchase price and capitalized improvements.
Gross profit is revenue less cost of revenue. Gross margin is gross profit expressed as a percentage of revenue. Our gross margin has and will continue to be affected by a number of factors, including real estate revenue per real estate transaction and the productivity of our lead agents and support staff.
Operating Expenses
Technology and Development
Technology and development expenses relate primarily to developing new software used by our customers and internal teams, making enhancements to our existing software, and maintaining and improving our website and mobile application. These expenses consist primarily of personnel costs, stock-based compensation, data licenses, software, and equipment, and infrastructure such as for data centers and hosted services. Technology and development expenses also include amortization of capitalized internal-use software and website and mobile application development costs.
Marketing
Marketing expenses consist primarily of media costs for online and traditional advertising, as well as personnel costs and stock-based compensation.
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General and Administrative
General and administrative expenses consist primarily of personnel costs, stock-based compensation, facilities, and related expenses for our executive, finance, human resources, facilities and legal organizations, and fees for professional services. Professional services are principally comprised of external legal, audit, and tax services.
Results of Operations
The following tables set forth our results of operations for the periods presented and as a percentage of our revenue for those periods. The period-to-period comparisons of our historical results are not necessarily indicative of the results that may be expected in the future.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||||||
(in thousands) | |||||||||||||||
Revenue | $ | 77,714 | $ | 104,935 | $ | 119,349 | $ | 164,802 | |||||||
Cost of revenue(1) | 50,303 | 67,975 | 88,808 | 121,467 | |||||||||||
Gross profit | 27,411 | 36,960 | 30,541 | 43,335 | |||||||||||
Operating expenses: | |||||||||||||||
Technology and development(1) | 8,060 | 10,090 | 15,958 | 19,762 | |||||||||||
Marketing(1) | 8,486 | 10,132 | 17,697 | 20,591 | |||||||||||
General and administrative(1) | 9,526 | 12,466 | 19,912 | 26,833 | |||||||||||
Total operating expenses | 26,072 | 32,688 | 53,567 | 67,186 | |||||||||||
Income (loss) from operations | 1,339 | 4,272 | (23,026 | ) | (23,851 | ) | |||||||||
Total interest income and other income, net | 49 | 32 | 133 | 89 | |||||||||||
Net income (loss) | $ | 1,388 | $ | 4,304 | $ | (22,893 | ) | $ | (23,762 | ) | |||||
(1) Includes stock-based compensation as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||||||
(in thousands) | |||||||||||||||
Cost of revenue | $ | 525 | $ | 699 | $ | 1,043 | $ | 1,414 | |||||||
Technology and development | 559 | 751 | 1,098 | 1,482 | |||||||||||
Marketing | 112 | 123 | 221 | 242 | |||||||||||
General and administrative | 718 | 1,065 | 1,372 | 2,182 | |||||||||||
Total | $ | 1,914 | $ | 2,638 | $ | 3,734 | $ | 5,320 | |||||||
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Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||
2016 | 2017 | 2016 | 2017 | ||||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of revenue(1) | 64.7 | 64.8 | 74.4 | ||||||||