|
Item 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
The following discussion should be read together with our
unaudited 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 September 30, 2017, and the results of operations for the three and nine months
ended September 30, 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 nine-month
period ended September 30, 2017, we increased our net real estate brokerage agent and broker base by 104%, from approximately 2,400
as of December 31, 2016 to over 4,900. These increases were incurred in both new and existing geographical markets and contributed
to net revenue increases of 203% and 205% as compared to the nine months and three months ended September 30, 2016, respectively.
RECENT BUSINESS DEVELOPMENTS
Advancements during the three months ended September 30, 2017
centered on the addition of scaling the corporate operations of the Company to match current and ongoing growth of the business.
During this period the Company hired a new chief operating officer for our eXp Realty division who most recently held leadership
positions at both Realty Executives and HomeSmart International. This new role will focus on cross collaboration efforts across
the entire organization in addition to working with our agent advisory council. We also hired a new vice president of employee
experience. As the organization continues to grow in an effort to support our rapidly growing agent base, we believe it is important
to continue building our culture in alignment with long term goals of the Company.
On September 27, 2017, the Company and Alan Goldman, Chief Financial
Officer, entered into an employment agreement memorializing the terms of his employment as previously disclosed.
As detailed in a Current Report on Form 8-K filed on August
2, 2017, on July 27, 2017 we entered into a separation agreement and release with Mr. Russell Cofano our former President and
General Counsel who resigned on July 28, 2017. A summary of that agreement is contained in Form 8-K, and the agreement is filed
as Exhibit 10.1 to the Form 8-K.
The Company launched eXp Enterprise (“Enterprise”)
earlier this year. Enterprise is a new proprietary platform that manages all of the Company’s critical processes and information,
including agent details, transactions, commissions and revenue share. It allows for a flow of real time information to eXp agents,
while also providing a singular platform for eXp staff to perform a variety of back office functions in a scalable and efficient
manner. The platform has already led to improvements in the areas of agent onboarding, transaction processing, and financial oversight.
This platform will lend itself to constantly enhance and build out capabilities that meet the needs of company stakeholders into
the future. To provide additional support to eXp agents in 44 states, the Company redefined the role of the State Administrative
Broker and created a new role: Regional Development Leader (“RDL”). The RDL role is designed to deal with the multitude
of request from agents considering moving to eXp, allowing the State Administrative Broker to work more closely with a growing
base of current agents.
During the nine months ended September 30, 2017, the Company
also created a variety of new marketing and communications collateral, allowing stakeholders to have more transparency into the
organization while providing more ways to provide feedback. Collateral provided to agents included tools to assist with social
media, public relations, and a variety of internal communication pieces to help agents be more productive and in-the-know.
The Company expects to continue to add staff and make strategic
additions to its executive team in future periods.
MARKET CONDITIONS AND TRENDS
According to the National Association of REALTORS (“NAR”)
home sale transactions of single family homes volume was projected to increase 10.4% in the third quarter of 2017 as compared to
the same period in 2016 as a result of both an increase in the number of home sale transactions, combined with average home sale
price growth (preliminary). 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
149.9 for August (preliminary) 2017 and
163.7 for 2016.
The housing affordability index remains significantly higher than the average of 127 for the period from 1970 through 2016.
The favorable housing affordability index is due in part to
favorable mortgage rate conditions. Mortgage rates increased approximately 60 basis points from September 30, 2016 to September
30, 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.
According to the Federal Housing Finance Agency,
mortgage rates on commitments for 30-year, conventional, fixed-rate first mortgages averaged 3.88% for 2016 and the rate rose to
4.19% in August 2017. To the extent that mortgage rates increase further, consumers continue to have financing alternatives such
as adjustable rate mortgages or shorter term mortgages which can be utilized to obtain a mortgage rate that is lower than a comparable
30-year fixed-rate mortgage.
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. is 1.90 million (preliminary)
and 2.03 million at the end of September 2017 and September 2016, respectively. The July 2017 inventory represents a national average
supply of 4.2 months at the current home sales pace which is below the 6.1 months 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 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.
The Company continues to monitor developments in our regulatory
environment. Currently, federal officials are discussing various potential changes to laws and regulations that could impact the
Company’s businesses, including tax reform that could affect the mortgage interest deductions and state and local tax deductions.
Changes in these tax incentives for homeownership, and more generally in the regulatory environment in which the Company and our
customers operate could impact the volume of mortgage originations in the United States and the Company’s competitive position
and results of operations. At this time, the nature and impact of any future changes is unknown.
Existing Home Sales
According to NAR, for the year ended December 31, 2016, existing
home sale transactions increased to 5.5 million
.
In the first nine months of 2017, NAR existing
home sale transactions increased 4.2 million year to date, but decreased 4.3% compared to the same period of 2016.
During
the same period, eXp Realty home sale transactions increased 223% 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 4,900 by the end
of the third quarter of 2017.
As of their most recent releases, NAR is forecasting existing
home sales to increase 3% in 2017 and another 2% 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 September 30, 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
Comparison of the Three Months Ended September 30, 2017 to
the Three Months Ended September 30, 2016
Revenues
During the three-month period ended September 30, 2017 net
revenues increased $32.35 million to $48.11 million as compared to the three-month period ended September 30, 2016 when we generated
$15.76 million. The increase as compared to the prior period is a direct result of the increase in our sales agent base by over
173% to over 4,900.
Operating Expenses
|
|
Three Months Ended
September 30,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
43,291,473
|
|
|
$
|
13,294,452
|
|
|
$
|
29,997,021
|
|
General and administrative
|
|
|
11,987,268
|
|
|
|
16,810,567
|
|
|
|
(4,823,299
|
)
|
Professional fees
|
|
|
223,811
|
|
|
|
140,804
|
|
|
|
83,007
|
|
Sales and marketing
|
|
|
380,452
|
|
|
|
158,968
|
|
|
|
221,484
|
|
Total operating expenses
|
|
$
|
55,883,004
|
|
|
$
|
30,404,791
|
|
|
$
|
25,478,213
|
|
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 $30.0 million in
the current three-month period ended September 30, 2017 as compared to the three-month period ended September 30, 2016 was driven
by the higher amount of net revenues and agent commission rates.
General and administrative includes costs related to wages,
including stock compensation, dues, operating leases, utilities, travel and other general overhead expenses. The decrease of $4.82
million in general and administrative costs in the three-month period ended September 30, 2017 as compared to the three-month
period ended September 30, 2016 was driven primarily by the increase in compensation of $2.57 million and the decrease in stock
options and stock compensation expense of $7.90 million.
Professional fees include costs related to legal, accounting
and other consultants. Costs increased $0.08 million during the three-month period ended September 30, 2017 as compared to the
three-month period ended September 30, 2016. Professional fees were higher due to higher audit costs as compared to the same period
last year in addition to other 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 into new geographical markets.
Sales and marketing includes 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-month period ended September 30, 2017 as compared to the three-month period ended September 30, 2016.
Results of Operations
Comparison of the Nine Months Ended September 30, 2017 to
the Nine Months Ended September 30, 2016
Revenues
During the nine-month period ended September 30, 2017 net revenues
increased $73.51 million to $109.69 million as compared to the nine-month period ended September 30, 2016 when we generated $36.18
million. The increase as compared to the prior period is a direct result of the increases in sales agent base by over 173% to
over 4,900.
Operating Expenses
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
97,620,066
|
|
|
$
|
30,868,564
|
|
|
$
|
66,751,502
|
|
General and administrative
|
|
|
14,697,040
|
|
|
|
25,801,423
|
|
|
|
(11,104,383
|
)
|
Professional fees
|
|
|
906,654
|
|
|
|
414,197
|
|
|
|
492,457
|
|
Sales and marketing
|
|
|
1,030,497
|
|
|
|
358,396
|
|
|
|
672,101
|
|
Total operating expenses
|
|
$
|
114,254,257
|
|
|
$
|
57,442,580
|
|
|
$
|
56,811,677
|
|
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 $66.75 million in
the current nine-month period ended September 30, 2017 as compared to the nine-month period ended September 30, 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 decrease of $11.10 million
in general and administrative costs in the nine-month period ended September 30, 2017 as compared to the nine-month period ended
September 30, 2016 was driven primarily by the increase in compensation of $5.81 million and the decrease in stock options and
stock compensation expense of $ 18.47 million.
Professional fees include costs related to legal, accounting,
and other consultants. Costs increased $0.49 million during the nine-month period ended September 30, 2017 as compared to the nine-month
period ended September 30, 2016. Professional fees were higher due to higher audit costs as compared to the same period last year
in addition to other 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 includes costs related to lead capture,
digital and print media, and trade shows, in addition to other promotional materials. The cost increase of approximately $0.67
million was due to increased cost in lead capture and other internet marketing related to our growth in agent and broker headcount
for the nine-month period ended September 30, 2017 as compared to the nine-month period ended September 30, 2016.
LIQUIDITY AND CAPITAL RESOURCES
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
12,619,392
|
|
|
$
|
5,565,642
|
|
Current liabilities
|
|
|
(9,291,701
|
)
|
|
|
(3,577,021
|
)
|
Net working capital
|
|
$
|
3,327,691
|
|
|
$
|
1,988,621
|
|
Our working capital as of September 30, 2017 increased 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 to commissions payable.
The following table presents our cash flows for the nine months
ended September 30, 2017 and 2016:
|
|
Nine Months ended
September 30,
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
2,396,701
|
|
|
$
|
637,881
|
|
|
$
|
1,758,820
|
|
Cash used in investment activities
|
|
|
(849,764
|
)
|
|
|
(281,203
|
)
|
|
|
(568,561
|
)
|
Cash provided by financing activities
|
|
|
122,773
|
|
|
|
–
|
|
|
|
122,773
|
|
Net cash provided by operating activities for the nine months
ended September 30, 2017 primarily resulted from the increased volume in our sales transactions and higher commissions receivable.
As a result of the increased sales volume, we also incurred higher accrued expenses, specifically commissions payable. If we are
successful in our growth plans, which would result in further increases in sales volumes, we expect to generate positive operating
cash flows for the next twelve months.
During the nine months ended September 30, 2017, our investing
activities consisted of additional expenditures related to the on-going development of our internal use software. As we continue
to 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 $0.12 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
options to purchase 25,000 shares of common stock.
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 to the manner 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, however, we may need or seek advantageously to obtain additional funding through equity or debt
financing.
During the period, we secured a line of credit which provides
that the Company may borrow up to $500,000. We currently have no borrowings against the line of credit facility or any other term
loan bank debt. 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 year ended December 31, 2016.
Non-GAAP Measurements
As of September 30, 2017 we have outstanding options to purchase
approximately 6.0 million shares of 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.
As 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 other public disclosures of financial measures, that are not calculated 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, which is 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
are no further performance requirements associated with earning the awards, we believe that omitting these fluctuations provides
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:
|
|
Nine Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(4,616,660
|
)
|
|
$
|
(21,272,872
|
)
|
Adjustment for change in intrinsic value
|
|
|
5,502,948
|
|
|
|
(20,456,078
|
)
|
Adjusted net loss
|
|
$
|
(10,119,608
|
)
|
|
$
|
(816,794
|
)
|
|
|
Three Months Ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(7,780,570
|
)
|
|
$
|
(14,647,098
|
)
|
Adjustment for change in intrinsic value
|
|
|
(2,478,062
|
)
|
|
|
(14,088,341
|
)
|
Adjusted net loss
|
|
$
|
(5,302,508
|
)
|
|
$
|
(558,757
|
)
|
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.