Opendoor Technologies Inc.: Form 10-Q for the period ended Sep 30, 2022

The following discussion and analysis provides information that our management believes is relevant to an assessment and understanding of our condensed consolidated results of operations and financial condition. The discussion should be read together with the historical condensed consolidated financial statements and related notes that appear in this Quarterly Report on Form 10-Q.

This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Forward-Looking Statements,” “Risk Factors” or in other parts of this Quarterly Report on Form 10-Q, and in “Part I - Item 1A. Risk Factors” in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the “Annual Report”).

Overview

Opendoor’s mission is to empower everyone with the freedom to move and make it possible to buy, sell and move at the tap of a button. We are transforming what has historically been a complex, uncertain, time-consuming and mostly offline process into a simple, online experience. Since our inception in 2014, we have built scalable pricing capabilities, technology-enabled centralized operations, and a suite of digital-first consumer products. These investments have enabled us to help customers buy or sell homes in over 200,000 transactions and expand our footprint to 51 markets across the country. Most importantly, we have grown rapidly while delighting our customers with an experience that brings simplicity, certainty and speed to the home selling and buying process.

Financial Highlights

(in millions, except percentages, homes sold, number of markets, and homes in inventory)

Current Housing Environment

The residential real estate market continues to be dominated by concerns of elevated inflation, rising rates, and increasing probability of recession. In response to persistent inflationary pressures, the U.S. Federal Reserve Board has implemented four 75-basis point hikes in target rates since June 2022, marking the most aggressive response by the U.S. Federal Reserve Board since the early 1980s. These actions have pushed long-term interest rates higher with mortgage rates following suit. Thirty-year fixed mortgage rates reached a decade-high average level of 5.6% in the third quarter, relative to an average rate of 3.8% during the three months ended March 31, 2022. Mortgage rates have continued their rise since then, reaching over 7% in late October 2022, a level last seen in the early 2000s.

The ensuing decline in housing affordability has driven a sharp pullback in home buyer demand, which precipitated a slowdown in both transaction velocity and home price appreciation (“HPA”) from close-to-record highs observed as recently as May of this year. While we had anticipated a slowdown in the housing market from peak levels, the speed of adjustment realized earlier this year was much faster than expected and sharper than typical seasonal trends.

According to the National Association of Realtors, single-family existing home transaction volumes as of the end of the third quarter were down 23% versus the year prior on a seasonally adjusted basis with most of the decline in monthly transaction volumes taking place since April of this year. That said, transaction volumes as of the end of the third quarter are consistent with 2014 levels, with 2021, in particular, being an outlier compared to recent history. While housing inventories remain at close to all-time lows as reported by the National Association of Realtors, declining volumes have reduced the rate of market clearance, defined as the percentage of listed homes that go into contract per day. Within the markets where Opendoor operates, clearance rates were pacing at near all-time highs in April of this year but have since declined to 2019 levels, into what is normally a slower clearance period given housing market seasonality.

These volume declines have resulted in weaker price dynamics. We typically observe a gradual decline in month-over-month HPA to zero or slightly negative in the back half of the year given housing seasonality. In contrast, the speed with which it got there this year from peak levels early in the second quarter was faster than our expectation and sharper than typical seasonal home price declines. For example, we saw one-month HPA (non-seasonally adjusted, weighted by Opendoor’s markets) move from approximately 300 basis points per month in early May to negative 100 basis points in mid July. We have continued to observe a flattening of the month-over-month change in HPA at negative 100 to 150 bps per month since July.

These macroeconomic changes require us to adopt a highly dynamic and rigorous approach to managing risk and overall inventory health. We believe we are well-positioned to navigate this volatility given our pricing strategies, flexible operating model and balance sheet. We discuss the anticipated effects on our business throughout this section, including under “Factors Affecting Our Business Performance.”

In light of ongoing market uncertainty and our reduced volume expectations, we have scaled back our operational capacity by reducing both third-party labor and our internal workforce. In addition, on November 2, 2022, we announced a workforce reduction of approximately 550 employees, representing 18% of our workforce at that time. We are providing post-employment benefits to impacted employees for a total cash cost of approximately $15 million,which we expect will be recognized in the fourth quarter of fiscal 2022 and paid primarily during the same period. As a result of the timing of the workforce reduction, the results set forth herein are not impacted by such reduction.

Business Impact of COVID-19

While we believe we have adapted our operations to function effectively during the ongoing COVID-19 pandemic, our business remains sensitive to potential future disruptions of the real estate market caused by COVID-19 and its variants.

Factors Affecting our Business Performance

Market Penetration in Existing Markets

Residential real estate is one of the largest consumer markets, with approximately $2.3 trillion of home value transacted annually. Given the fact that we operate in a highly fragmented industry and offer a differentiated value proposition to the incumbent agent-led transaction, we believe there is significant opportunity to expand our share in our existing cities. By providing a consistent, high-quality and differentiated experience to our customers, we hope to continue to drive positive word-of-mouth awareness and trust in our platform. We believe this creates a virtuous cycle, whereby more home sellers will request an offer from Opendoor, allowing us to deepen our market penetration.

We are launching in certain markets our Exclusives marketplace where our sellers will connect directly with our buyers thereby expanding our target audience to additional sellers. We expect this marketplace to reduce our inventory exposure, capital intensity and macroeconomic risk, which we believe has the potential to positively impact our results.

We also expect to launch our new partnership agreement with Zillow, Inc. in early 2023 that will allow home sellers on the Zillow, Inc. platform to request an offer directly from Opendoor, which will create an additional channel for us to drive brand awareness and acquire customers.

Expansion into New Markets

We operated in 51 markets as of September 30, 2022. The following table represents the number of markets as of the periods presented:

We launched seven new markets in the first nine months of 2022, adding to the 23 markets launched in 2021.

We have honed our market launch playbook by centralizing many of our core pricing, operations, and customer service functions, enabling us to launch new markets more efficiently and quickly in the future. For example, we are generally able to launch a market with only a small field team focused on home renovation oversight, with all other key functions managed centrally.

We view the first year of a market launch as an investment period during which we refine our pricing models, renovation strategies and cost structure. Historically, we have seen underwriting performance for purchase cohorts in new markets improve approximately one year after initial launch. While new markets do not contribute significantly to revenue during their first year of operation, they provide a foundation for long-term growth once local operational and pricing capabilities have been refined.

We have historically made substantial investments to support our market launches, which tends to impact both Contribution Margin and Adjusted EBITDA as these new markets mature. We expect such investments to continue as we launch additional markets.

Adjacent Services

We believe home sellers and buyers value simplicity and convenience. To that end, we are building an online, integrated suite of home services, which currently include title insurance and escrow services, Buy with Opendoor, and Opendoor Complete. We also offer mortgage services. Historically, we primarily delivered these services through Opendoor Home Loans, which operated as a correspondent lender. We are focusing our mortgage efforts on the seamless integration of financing with the rest of the Opendoor ecosystem and as such are now more focused on brokerage activities via both Opendoor Home Loans and OD Homes Brokerage (formerly RedDoor HQ Inc. (“RedDoor”)). We work closely with our strategic partner Lower.com as well as other mortgage lenders to offer our customers a broader suite of mortgage products and services. Our success with title insurance and escrow services helps validate our view that customers prefer an online, integrated experience. We expect that these adjacent services will also be accretive to our Contribution Margin.

We will continue to evaluate new ways to improve our end-to-end solution and expect to invest in additional adjacent products and services over time.

Unit Economics

We view Contribution Margin and Contribution Margin after Interest as key measures of unit economic performance. Our long-term financial performance depends, in part, on continuing to maintain and expand unit margins via pricing engine optimization and enhancements, lowering platform efficiencies, greater automation and self-service, more efficient forms of financing, and the successful attach of services that supplement the core transaction margin profile via our existing services as well as new ones.

Inventory Management

Effectively managing our overall inventory position is critical to our financial performance. Since our inception, we have prioritized investment in our pricing capabilities across our home acquisition processes and our forecasting and resale systems, and will continue to do so. As part of our overall risk management framework, we consider both individual market and aggregate portfolio exposures. We typically seek to maximize the resale margin performance of our inventory in the context of managing overall risk and inventory health through monitoring sell-through rates, holding periods, and portfolio aging.

Our performance in the third quarter of 2022 reflects the sharp transition in the housing market from peak levels earlier this year to lower transaction velocity and home price appreciation well beyond typical seasonal trends. Given these macroeconomic pressures, we have been focused on managing for overall inventory health and risk. As part of that focus, we have continued to adjust down listed prices on our inventory to stay in-line with the market and drive resale clearance. Related to those price actions, we have recorded inventory valuation adjustments of $573 million and $663 million during the three and nine months ended September 30, 2022, respectively. We have also proactively reduced our acquisition pace via higher spreads embedded in our offers and lower marketing investment. While this has the effect of reducing our acquisition pace to allow us to manage overall inventory growth, we also expect future margins on those acquisition cohorts to be in-line with our expectations for positive contribution margins. We expect to resume a higher acquisition pace as the housing market stabilizes.

As one key measure of inventory management performance, we evaluate our portfolio metrics relative to the broader market (as observed on the multiple listing services (“MLS”)). One such metric is our percentage of homes “on the market” for greater than 120 days as measured from initial listing date. As of September 30, 2022, such homes represented 21% of our portfolio, compared to 15% for the broader market when filtered for the types of homes we are able to underwrite and acquire in a given market based on characteristics such as price range, home type, home location, year built and lot size (referred to as our buybox). This metric is impacted by the mix of homes in our inventory. Beginning early in the third quarter of 2022, we significantly reduced our offer pace and subsequent closings of new home acquisitions in light of our risk management objective and overall macroeconomic uncertainty. When newer acquired homes represent a smaller proportion of our overall inventory, average days on market for our portfolio generally increases. As such, given the reduction in newer acquired homes, we anticipate days to sale to increase in the fourth quarter of 2022 and into early 2023.

Inventory Financing

Our business model is working capital intensive and inventory financing is a key enabler of our growth. We primarily rely on our access to non-recourse asset-backed debt, which consists of asset-backed senior debt facilities and asset-backed mezzanine term debt facilities, to finance our home acquisitions. See “—Liquidity and Capital Resources — Debt and Financing Arrangements.”

Seasonality

The residential real estate market is seasonal, with greater demand and home price appreciation from home buyers in the spring and summer, and typically weaker demand and lower home price appreciation in late fall and winter. In general, we expect our financial results and working capital requirements to reflect seasonal variations over time. However, other factors, including growth, market expansion and changes in macroeconomic conditions, such as rising inflation and interest rate increases as recently observed, have obscured the impact of seasonality in our historical financials and we expect may continue to do so.

Non-GAAP Financial Measures

In addition to our results of operations below, we report certain financial measures that are not required by, or presented in accordance with, U.S. generally accepted accounting principles (“GAAP”).

These measures have limitations as analytical tools when assessing our operating performance and should not be considered in isolation or as a substitute for GAAP measures, including gross (loss) profit and net income. We may calculate or present our non-GAAP financial measures differently than other companies who report measures with similar titles and, as a result, the non-GAAP financial measures we report may not be comparable with those of companies in our industry or in other industries.

Adjusted Gross Profit, Contribution (Loss) Profit and Contribution (Loss) Profit After Interest

To provide investors with additional information regarding our margins and return on inventory acquired, we have included Adjusted Gross Profit, Contribution (Loss) Profit and Contribution (Loss) Profit After Interest, which are non-GAAP financial measures. We believe that Adjusted Gross Profit, Contribution (Loss) Profit and Contribution (Loss) Profit After Interest are useful financial measures for investors as they are supplemental measures used by management in evaluating unit level economics and our operating performance. Each of these measures is intended to present the economics related to homes sold during a given period. We do so by including revenue generated from homes sold (and adjacent services) in the period and only the expenses that are directly attributable to such home sales, even if such expenses were recognized in prior periods, and excluding expenses related to homes that remain in inventory as of the end of the period. Contribution (Loss) Profit provides investors a measure to assess Opendoor’s ability to generate returns on homes sold during a reporting period after considering home purchase costs, renovation and repair costs, holding costs and selling costs. Contribution (Loss) Profit After Interest further impacts gross (loss) profit by including senior interest costs attributable to homes sold during a reporting period. We believe these measures facilitate meaningful period over period comparisons and illustrate our ability to generate returns on assets sold after considering the costs directly related to the assets sold in a given period.

Adjusted Gross Profit, Contribution (Loss) Profit and Contribution (Loss) Profit After Interest are supplemental measures of our operating performance and have limitations as analytical tools. For example, these measures include costs that were recorded in prior periods under GAAP and exclude, in connection with homes held in inventory at the end of the period, costs required to be recorded under GAAP in the same period. Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We include a reconciliation of these measures to the most directly comparable GAAP financial measure, which is gross (loss) profit.

Adjusted Gross Profit / Margin

We calculate Adjusted Gross Profit as gross (loss) profit under GAAP adjusted for (1) inventory valuation adjustment in the current period, and (2) inventory valuation adjustment in prior periods. Inventory valuation adjustment in the current period is calculated by adding back the inventory valuation adjustments recorded during the period on homes that remain in inventory at period end. Inventory valuation adjustment in prior periods is calculated by subtracting the inventory valuation adjustments recorded in prior periods on homes sold in the current period. We define Adjusted Gross Margin as Adjusted Gross Profit as a percentage of revenue. See “—Critical Accounting Policies and Estimates— Real Estate Inventory” for detailed discussion of inventory valuation adjustment.

We view this metric as an important measure of business performance as it captures gross margin performance isolated to homes sold in a given period and provides comparability across reporting periods. Adjusted Gross Profit helps management assess home pricing, service fees and renovation performance for a specific resale cohort.

Contribution (Loss) Profit / Margin

We calculate Contribution (Loss) Profit as Adjusted Gross Profit, minus certain costs incurred on homes sold during the current period including: (1) holding costs incurred in the current period, (2) holding costs incurred in prior periods, and (3) direct selling costs. The composition of our holding costs is described in the footnotes to the reconciliation table below. Contribution Margin is Contribution (Loss) Profit as a percentage of revenue.

We view this metric as an important measure of business performance as it captures the unit level performance isolated to homes sold in a given period and provides comparability across reporting periods. Contribution (Loss) Profit helps management assess inflows and outflows directly associated with a specific resale cohort.

Contribution (Loss) Profit / Margin After Interest

We define Contribution (Loss) Profit After Interest as Contribution (Loss) Profit, minus interest expense under our non-recourse asset-backed senior debt facilities incurred on the homes sold during the period. This may include interest expense recorded in periods prior to the period in which the sale occurred. Our asset-backed senior debt facilities are secured by our real estate inventory and cash. See “— Liquidity and Capital Resources — Debt and Financing Arrangements.” In addition to our senior debt facilities, we use a mix of debt and equity capital to finance our inventory and that mix will vary over time. We expect to continue to evolve our cost of financing as we include other debt sources beyond mezzanine capital. As such, in order to allow more meaningful period over period comparisons that more accurately reflect our asset performance rather than our evolving financing choices, we do not include interest expense associated with our mezzanine term debt facilities in this calculation. Contribution Margin After Interest is Contribution (Loss) Profit After Interest as a percentage of revenue.

We view this metric as an important measure of business performance. Contribution (Loss) Profit After Interest helps management assess Contribution Margin performance, per above, when burdened with the cost of senior financing.

The following table presents a reconciliation of our Adjusted Gross Profit, Contribution (Loss) Profit and Contribution (Loss) Profit After Interest to our gross (loss) profit, which is the most directly comparable GAAP measure, for the periods indicated:

(in millions, except percentages)

(1) Inventory valuation adjustment includes adjustments to record real estate inventory at the lower of its carrying amount or its net realizable value. See “—Critical Accounting Policies and Estimates — Real Estate Inventory.”

(2) Inventory valuation adjustment — Current Period is the inventory valuation adjustments recorded during the period presented associated with homes that remain in inventory at period end.

(3) Inventory valuation adjustment — Prior Periods is the inventory valuation adjustments recorded in prior periods associated with homes that sold in the period presented.

(4) Represents selling costs incurred related to homes sold in the relevant period. This primarily includes broker commissions, external title and escrow-related fees and transfer taxes.

(5) Holding costs include mainly property taxes, insurance, utilities, homeowners association dues, cleaning and maintenance costs. Holding costs are included in Sales, marketing, and operations on the Condensed Consolidated Statements of Operations.

(6) Represents holding costs incurred in the period presented on homes sold in the period presented.

(7) Represents holding costs incurred in prior periods on homes sold in the period presented.

(8) This does not include interest on mezzanine term debt facilities or other indebtedness. See “— Liquidity and Capital Resources — Debt and Financing Arrangements.”

(9) Represents the interest expense under our asset-backed senior debt facilities incurred during the period presented on homes sold in the period presented.

(10) Represents the interest expense under our asset-backed senior debt facilities incurred during prior periods on homes sold in the period presented.

Adjusted Net Loss and Adjusted EBITDA

We also present Adjusted Net Loss and Adjusted EBITDA, which are non-GAAP financial measures that management uses to assess our underlying financial performance. These measures are also commonly used by investors and analysts to compare the underlying performance of companies in our industry. We believe these measures provide investors with meaningful period over period comparisons of our underlying performance, adjusted for certain charges that are non-recurring, non-cash, not directly related to our revenue-generating operations or not aligned to related revenue.

Adjusted Net Loss and Adjusted EBITDA are supplemental measures of our operating performance and have important limitations. For example, these measures exclude the impact of certain costs required to be recorded under GAAP. These measures also include inventory valuation adjustments that were recorded in prior periods under GAAP and exclude, in connection with homes held in inventory at the end of the period, inventory valuation adjustments required to be recorded under GAAP in the same period. These measures could differ substantially from similarly titled measures presented by other companies in our industry or companies in other industries. Accordingly, these measures should not be considered in isolation or as a substitute for analysis of our results as reported under GAAP. We include a reconciliation of these measures to the most directly comparable GAAP financial measure, which is net loss.

Adjusted Net Loss

We calculate Adjusted Net Loss as GAAP net loss adjusted to exclude non-cash expenses of stock-based compensation, equity securities fair value adjustment, warrant fair value adjustment, and intangibles amortization expense. It also excludes non-recurring gain on lease termination, payroll tax on initial RSU release, and legal contingency accrual and related expenses. Adjusted Net Loss also aligns the timing of inventory valuation adjustments recorded under GAAP to the period in which the related revenue is recorded in order to improve the comparability of this measure to our non-GAAP financial measures of unit economics, as described above. Our calculation of Adjusted Net Loss does not currently include the tax effects of the non-GAAP adjustments because our taxes and such tax effects have not been material to date.

Adjusted EBITDA

We calculated Adjusted EBITDA as Adjusted Net Loss adjusted for depreciation and amortization, property financing and other interest expense, interest income, and income tax expense. Adjusted EBITDA is a supplemental performance measure that our management uses to assess our operating performance and the operating leverage in our business.

The following table presents a reconciliation of our Adjusted Net Loss and Adjusted EBITDA to our net loss, which is the most directly comparable GAAP measure, for the periods indicated:

(in millions, except percentages)

(1) Represents the gains and losses on certain financial instruments, which are marked to fair value at the end of each period.

(2) Represents amortization of acquisition-related intangible assets. The acquired intangible assets have useful lives ranging from 1 to 5 years and amortization is expected until the intangible assets are fully amortized.

(3) Inventory valuation adjustment includes adjustments to record real estate inventory at the lower of its carrying amount or its net realizable value.

(4) Inventory valuation adjustment — Current Period is the inventory valuation adjustments recorded during the period presented associated with homes that remain in inventory at period end.

(5) Inventory valuation adjustment — Prior Periods is the inventory valuation adjustments recorded in prior periods associated with homes that sold in the period presented.

(6) Includes primarily gain or loss on interest rate lock commitments, gain or loss on the sale of available for sale securities, sublease income, and income from equity method investments.

(7) Includes interest expense on our non-recourse asset-backed debt facilities.

(8) Includes amortization of debt issuance costs and loan origination fees, commitment fees, unused fees, other interest related costs on our asset-backed debt facilities, interest expense related to the 2026 convertible senior notes outstanding, and interest expense on other secured borrowings.

(9) Consists mainly of interest earned on cash, cash equivalents and marketable securities.

Components of Our Results of Operations

Revenue

We generate the majority of our revenue from the sale of homes that we previously acquired from homeowners. In addition, we generate revenue from additional services we provide to both home sellers and buyers, which consists primarily of title insurance and escrow services, Buy with Opendoor and mortgage financing services.

Home sales revenue from selling residential real estate is recognized when title to and possession of the property has transferred to the buyer and we have no continuing involvement with the property, which is generally the close of escrow. The amount of revenue recognized for each home sale is equal to the sale price of the home net of any concessions.

Cost of Revenue

Cost of revenue includes the property purchase price, acquisition costs and direct costs to renovate or repair the home. These costs are accumulated in real estate inventory during the property holding period and charged to cost of revenue under the specific identification method when the property is sold. Real estate inventory is reviewed for valuation adjustments at least quarterly. If the carrying amount or basis is not expected to be recovered, an inventory valuation adjustment is recorded to cost of revenue and the related assets are adjusted to their net realizable value. Additionally, for our revenue other than home sales revenue, cost of revenue consists of any costs incurred in delivering the service, including associated headcount expenses such as salaries, benefits and stock-based compensation.

Operating Expenses

Sales, Marketing and Operations Expense

Sales, marketing and operations expense consists primarily of broker commissions (paid to the home buyers’ real estate agents and third-party listing agents, if applicable), resale closing costs, holding costs related to real estate inventory including utilities, property taxes and maintenance, and expenses associated with product marketing, promotions and brand-building. Sales, marketing and operations expense also includes any headcount expenses in support of sales, marketing, and real estate operations such as salaries, benefits and stock-based compensation.

General and Administrative Expense

General and administrative expense consists primarily of headcount expenses, including salaries, benefits and stock-based compensation for our executive, finance, human resources, legal and administrative personnel, third-party professional services fees and rent expense.

Technology and Development Expense

Technology and development expense consists primarily of headcount expenses, including salaries, benefits and stock-based compensation for employees in the design, development, testing, maintenance and operation of our mobile applications, websites, tools and applications that support our products. Technology and development expense also includes amortization of capitalized software development costs.

Warrant Fair Value Adjustment

Warrant fair value adjustment consists of unrealized gains and losses as a result of marking our Sponsor Warrants, assumed upon closing of the Business Combination, to fair value at the end of each reporting period. On July 9, 2021, the Company completed the redemption of all of its outstanding Sponsor Warrants.

Interest Expense

Interest expense consists primarily of interest paid or payable and the amortization of debt discounts and debt issuance costs. Interest expense varies period over period, primarily due to fluctuations in our inventory volumes and changes in the

Benchmark Rate, which impact the interest incurred on our senior revolving credit facilities (see “— Liquidity and Capital Resources — Debt and Financing Arrangements”).

We expect our overall interest expense to increase as inventory increases. Subject to market conditions and cost of capital trade-offs, we will evaluate opportunities to expand our sources of financing over time, which may allow us to diversify our mix of financing sources to include more cost effective financing relative to our higher cost mezzanine term debt facilities.

Other (Loss) Income — Net

Other (loss) income-net consists primarily of changes in fair value of, and dividend income from, our investment in equity securities as well as interest income from our investment in money market funds, time deposits, and debt securities.

Income Tax Expense

We record income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial statement and income tax basis of existing assets and liabilities. These differences are measured using the enacted statutory tax rates that are expected to apply to taxable income for the years in which differences are expected to reverse. We recognize the effect on deferred income taxes of a change in tax rates in income in the period that includes the enactment date.

We record a valuation allowance to reduce our deferred tax assets and liabilities to the net amount that we believe is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing tax planning strategies in assessing the need for a valuation allowance.

Results of Operations

The following table sets forth our results of operations for each of the periods presented:

(in thousands, except percentages)

N/M - Not meaningful.

(Tabular amounts in millions, except share and per share data and ratios, or as noted)

(in thousands, except percentages)

N/M - Not meaningful.

Revenue

Revenue increased by $1.1 billion, or 48%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase in revenue was primarily attributable to higher sales volumes as well as higher revenue per home. We sold 8,520 homes during the three months ended September 30, 2022, compared to 5,988 homes during the three months ended September 30, 2021, representing an increase of 42%. Revenue per home sold increased 4% between periods.

Revenue increased by $8.5 billion, or 203%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in revenue was primarily attributable to higher sales volumes as well as higher revenue per home. We sold 31,671 homes during the nine months ended September 30, 2022, compared to 11,931 homes during the nine months ended September 30, 2021, representing an increase of 165%. Revenue per home sold increased 14% between periods due to price mix within markets and buybox expansion.

Cost of Revenue and Gross (Loss) Profit

Cost of revenue increased by $1.7 billion, or 83%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase in cost of revenue was primarily attributable to higher sales volumes and a 11% increase in cost of revenue per home, excluding inventory valuation adjustments, as a result of inventory mix, buybox expansion and home price appreciation at the time of inventory acquisition. In addition, we recorded $573 million of inventory valuation adjustments during the three months ended September 30, 2022 to adjust the cost basis of homes remaining in inventory at September 30, 2022 to their net realizable value as compared to $31 million of inventory valuation adjustments during the three months ended September 30, 2021.

Cost of revenue increased by $8.4 billion, or 224%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in cost of revenue was primarily attributable to higher sales volumes and a 17% increase in cost of revenue per home, excluding inventory valuation adjustments, as a result of inventory mix, buybox expansion and home price appreciation at the time of inventory acquisition. In addition, we recorded $620 million of inventory valuation adjustments during the nine months ended September 30, 2022 to adjust the cost basis of homes remaining in inventory at September 30, 2022 to their net realizable value as compared to $32 million of inventory valuation adjustments during the nine months ended September 30, 2021.

Gross (loss) profit decreased from $202 million to $(425) million and gross margin decreased from 8.9% to (12.6)% for the three months ended September 30, 2021 and September 30, 2022, respectively. For the same periods, Adjusted Gross Margin decreased from 10.3% to 3.3%. The decrease in gross margin and Adjusted Gross Margin reflects our decision to prioritize risk management and resale clearance at the expense of resale margin performance. As a result of the faster downturn in the housing market than we had forecast, market conditions at the time of sale were weaker than we believed they would be at the time of acquisition pricing. Contribution Margin decreased from 7.5% to (0.7)%, due to the reasons noted above as well as increased direct selling and holding costs. See “— Non-GAAP Financial Measures.” Gross margin was also impacted by $573 million of inventory valuation adjustments recorded during the three months ended September 30, 2022 to adjust homes remaining in inventory at September 30, 2022 to their net realizable value. We recorded inventory valuation adjustments of $31 million during the three months ended September 30, 2021. The inventory valuation adjustments recorded during the three months ended September 30, 2022 are equal to 17% of revenue recorded during the same time period and represent losses we expect to incur on homes that will be sold, and revenue that will be recorded, in future periods.

Gross profit increased from $458 million to $596 million for the nine months ended September 30, 2021 and September 30, 2022, respectively, due to higher sales volumes. For the same periods, gross margin decreased from 10.9% to 4.7% and Adjusted Gross Margin decreased from 11.7% to 9.3%. The decrease in gross margin and Adjusted Gross Margin reflects our decision to prioritize risk management and resale clearance at the expense of resale margin performance. In addition, gross margin and Adjusted Gross Margin for the nine months ended September 30, 2021 benefited from a fresh book of inventory after the Company sold down its inventory to a low point of $152 million as of September 30, 2020 in response to the COVID-19 pandemic and more favorable macroeconomic conditions as compared to the nine months ended September 30, 2022. Contribution Margin decreased from 8.9% to 5.8% due to the reasons noted above as well as increased direct selling and holding costs. See “— Non-GAAP Financial Measures.” Gross margin was also impacted by $620 million of inventory valuation adjustments recorded during the nine months ended September 30, 2022 to adjust homes remaining in inventory at September 30, 2022 to their net realizable value. We recorded inventory valuation adjustments of $32 million during the nine months ended September 30, 2021. The inventory valuation adjustments recorded during the nine months ended September 30, 2022 are equal to 5% of revenue recorded during the same time period and represent losses we expect to incur on homes that will be sold, and revenue that will be recorded, in future periods.

Operating Expenses

Sales, Marketing and Operations. Sales, marketing and operations increased by $107 million, or 70%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily attributable to a $48 million increase in resale transaction costs and broker commissions, consistent with the 42% increase in the number of homes sold and inclusive of temporary agent commission bonuses in order to drive sales. Property holding costs increased by $28 million, consistent with increased inventory levels and longer inventory holding periods compared to the three months ended September 30, 2021. Advertising expense increased $11 million, from $34 million for the three months ended September 30, 2021 to $45 million for the three months ended September 30, 2022 as we increased marketing to drive acquisition volumes in both existing and new markets. Headcount expenses, including salaries and benefits, increased $14 million consistent with the increase in headcount.

Sales, marketing and operations increased by $493 million, or 155%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily attributable to a $240 million increase in resale transaction costs and broker commissions, consistent with the 165% increase in the number of homes sold and inclusive of temporary agent commission bonuses paid on homes that closed in August and September in order to drive sales. Property holding costs increased by $88 million, consistent with increased inventory levels and longer inventory holding periods compared to the nine months ended September 30, 2021 when we held a fresh book of inventory. Advertising expense increased $82 million, from $90 million for the nine months ended September 30, 2021 to $172 million for the nine months ended September 30, 2022 as we increased marketing to drive acquisition volumes in both existing and new markets. Headcount expenses, including salaries and benefits, increased $49 million consistent with the increase in headcount.

General and Administrative. General and administrative decreased by $6 million, or 7%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 primarily attributable to a reduction in stock-based compensation.

General and administrative decreased by $180 million, or 36%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease was primarily attributable to a $273 million reduction in stock-based compensation due to the expense recognition of certain performance awards during the nine months ended September 30, 2021 following the consummation of the Business Combination in December 2020 as well as the recognition of expense related to certain restricted stock units ("RSUs") upon the fulfillment of the liquidity event vesting condition satisfied by the February 2021 Offering. The reduction in stock-based compensation is partially offset by a $45 million legal contingency accrual recorded during the nine months ended September 30, 2022. Headcount expenses, including salaries and benefits, increased $20 million consistent with the increase in headcount. In addition, depreciation expense primarily related to an increase in home security systems and employee laptops increased by $8 million.

Technology and Development. Technology and development increased by $13 million, or 48%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily attributable to a $8 million increase in headcount expenses, including salaries and benefits, and stock-based compensation consistent with the increase in headcount.

Technology and development increased by $19 million, or 19%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily attributable to a $22 million increase in headcount expenses, including salaries and benefits, consistent with the increase in headcount.

Warrant Fair Value Adjustment

Warrant fair value adjustment decreased by $3 million, or 100%, and $12 million, or 100% for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021, respectively. The gains recorded for the three and nine months ended September 30, 2021 were attributable to a decrease in the fair value of the Sponsor Warrants, which were fully redeemed as of July 9, 2021. The Company did not record warrant fair value adjustments after September 30, 2021.

Interest Expense

Interest expense increased by $72 million, or 167%, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily attributable to increases in the average outstanding balance of our asset-backed senior debt facilities, which is consistent with our increase in inventory over the same periods, and increases in the average outstanding balance of mezzanine term debt facilities. In addition, interest expense from our Asset-backed Senior Revolving Credit Facilities, which bear interest at a floating reference rate based on LIBOR or SOFR, has increased due to higher reference rates during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Interest expense increased by $202 million, or 289%, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily attributable to increases in the average outstanding balance of our asset-backed senior debt facilities, which is consistent with our increase in inventory over the same periods, and increases in the average outstanding balance of mezzanine term debt facilities. In addition, interest expense from our Asset-backed Senior Revolving Credit Facilities, which bear interest at a floating reference rate based on LIBOR or SOFR, has increased due to higher reference rates during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Other (Loss) Income — Net

Other (loss) income – net decreased to $(2) million from $53 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The decrease is primarily related to a $62 million unrealized fair value adjustment recorded to our investment in equity securities offset by a $7 million increase in interest income during the three months ended September 30, 2022.

Other (loss) income – net decreased to $(20) million from $54 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The decrease is primarily related to an $87 million unrealized fair value adjustment recorded to our investment in equity securities offset by a $13 million increase in interest income during the nine months ended September 30, 2022.

Income Tax Expense

Income tax expense changed by a nominal amount for the three and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021.

Liquidity and Capital Resources

Overview

Our principal sources of liquidity have historically consisted of cash generated from our operations and from financing activities. As of September 30, 2022, we had cash and cash equivalents of $1.3 billion, restricted cash of $1.8 billion, and marketable securities of $178 million. The decline in our cash, cash equivalents and marketable securities balance of $710 million as compared to December 31, 2021 was a result, in part, of us borrowing less from our senior revolving credit facilities relative to our real estate inventory as part of an incremental deleveraging of our inventory. The increase in our restricted cash balance of $905 million as compared to December 31, 2021 was a result of the proactive reduction of our acquisition pace via higher spreads embedded in our offers and lower marketing investment, resulting in greater restricted cash available for the future acquisition of real estate inventory.

The Company had total outstanding balances on our asset-backed debt and other secured borrowings of $7.1 billion and aggregate principal outstanding from Convertible Senior Notes of $978 million. In addition, we had undrawn borrowing capacity of $4.7 billion under our non-recourse asset-backed debt facilities (as described further below), of which $1.7 billion was committed.

On February 9, 2021, we completed an underwritten public offering (the “February 2021 Offering”) in which we sold 32,817,421 shares of our common stock at a public offering price of $27.00 per share, including the exercise in full by the underwriters of their option to purchase up to 4,280,533 additional shares of common stock, which was completed on February 11, 2021. We received aggregate net proceeds from the February 2021 Offering of approximately $859 million after deducting underwriting discounts and commissions and offering expenses payable by us.

In August 2021, we issued 0.25% convertible senior notes due in 2026 (the “2026 Notes”) with an aggregate principal amount of $978 million, which resulted in net proceeds after underwriting fees and other transactions costs of $953 million. In connection with the issuance of the 2026 Notes, the Company purchased capped calls from certain financial institutions at a cost of $119 million.

We have incurred losses from inception through December 31, 2021 and had net income for the first time during the three months ended March 31, 2022. We incurred a net loss during the three and nine months ended September 30, 2022 and expect to incur additional losses in the future. Our ability to service our debt, fund working capital, business operations and capital expenditures will depend on our ability to generate cash from operating activities, which is subject to our future operating success, and obtain inventory acquisition financing on reasonable terms, which is subject to factors beyond our control, including general economic, political and financial market conditions.

Our working capital requirements may increase should our inventory balance increase over the remainder of the year. We believe our cash, cash equivalents, and marketable securities together with cash we expect to generate from future operations and borrowings, will be sufficient to meet our working capital and capital expenditure requirements for a period of at least twelve months from the date of this Quarterly Report on Form 10-Q.

Debt and Financing Arrangements

Our financing activities include: short-term borrowings under our asset-backed senior revolving credit facilities and our mortgage repurchase financing; the issuance of long-term asset-backed senior term debt, asset-backed mezzanine term debt, and convertible debt; and new issuances of equity. Historically, we have required access to external financing resources in order to fund growth, expansion into new markets and strategic initiatives and we expect this to continue in the future. Our access to capital markets can be impacted by factors outside our control, including economic conditions.

We primarily use non-recourse asset-backed debt, consisting of asset-backed senior debt facilities and asset-backed mezzanine term debt facilities to provide financing for our real estate inventory purchases and renovations. Our business is capital intensive and maintaining adequate liquidity and capital resources is needed as we continue to scale and accumulate additional inventory. We intend to actively manage our relationships with multiple financial institutions and seek to optimize duration, flexibility, efficiency and cost of funds, but there can be no assurance that we will be able to obtain sufficient capital for our business or to do so on acceptable financial and other terms.

Our asset-backed facilities are each collateralized by a specified pool of assets, consisting of real estate inventory, restricted cash and equity interests in certain consolidated subsidiaries of Opendoor that directly or indirectly own our real estate inventory. The terms of our inventory financing facilities require an Opendoor subsidiary to comply with customary financial covenants, such as maintaining certain levels of liquidity, tangible net worth or leverage (ratio of debt to equity). As of September 30, 2022, the Company was in compliance with all financial covenants.

Our property financing subsidiaries’ assets and credit generally are not available to satisfy the debts and other obligations of any other Opendoor entities. Our asset-backed debt is non-recourse to Opendoor and our subsidiaries that are not party to the relevant financing arrangements, except for limited guarantees provided by an Opendoor subsidiary for certain obligations in situations involving “bad acts” by an Opendoor entity and certain other limited circumstances.

Our asset-backed senior debt facilities generally provide for advance rates of 70% to 90% against our cost basis in the underlying properties upon acquisition. Our mezzanine term facilities may finance 95% to 100% of our cost basis in the underlying properties upon acquisition depending on the performance of the properties financed under a given facility. The maximum initial advance rates vary by facility and generally decrease on a fixed timeline that varies by facility based on the length of time a given property has been financed and other facility-specific adjustments.

The following table summarizes certain details related to our non-recourse asset-backed debt and other secured borrowings as of September 30, 2022 (in millions, except interest rates):

Asset-backed Senior Revolving Credit Facilities

We classify the senior revolving credit facilities as current liabilities on our condensed consolidated balance sheets. In some cases, the borrowing capacity amounts under the asset-backed senior revolving credit facilities as reflected in the table are not fully committed and any borrowings above the committed amounts are subject to the applicable lender’s discretion. As of September 30, 2022, we had committed borrowing capacity with respect to asset-backed senior revolving credit facilities of $4.0 billion.

The revolving period end dates and final maturity dates reflected in the table above are inclusive of any extensions that are at the sole discretion of the Company. Certain of our asset-backed senior revolving credit facilities also have additional extension options that are subject to lender approval that are not reflected in the table above.

Asset-backed Senior Term Debt Facilities

We classify our senior term debt facilities as non-current liabilities in our condensed consolidated balance sheets. The carrying value of the non-current liabilities is reduced by issuance costs of $21 million. In some cases, the borrowing capacity amounts under the asset-backed senior term debt facilities as reflected in the table are not fully committed and any borrowings above the committed amounts are subject to the applicable lender’s discretion. As of September 30, 2022, we had committed borrowing capacity with respect to asset-backed senior term debt facilities of $2.1 billion.

The withdrawal period end dates and final maturity dates reflected in the table above are inclusive of any extensions that are at the sole discretion of the Company. Certain of our asset-backed senior term debt facilities also have additional extension options that are subject to lender approval that are not reflected in the table above.

Asset-backed Mezzanine Term Debt Facilities

In addition to the asset-backed senior revolving credit facilities and asset-backed senior term debt facilities, we have issued asset-backed mezzanine term debt facilities which are subordinated to the related senior facilities. The borrowing capacity amounts under the asset-backed mezzanine term debt facilities as reflected in the table are not fully committed and any borrowing above the committed amounts are subject to the applicable lender's discretion. As of September 30, 2022, we had committed borrowing capacity with respect to asset-backed mezzanine term debt facilities of $2.5 billion.

Mortgage Financing

We have primarily used debt financing to fund our mortgage loan originations. In 2019 we entered into a master repurchase agreement (the "Repurchase Agreement") to finance substantially all of the mortgage loans that we originate. Once our mortgage business sold a loan in the secondary mortgage market, we used the sale proceeds to reduce the outstanding balance under the repurchase facility. As of September 30, 2022, no mortgage loans were financed under the repurchase facility due to a change in the manner in which the Company delivers mortgage services. The Repurchase Agreement was terminated in October 2022.

Convertible Senior Notes

In August 2021, we issued the 2026 Notes with an aggregate principal amount of $978 million. The table below summarizes certain details related to our 2026 Notes (in millions):

See “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 6. Credit Facilities and Long-Term Debt” for additional information regarding our debt and financing arrangements.

Cash Flows

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

(in millions)

48

Net Cash Used in Operating Activities

Net cash used in operating activities was $665 million and $5.9 billion for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, cash used in operating activities was primarily driven by the $663 million increase in real estate inventory. For the nine months ended September 30, 2021, cash used in operating activities was primarily driven by a $5.8 billion increase in real estate inventory and a $120 million increase in escrow receivable correlated to the increase in revenue during the first nine months of 2021.

Net Cash Provided by (Used in) Investing Activities

Net cash provided by (used in) investing activities was $210 million and $(432) million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, cash provided by investing activities primarily consisted of a net decrease in marketable securities of $265 million, partially offset by $19 million for strategic investments in certain privately held companies and a $33 million increase in property and equipment. For the nine months ended September 30, 2021, cash used in investing activities primarily consisted of the $373 million increase in marketable securities, $20 million for the purchase of Pro.com, net of cash acquired, and the $15 million strategic investment in a privately held company. In addition, we used $23 million for capital expenditures, including internally developed software, employee computers and leasehold improvements.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $956 million and $6.7 billion for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, cash provided by financing activities was primarily attributable to $981 million net proceeds on non-recourse asset-backed debt. For the nine months ended September 30, 2021, cash provided by financing activities was primarily attributable to $4.9 billion net proceeds from non-recourse asset-backed debt and $886 million in proceeds from the February 2021 Offering, net of $29 million issuance costs. In addition, we received $978 million in proceeds from the issuance of the 2026 Notes, net of $25 million of issuance costs and offset by $119 million purchase of the Capped Calls related to the 2026 Notes.

Contractual Obligations and Commitments

There have been no material changes outside the ordinary course of business in our commitments under contractual obligations as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021, except for the categories of contractual obligations included in the table below, which have been updated to reflect our contractual obligations as of September 30, 2022:

(in thousands)

(1) Represents the principal amounts outstanding as of September 30, 2022. Includes estimated interest payments, calculated using the variable rate in existence at period end over an assumed holding period of 90 days. Borrowings under the senior revolving credit facilities are payable as the related inventory is sold. The payment is expected to be within one year of September 30, 2022.

(2) Represents the principal amounts outstanding as of September 30, 2022 and interest payments assuming the principal balances remain outstanding until maturity. The final maturity dates of the senior and mezzanine term debt facilities vary, as discussed above.

(3) As of September 30, 2022, we were under contract to purchase 2,259 homes for an aggregate purchase price of $802 million.

Critical Accounting Policies and Estimates

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

We consider an accounting judgment, estimate or assumption to be critical when (1) the estimate or assumption is complex in nature or requires a high degree of judgment and (2) the use of different judgments, estimates and assumptions could have a material impact on the condensed consolidated financial statements. Based on this definition, critical accounting policies and estimates are discussed in “Part II – Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in the Annual Report. There have been no significant changes to these critical accounting estimates during the first nine months of 2022. In addition, we have other key accounting policies and estimates that are described in “Part I – Item 1. Financial Statements –Notes to Condensed Consolidated Financial Statements – Note 1. Description of Business and Accounting Policies” in this Quarterly Report on Form 10-Q.

Real Estate Inventory

Real estate inventory carrying value is equal to the lower of cost or net realizable value and each home constitutes the unit of account. Real estate inventory cost includes but is not limited to the property purchase price, acquisition costs and direct costs to renovate or repair the home, less inventory valuation adjustments, if any. The property purchase price is net of our service fee and represents the cash proceeds paid to the home seller. Real estate inventory is reviewed for valuation adjustments on a quarterly basis. If the carrying amount for a given home is not expected to be recovered, an inventory valuation adjustment is recorded to cost of revenue and the home’s carrying value is adjusted to its net realizable value. Inventory valuation adjustments are not offset by any expected gains and are not reversed or adjusted should the expected net realizable value subsequently increase. For homes under contract, the net realizable value is the contract price less expected selling costs and any expected concessions. For all other homes, the net realizable value is our internal projection price less expected selling costs. Changes in our pricing assumptions may lead to a change in the outcome of our inventory valuation adjustment, and actual results may also differ from our assumptions.

Recent Accounting Pronouncements

For information on recent accounting standards, see “Part I – Item 1. Financial Statements – Notes to Condensed Consolidated Financial Statements – Note 1. Description of Business and Accounting Policies”.

We are exposed to market risks in the ordinary course of our business. These risks primarily consist of fluctuations in interest rates.

Interest Rate Risk

We are subject to market risk by way of changes in interest rates on borrowings under our inventory financing facilities. The Company had total outstanding balances on our asset-backed debt and other secured borrowings of $7.1 billion, 50% of which was fixed rate with a duration of 3.6 years and the remaining 50% was based on a floating rate. Total interest expense for the first nine months ended September 30, 2022 was $236 million, of which $142 million was fixed and $94 million was floating. As of September 30, 2022 and December 31, 2021 we had outstanding borrowings of $3.6 billion and $4.2 billion, respectively, which bear interest at a floating Benchmark reference rate ("Benchmark Rate"), based on a London Interbank Offered Rate (“LIBOR”) or the secured overnight financing rate (“SOFR”), plus an applicable margin. Accordingly, fluctuations in market interest rates may increase or decrease our interest expense. We may use interest rate cap derivatives, interest rate swaps or other interest rate hedging instruments to economically hedge and manage interest rate risk with respect to our variable floating rate debt. Many of our floating rate debt facilities also have Benchmark Rate floors. Assuming no change in the outstanding borrowings on our credit facilities, we estimate that a one percentage point increase in the Benchmark Rate would increase our annual interest expense by approximately $36 million and $37 million as of September 30, 2022 and December 31, 2021, respectively.

Inflation Risk

We do not believe that inflation has had a material effect on our business, results of operations or financial condition as it relates to areas, such as labor and materials costs for home repairs. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs by adjusting our operational model or our pricing methodology. Our inability to do so could harm our business, results of operations and financial condition.

Inherent Limitations on Effectiveness of Controls

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective at the reasonable assurance level as of September 30, 2022.

Changes in Internal Control over Financial Reporting

There have been no material changes in our internal control over financial reporting in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In the course of conducting our business operations, we are exposed to a variety of risks. These risks are generally inherent to the U.S. residential real estate industry or otherwise generally impact iBuyers like us. Any of the risk factors we described in "Part I – Item 1A. Risk Factors," in our Annual Report or in subsequent periodic reports, have affected or could materially adversely affect our business, financial condition and results of operations. The market price of shares of our common stock could decline, possibly significantly or permanently, if one or more of these risks and uncertainties occurs. Certain statements in “Risk Factors” are forward-looking statements. See “Forward-Looking Statements.”

Other than as set forth below, there have been no material changes to the Company's risk factors since the Annual Report.

The Company entered into a consent order with the FTC that imposes ongoing obligations. Any alleged or actual noncompliance with the consent order could have a material adverse effect on the Company’s business.

As previously disclosed by the Company, the FTC began conducting an investigation into the Company in August 2019. The inquiry related primarily to statements in the Company’s advertising and website comparing selling homes to the Company with selling homes in a traditional manner using an agent and relating to statements that the Company’s offers reflect or are based on market prices. The Company and the FTC began discussing resolution of this matter in December 2020. After extensive negotiations, the Company agreed to enter into a consent order resolving all aspects of the inquiry, which became final on October 21, 2022. Pursuant to the consent order, the Company did not admit any wrongdoing and is required to possess competent and reliable supporting data prior to making statements regarding the costs, savings, repair costs, or financial benefits of Company services related to assisting consumers selling homes. The consent order also requires that the Company retain certain records, submit a compliance report to the FTC, and pay the FTC $62 million, an amount the Company previously accrued.

If the Company fails to comply, or is alleged to be in noncompliance with, the consent order, the Company could be subject to additional regulatory or governmental investigations or civil actions, which may result in significant monetary fines, judgments or other penalties that could have a material adverse effect on the Company’s business.

We are and may be subject to securities litigation, which is expensive and could divert management attention.

The market price of our common stock has been, and may continue to be, volatile. Companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We are currently, and may in the future be, the target of this type of litigation. For example, a securities litigation claim was recently filed against us and certain of our current and former officers and directors related to our pricing algorithm.

Litigation is inherently uncertain and adverse rulings could occur, including monetary damages. An unfavorable outcome or settlement may result in a material adverse impact on our business, operations and financial condition. In addition, regardless of the outcome, litigation could result in substantial costs and divert management’s attention from other business concerns, which could seriously harm our business.