Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with our condensed
consolidated financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking
statements based upon current expectations that involve numerous risks, uncertainties and assumptions. Our actual results could
differ materially from those anticipated in these forward-looking statements for many reasons. Those reasons include, without limitation,
those described at the beginning of this report under “Statement regarding forward-looking statements,” as well as
those that may be set forth elsewhere in this report. Except as otherwise required by law, we do not intend to update any information
contained in these forward-looking statements. The following discussion also addresses matters we consider important for an understanding
of our financial position as of March 31, 2017, and the results of operations for the three months ended March 31, 2017, which
may not be indicative of our future results through the year ended December 31, 2017 or beyond.
OVERVIEW
eXp World Holdings, Inc., (the “Company”,“eXp”,
“we”, “us”, “our”), is a cloud-based residential real estate brokerage. Our operations are
focused on the use of cloud-based technologies in order to grow an international brokerage without the burden of physical bricks
and mortar or redundant staffing costs. Our technology focus includes the development of a proprietary cloud based real estate
transactional platform.
Continued Accelerated Growth
– During the three-month
period ending March 31, 2017, we increased our net real estate brokerage agent and broker base by 29%, from approximately 2,400
as of December 31, 2016 to over 3,100. These increases were incurred in both new and existing geographical markets and contributed
to net revenue increases of 22% and 208% as compared to the quarter ended December 31, 2016 and the quarter ended March 31, 2016,
respectively.
RECENT BUSINESS DEVELOPMENTS
Building for the Present and the Future – During the period,
the Company was focused on building its operating infrastructure with the hiring of new staff across all departments of the organization
to support both the current growth velocity but also expected future growth. In addition to people, the Company is also investing
in scalable technology as a necessary element of its growth initiative. To date, the Company has evolved through substantial dependence
on independent third-party software and applications which, when taken together, constitute a patchwork that has sustained and
supported the Company’s growth. As the Company continues to introduce and execute on a number of initiatives aimed at accelerating
expansion, it finished building the first instance of an enterprise application in order to move away from the integrations of
external systems which the Company hopes to launch in the second quarter.
Agent Experience – The Company has a very attractive economic
model and is working to marry that with a world-class agent experience. From onboarding to technology and other support to transaction
management, delivering high a level of service to its agents and brokers will be a critical element of the Company’s future
success. To this end, the Company created a new department called Agent Experience and hired Kee Wah Chung as Vice President of
Agent Experience. Prior to joining eXp, Mr. Chung was Director of the Real Estate Customer Success Program for DocuSign where he
created and built the first real estate focused team to drive an end-to-end world class customer experience. Prior to DocuSign,
Mr. Chung served as Sr. Director and other leadership positions for Comcast, Premera, Polycom and Microsoft.
Brokerage Operations – The Company relies on employed
brokers in each of the states and provinces that it operates to supervise its affiliated real estate agents, review transactions
and ensure compliance with applicable real estate license law. In order to better manage these brokers and create a greater consistency
of operations, the Company formed a Brokerage Operations business unit and name Kathy Gordon as Vice President of Brokerage Operations.
Ms. Gordon, who has nearly two decades of experience in the industry, will deliver value to eXp agents through the support of eXp’s
state administrative brokers, the administration of eXp’s brokerage policies and procedures, and license law and regulatory
compliance. She also will serve as liaison with eXp’s legal resources and risk management programs. Prior to joining eXp,
Ms. Gordon was previously was Broker of Record at one of Keller Williams’ largest firms, with nearly 3000 agents.
The Company expects to continue adding staff as well as making
strategic additions to its executive team in future quarters.
MARKET CONDITIONS AND TRENDS
According to the National Association of REALTORS (“NAR”),
home sale transaction volume increased 11% in the first quarter of 2017 as a result of both an increase in the number of home sale
transactions, combined with average home sale price growth. Also according to NAR,
the housing affordability
index has continued to be at historically favorable levels. When the index is above 100, it indicates that a family earning the
median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify
for a mortgage. The composite housing affordability index was
161 for February 2017 and
165
for 2016.
The housing affordability index remains significantly higher than the average of 127 for the period from 1970
through 2016.
A part of this involves favorable mortgage rate conditions.
Mortgage rates increased approximately 75 basis points from September 30, 2016 to March 31, 2017, but continue to be at historically
low levels. While any increase to mortgage rates can adversely impact housing affordability, we believe that rising wages, improving
consumer confidence and continued low inventory levels will result in favorable demand conditions and existing home sale volume
growth.
Partially offsetting the positive impact of low mortgage rates
are low housing inventory levels. According to NAR, the inventory of existing homes for sale in the U.S. was 1.8 million and 2.0
million at the end of March 2017 and March 2016, respectively. The March 2017 inventory represents a national average supply of
3.8 months at the current home sales pace which is below the 6.1 month 25-year average.
Additional factors offsetting the positive impact of low mortgage
rates include the ongoing rise in home prices,
less than favorable mortgage underwriting standards
and some would-be home sellers having limited or negative equity in homes.
Mortgage credit conditions tightened significantly
during the recent housing downturn, with banks limiting credit availability to more creditworthy borrowers and requiring larger
down payments, stricter appraisal standards, and more extensive mortgage documentation. Although mortgage credit conditions appear
to be easing, mortgages remain less available to some borrowers and it frequently takes longer to close a residential transaction
due to current mortgage and underwriting requirements.
Existing Home Sales
According to NAR, for the year ended December 31, 2016, existing
home sale transactions increased to 5.5 million homes or up 4% compared to 2015
.
In the first
quarter of 2017, NAR existing home sale transactions increased to 1.1 million homes, or up 5%, compared to the same period
of 2016.
During the same period, eXp Realty home sale transactions increased 233% compared to the
same period in 2016. Our home sale transactions were impacted by the growth of our agent base which grew from approximately 2,400
at the end of 2016 to over 3,100 by the end of the first quarter of 2017.
As of their most recent releases, NAR is forecasting existing
home sales to increase 2% in 2017 and another 4% in 2018.
Existing Home Sale Price
We believe primary drivers to the long-term demand for housing
and the growth of our company to support that demand are housing affordability, the general economic health of the U.S. economy,
demographic trends such as population growth, the increase in household formation, mortgage rate levels and mortgage availability,
job growth, the inherent benefits of owning a home versus renting and the influence of local housing
dynamics of supply versus demand.
As of March 31, 2017, we believe that these factors are generally favorable.
However,
significant changes to one or more of these drivers could cause the demand for housing to slow, negatively affecting all real
estate brokerage firms, including eXp Realty.
Regardless of whether the housing market continues to grow or slows, eXp
Realty expects to adhere to its low-cost, high-engagement model, affording a growing number of agents and brokers increased income
and ownership opportunities while offering a scalable solution to brokerage owners looking to survive and thrive in a wide range
of economic conditions.
Results of Operations
Revenues
During the three-months period ended March 31, 2017 net revenues
increased $14.87 million to $22.01 million as compared to the three-month period ended March 31, 2016 when we generated $7.14
million. The increase as compared to the prior period is a direct result of the increases in sales agent base by over 183% to
over 3,100.
Operating Expenses
|
|
Three months Ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
19,279,626
|
|
|
$
|
6,110,987
|
|
|
$
|
13,168,639
|
|
General and administrative
|
|
|
2,109,352
|
|
|
|
1,425,158
|
|
|
|
684,194
|
|
Professional fees
|
|
|
364,460
|
|
|
|
143,375
|
|
|
|
221,085
|
|
Sales and marketing
|
|
|
301,222
|
|
|
|
77,143
|
|
|
|
224,079
|
|
Total operating expenses
|
|
$
|
22,054,660
|
|
|
$
|
7,756,663
|
|
|
$
|
14,297,997
|
|
Cost of revenues includes costs related to sales agent commissions
and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase of $13.17 million in
the current three-months ended March 31, 2017 as compared to the three-months ended March 31, 2016 was driven by the higher amount
of net revenues and agent commission rates.
General and administrative includes costs related to wages,
stock compensation, dues, operating leases, utilities, travel, and other general overhead expenses. The increase of $0.684 million
in general and administrative costs in the three-months ended March 31, 2017 as compared to the three-months ended March 31, 2016
was driven primarily from an increase in our non-broker and agent headcount required to support the approximate 208% growth in
the number of agents and brokers.
Professional fees include costs related to legal, accounting, and
other consultants. Costs increased $0.22 million during the three-months ended March 31, 2017 as compared to the three-months ended
March 31, 2016. Professional fees fluctuate on a periodic basis in correlation to non-recurring transactions, specifically as it
relates to performing diligence and contract review and preparation to support the growth of new agent and broker bases as well
as entry to new geographical markets.
Sales and marketing include costs related to lead capture, digital
and print media, and trade shows, in addition to other promotional materials. The cost increase of approximately $0.22 million
was due to increased cost in lead capture and other internet marketing related to our growth in agent and broker headcount for
the three-months ended March 31, 2017 as compared to the three-months ended March 31, 2016.
LIQUIDITY AND CAPITAL RESOURCES
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
6,463,681
|
|
|
$
|
5,565,642
|
|
Current liabilities
|
|
|
(4,545,524
|
)
|
|
|
(3,577,021
|
)
|
Net working capital
|
|
$
|
1,918,157
|
|
|
$
|
1,988,621
|
|
Our working capital remained relatively flat as of March 31,
2017 as compared to December 31, 2016. Our increased sales volumes, resulting in increased receivables and restricted cash were
off-set by corresponding increases in accrued expenses related commissions payable.
The following table presents our cash flows:
|
|
Three months ended
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
Cash provided by (used in) operating activities
|
|
$
|
157,286
|
|
|
$
|
(89,293
|
)
|
|
$
|
246,579
|
|
Cash (used in) investment activities
|
|
|
(213,625
|
)
|
|
|
(64,028
|
)
|
|
|
(149,597
|
)
|
Cash provided by (used in) financing activities
|
|
|
148,354
|
|
|
|
(1,000
|
)
|
|
|
149,354
|
|
Net cash provided by operating activities for the three months
ended March 31, 2017 primarily resulted from the increased volume in our sales transactions. As a result of the increased sales
volume, we incurred higher accrued expenses, specifically commission payable, as partially off-set by a net stock option benefit
as a result of declines in the intrinsic value of some of our outstanding stock options totaling approximately $2.5 million offset
by $1.4 million of stock option expense. If we are successful in our growth plans, resulting in further increases in sales volumes,
we expect to generate positive operating cash flows for the next twelve months.
During the three months ended March 31, 2017, our investing activities
consisted of additional expenditures related to the on-going development of our internal use software. As we continue develop and
refine our cloud-based platforms, we expect to continue to use our existing cash resources on similar expenditures for the next
twelve months.
We generated approximately $0.15 million in cash flows from
financing activities primarily related to the completion of our December 31, 2016 private placement and the exercise of 25,000
stock options.
Our future capital requirements will depend on many factors, including
our level of investment in technology and our rate of growth into new markets. Our capital requirements may be affected by factors
which we cannot control such as the residential real estate market, interest rates, and other monetary and fiscal policy changes
in which we currently operate. We anticipate that between our current cash position and cash flow from ongoing operations we have
the necessary resources to continue operating our business over the next 12 months. In order to support and achieve our future
growth plans, we may have a need or find it advantageous to obtain additional funding through equity or debt financing.
We currently have no bank debt or line of credit facilities. In
the event that additional financing is required in the future, we may not be able to raise it on terms acceptable to us or at all.
If we are unable to raise additional capital when desired, our business and results of operations will likely suffer.
CRITICAL ACCOUNTING ESTIMATES
There has been no change in our critical accounting estimates as
previously disclosed in our Annual Report on Form 10-K for the period ended December 31, 2016.
Non-GAAP Measurements
We currently have approximately 6.4 million outstanding stock options
exercisable into restricted shares of our common stock at a weighted average exercise price of $0.14 per share, measured using
the intrinsic value method. In accordance with US GAAP and Rules and Regulations as promulgated by the Securities and Exchange
Commission (“SEC”), we were unable to retroactively apply the fair value method to awards previously outstanding under
the intrinsic value method. In accordance with the intrinsic value method, we are required to re-measure the intrinsic value at
each reporting date through the date of exercise or other settlement, while recognizing the applicable changes in the intrinsic
value as a component of operations in the accompanying consolidated statements of operations.
Upon becoming a public company, we value stock options at their
grant date fair value, and recognize the associated compensation cost systematically over the requisite service or performance
period, with no consideration given to market changes in the underlying equity instruments or other assumptions used for valuation
purposes on the grant date. If we had the ability to reasonably estimate the fair value of options issued at our inception as a
private company, all associated expenses would have been recognized in prior periods as the awards vested without giving effect
to re-measurement through the date of exercise or expiration.
The SEC has adopted rules to regulate the use in filings with the
SEC, and in public disclosures of financial measures, that are not in accordance with US GAAP, such as EBITDA, omission of non-recurring
or infrequent items, and other omissions of non-cash items whether recurring or non-recurring. These measures are derived from
methodologies other than in accordance with US GAAP.
We believe that the omission of non-cash income or expense based
on fluctuations in the Company’s stock price, significantly outside of its control, is more reflective of the key factors
that affect our operating performance. Since the equity-linked instruments were issued early in our existence, and there being
no further performance requirements associated with earning the awards, we believe that omitting these fluctuations provide a useful
supplemental measure in evaluating the performance of our operations and provides better transparency into our results of operations.
Our management does not evaluate the Company’s performance, either financial or operational, inclusive of fluctuations in
the intrinsic value of the awards issued prior becoming a public company.
Eliminating non-cash fluctuations for awards fully earned in prior
periods, has limitations as an analytical tool, and you should not consider these omissions either in isolation or as a substitute
for analyzing our results as reported under US GAAP. Some of these limitations are:
|
·
|
this measure does not reflect changes in, or cash requirements for, our working capital needs;
|
|
·
|
this measure does not reflect the further issuance of equity and equity-linked instruments based on grant date fair values with continuing performance and service requirements;
|
|
·
|
this measure does not reflect historical cash expenditures or future requirements for expenditures or contractual commitments.
|
|
·
|
the recognition of significant intrinsic value fluctuations may
result in the recognition of net income or losses that are not correlated to our business operations.
|
The following table represents the impacts of the intrinsic value
variances on our results of operations for the periods presented:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net (loss)
|
|
$
|
(69,729
|
)
|
|
$
|
(625,447
|
)
|
Decrease (increase) in intrinsic value
|
|
|
(2,533,923
|
)
|
|
|
316,670
|
|
Adjusted net income (loss)
|
|
$
|
(2,603,652
|
)
|
|
$
|
(308,777
|
)
|
OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to our stockholders.
Item 4.
CONTROLS
AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures, as defined in Rule
13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are
designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that
such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report we carried
out an evaluation of the effectiveness of our disclosure controls and procedures with the participation of our Chief Executive
Officer and Chief Financial Officer. In making this assessment, management used the criteria for effective internal control over
financial reporting described in the “Internal Control-Integrated Framework” (2013) set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were not effective to ensure that information we are required to disclose
in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information was not accumulated and communicated to management, including
our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
The determination that our disclosure controls and procedures
were not effective was based on the following material weaknesses in our internal control over financial reporting, which were
identified and described in detail in our Annual Report on Form 10-K for the year ended December 31, 2016, and summarized below:
|
·
|
Failure to properly recognize and measure the fair value of equity
and equity-linked awards issued to employees and non-employees.
|
|
·
|
Insufficient corporate governance policies.
|
|
·
|
Despite the addition of two new independent directors and an independent
Audit Committee during 2016, at December 31, 2016, our level of independent director oversight still posed risk of management override
and potential fraud.
|
During the first quarter of 2017, we continued our remediation
activities related to the material weaknesses summarized above, including the following:
In January 2017, we appointed Laurie Hawkes to the Board as
an additional independent director, resulting in a majority of independent directors for the first time on the Board.
In March 2017, a Compensation Committee comprised of three independent
directors was formed. Each of our standing committees, including the Audit Committee, Governance Committee and Compensation Committee,
has been specifically charged with certain oversight functions. During 2017 to date, our independent Board committees have been
active.
CHANGES IN INTERNAL CONTROL
Outside of the remediation activities described above under
Controls and Procedures – Evaluation of Disclosure Controls and Procedures, there have been no changes in our internal control
over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the period ended March
31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.