●
|
Part II - Item 6 – Exhibits
|
The restatement disclosed in our Current Report on
Form 8-K that was filed on April 3, 2018, resulted from accounting errors in the treatment of equity instruments granted to non-employees
in 2012 and 2013, which materially impacted our financial statements for the fiscal year ended December 31, 2016 (“Fiscal
2016”) and the first three fiscal quarters of the fiscal year ended December 31, 2017 (“Fiscal 2017”). The restatement
disclosed in our Current Report on Form 8-K that was filed on April 16, 2018 resulted from accounting errors in the treatment
of equity instruments granted to employees in 2012 and 2013 which materially impacted our financial statements for the fiscal
year ended December 31, 2015, Fiscal 2016, and the first three quarters of Fiscal 2017.
The accounting errors had no effect on cash and no
impact on the Company’s assets, liabilities, or net cash flows from operating, investing, and financing activities on the
statement of cash flows during the three months ended March 31, 2017 or the comparable period in Fiscal 2016. The combined non-cash
effect of the accounting errors lead to a net increase in previously recognized stock-based compensation expense of approximately
$0.2 million and $0.1 million for three months ended March 31, 2017 and the comparable period in Fiscal 2016, respectively and
an increase in previously recognized stock-option compensation expense of approximately of $2.7 million and a reduction of $0.2
million for three months ended March 31, 2017 and the comparable period in Fiscal 2016, respectively.
We previously did not recognize costs associated with
a 20% discount to the fair value determined each month when issuing shares under our Agent Equity Program. The restated financial
statements now include these additional charges as cost of sales expense in the restated periods.
In addition, the Company made a correction of certain
immaterial errors in revenue and cost of revenue, which decreases previously reported revenues and cost of revenues by approximately
$0.5 million for three months ended March 31, 2017 and by approximately $0.2 million for the three months ended March 31, 2016.
These errors had no impact on the previously reported net loss.
As disclosed in the Company’s Annual Report
on Form 10-K, the Company restated its additional paid in capital and accumulated deficit at December 31, 2015 and December 31,
2014. As such, 2016 additional paid in capital and accumulated deficit reflect the cumulative adjustments made in prior years.
These errors were discovered by management during
the course of its preparation of the Annual Report on Form 10-K for Fiscal 2017, and the audit of the financial results for Fiscal
2017. None of the errors involve misconduct with respect to the Company or its management or employees.
Except as described above, no other changes have
been made to the Original Filing and this Form 10-Q/A does not reflect subsequent events that may have occurred since the date
of the Original Filing or amend, update or change the financial statements or any other items or disclosures in the Original Filing.
In accordance with Rule 12b-5 under the Securities
Exchange Act of 1934, as amended, we have included new certifications from our Chief Executive Officer and Chief Financial Officer
dated the date of this Form 10-Q/A.
For the convenience of the reader, this Form 10-Q/A
sets forth the information in the Original Filing in its entirety, as such information as modified and superseded where necessary
to reflect the restatement and related revisions.
Statement Regarding Forward-Looking
Statements
Certain statements contained in this report on Form
10-Q/A are forward-looking statements which are intended to be covered by the safe harbors created thereby. All statements,
other than statements of historical facts, are forward-looking statements. The words “believe,” “expect,”
“anticipate,” “estimate,” “project,” “plan,” “should,” “intend,”
“may,” “will,” “would,” “potential” and similar expressions identify forward-looking
statements, but are not the exclusive means of doing so. Forward-looking statements may include statements about matters such
as: future revenues; future industry market conditions; future changes in our capacity and operations; future operating and overhead
costs; operational and management restructuring activities (including implementation of methodologies and changes in the board
of directors); future employment and contributions of personnel; tax and interest rates; capital expenditures and their impact
on us; nature and timing of restructuring charges and the impact thereof; productivity, business process, rationalization, investment,
acquisition, consulting, operational, tax, financial and capital projects and initiatives; contingencies; environmental compliance
and changes in the regulatory environment; and future working capital, costs, revenues, business opportunities, debt levels, cash
flows, margins, earnings and growth.
These statements are based on assumptions and assessments
made by our management in light of their experience and their perception of historical and current trends, current conditions,
possible future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees, representations
or warranties and are subject to risks and uncertainties that could cause actual results, developments and business decisions to
differ materially from those contemplated by such forward-looking statements. Some of those risks and uncertainties include the
risk factors set forth in this report and our Annual Report on Form 10-K for our prior fiscal year ended December 31, 2016, and
the following: current global economic and capital market uncertainties; potential dilution to our stockholders from our recapitalization
and balance sheet restructuring activities; potential inability to continue to comply with government regulations; adoption of,
or changes in legislation or regulations adversely affecting our businesses; permitting constraints or delays, business opportunities
that may be presented to, or pursued by, us; changes in the United States or other monetary or fiscal policies or regulations;
changes in generally accepted accounting principles; geopolitical events; potential inability to implement our business strategies;
potential inability to grow revenues organically; potential inability to attract and retain key personnel; assertion of claims,
lawsuits and proceedings against us; potential inability to maintain an effective system of internal controls over financial reporting;
potential inability or failure to timely file periodic reports with the SEC; and potential inability to list our securities on
any securities exchange or market. Occurrence of such events or circumstances could have a material adverse effect on our business,
financial condition, results of operations or cash flows or the market price of our securities. All subsequent written and oral
forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by
these factors. We undertake no obligation to publicly update or revise any forward-looking statement.
PART I – FINANCIAL INFORMATION
|
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 of Restatement
eXp World Holdings, Inc. is filing this Amendment
No. 1 on Form 10-Q/A to our Quarterly Report on Form 10-Q, as originally filed with the Securities and Exchange Commission on
May 19, 2017 (the “Original Filing”) to restate our unaudited condensed consolidated financial statements for the
quarter ended March 31, 2017 and to make related revisions to certain other disclosures in the Original Filing. The restatement
of our financial statements in this Form 10-Q/A reflects the correction of certain identified accounting errors related to the
treatment of equity instruments granted to both employees and non-employees in 2012 and 2013. Further explanation regarding the
restatement is set forth in Note 6 to the unaudited condensed consolidated financial statements included in this Form 10-Q/A.
All financial statement sections in the Original
Filing are revised in this Form 10-Q/A.
The restatement disclosed in our Current Report on
Form 8-K that was filed on April 3, 2018, resulted from accounting errors in the treatment of equity instruments granted to non-employees
in 2012 and 2013, which materially impacted our financial statements for the fiscal year ended December 31, 2016 (“Fiscal
2016”) and the first three fiscal quarters of the fiscal year ended December 31, 2017 (“Fiscal 2017”). The restatement
disclosed in our Current Report on Form 8-K that was filed on April 12, 2018 results from accounting errors in the treatment of
equity instruments granted to employees in 2012 and 2013 which materially impacted our financial statements for the fiscal year
ended December 31, 2015, Fiscal 2016, and the first three quarters of Fiscal 2017.
The accounting errors had no effect on cash and no
impact on the Company’s assets, liabilities, or net cash flows from operating, investing, and financing activities on the
statement of cash flows during the three months ended March 31, 2017 or the comparable period in Fiscal 2016. The combined non-cash
effect of the accounting errors lead to a net increase in previously recognized stock-based compensation expense of approximately
$0.2 million and $0.1 million for three months ended March 31, 2017 and the comparable period in Fiscal 2016, respectively and
an increase in previously recognized stock-option compensation expense of approximately of $2.7 million and a reduction of $0.2
million for three months ended March 31, 2017 and the comparable period in Fiscal 2016, respectively.
In addition, the Company made a correction of certain
immaterial errors in revenue and cost of revenue, which decreases previously reported revenues and cost of revenues by approximately
$0.5 million for three months ended March 31, 2017 and by approximately $0.2 million for the three months ended March 31, 2016.
These errors had no impact on the previously reported net loss.
These errors were discovered by management during
the course of its preparation of the Annual Report on Form 10-K for Fiscal 2017, and the audit of the financial results for Fiscal
2017. None of the errors involve misconduct with respect to the Company or its management or employees.
Except as described above, no other changes have
been made to the Original Filing and this Form 10-Q/A does not reflect subsequent events that may have occurred since the date
of the Original Filing or amend, update or change the financial statements or any other items or disclosures in the Original Filing.
In accordance with Rule 12b-5 under the Securities
Exchange Act of 1934, as amended, we have included new certifications from our Chief Executive Officer and Chief Financial Officer
dated the date of this Form 10-Q/A.
For the convenience of the reader, this Form 10-Q/A
sets forth the information in the Original Filing in its entirety, as such information as modified and superseded where necessary
to reflect the restatement and related revisions.
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 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 revenues
increased $14.5 million to $21.5 million as compared to the three-month period ended March 31, 2016 when we generated $7.0 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
(As
Restated)
|
|
|
2016
(As
Restated)
|
|
|
Change
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
$
|
18,960,135
|
|
|
$
|
5,989,924
|
|
|
$
|
14,541,200
|
|
General and administrative
|
|
|
4,775,881
|
|
|
|
1,290,012
|
|
|
|
3,485,869
|
|
Professional fees
|
|
|
364,460
|
|
|
|
143,375
|
|
|
|
221,085
|
|
Sales and marketing
|
|
|
301,222
|
|
|
|
77,143
|
|
|
|
224,079
|
|
Total operating expenses
|
|
$
|
24,401,698
|
|
|
$
|
7,500,454
|
|
|
$
|
16,901,244
|
|
Cost of revenues includes costs related to sales agent
commissions and revenue sharing. These costs are highly correlated with recognized revenues. As such, the increase of $14.5
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 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
$3.5 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 both stock option and stock compensation expense in addition to our increases
in our employee 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. 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.
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 3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting company”, we are
not required to provide the information required by this Item.
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.