What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2020-11-09 · 167 added, 190 removed, 108 unchanged (77% of the section changed)

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See “Item 1 A.

– Risk Factors” in our Annual Report on Form 10- K for the fiscal year ended December 31, 2019 filed with the SEC on March 12, 2020 (“2019 Annual Report”), and Part II, “Item 1A.

– Risk Factors” in this Quarterly Report for a discussion of certain risks, uncertainties and assumptions associated with these statements.

All dollar amounts are in thousands except share amounts and per share data and as otherwise noted.

– Risk Factors” in our 2020 Annual Report for a discussion of certain risks, uncertainties and assumptions associated with these statements.

This MD&A is divided into the following sections:

● Market Conditions and Industry Trends

● Key Business Metrics

● Recent Business Developments

● Results of Operations

GAAP Financial Measures

● Liquidity and Capital Resources

● Critical Accounting Policies and Estimates

All dollar amounts are in USD thousands except share amounts and per share data and as otherwise noted.

eXp World Holdings empowers the new economy through its people, platforms and personal and professional development solutions.

Through our brokerage, eXp Realty we operate one of the world’s fastest growing real estate brokerages.

We are focused on being the most agent-centric company on the planet and offer our agents a generous commission, and a thriving community built on our proprietary and unique cloud-based brokerage and collaboration suite.

While we do not consider acquisitions a critical element of our ongoing business, we seek opportunities to expand and enhance our portfolio of solutions.

Our strategy is to grow organically in the North American and certain international markets by increasing our independent agent and broker network.

Additionally, we intend to continue our advancement into more international markets.

Through our cloud-based operations and technology platform, we strive to achieve customer-focused efficiencies that allow us to increase market share and attain strong returns as we scale our business within the markets in which we operate.

By building partnerships and strategically deploying capital, we seek to grow the business and enter into attractive verticals and markets.

Throughout 2020 and the first quarter of 2021, we made progress towards achieving our strategic goals, including an increase in our agent count of 77% from 28,449 agents as of March 31, 2020 to 50,333 agents as of March 31, 2021.

The expected outcome of these activities will be to better position us to deliver on our full potential, to provide a platform for future growth opportunities, and to achieve our long-term financial goals.

MARKET CONDITIONS AND INDUSTRY TRENDS

Our business is dependent on the economic conditions within the markets for which we operate.

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Additionally, regulations imposed by local, state, and federal government agencies, and geopolitical instability, can also negatively impact the housing markets for which we operate.

For the first half of 2020, the COVID-19 pandemic materially and adversely affected businesses worldwide.

For the period ended March 31, 2021, the COVID-19 pandemic continued to materially and adversely affect businesses worldwide.

The magnitude and duration of the impact from COVID-19 are not fully known and cannot be reasonably estimated.

While the pandemic has been ongoing for much of the fiscal year, there is still significant volatility and uncertainty surrounding the outlook of the global economy.

The impact to the Company for the nine months ended September 30, 2020 has been less significant than anticipated.

While the pandemic has been ongoing, there is still significant volatility and uncertainty surrounding the outlook of the global economy due to continued

restrictions on gatherings and travel, inconsistencies in lifting of those restrictions across geographic markets, new variants to the virus, and the rate of inoculations and efficacy of vaccines.

We believe that, once COVID-19 is further contained, the economy will continue to rebound depending on the continued pace, rate, and effectiveness of lifting public health restrictions on businesses and individuals and how quickly people become comfortable engaging in public activities.

According to the National Association of Realtors (“NAR”), as of August 2020 the housing market is past the recovery phase from the initial downturn during the beginnings of the COVID-19 pandemic.

Current home sales are now at pre-pandemic level which is due to significant increase in demand.

According to the National Association of Realtors (“NAR”), the housing market is past the recovery phase from the initial downturn during the beginnings of the COVID-19 pandemic.

Current home sales are now at a pre-pandemic level, which is due to a significant increase in demand.

The sizable shift to remote work, which has led to current homeowners looking for larger homes and vacation homes, and the continued historic low interest rates have accelerated housing demand.

These low mortgage rates are also allowing more buyers to enter the market.

According to the NAR housing statistics, existing home sales continued to increase for the fourth consecutive month as of September 2020 with the existing-home median price growing 15% year of year.

Historically, home sales experience a seasonal decline during the last four months of the year, however this September home sales increased breaking with the historical pattern.

The NAR reported that pending home sales continued to increase for the fourth consecutive month of positive contract activity.

The index measures housing contract activity and is based on signed real estate contracts for existing single-family homes and condos.

However, given the overall uncertainty of the global pandemic, we continue to monitor and assess any potential impacts of the pandemic on our business, results of operations and financial condition as well as recognize the uncertainty inherent in the NAR forecast.

The Company is positioned to continue to grow in light of a series of fluctuations in economic activity and is performing better than expected throughout the current year.

However, depending on the continued course of the COVID-19 pandemic, specifically in key areas of operations, it is too early to predict the full extent of the effects the COVID-19 pandemic will have on our Company moving into the end of 2020 and into 2021.

Prior to September 30, 2020 increased demand and low mortgage rates caused inventory levels to decline to record lows.

With government implemented actions in response to COVID-19, fewer individuals are listing their homes and construction of new homes has slowed.

According to the NAR housing statistics, existing home sales decreased for the second consecutive month as of March 2021, while the existing-home median price reached a historic record high of $329.

The decline in sales is a result of both seasonal activity, with home sales slowing in winter months, and the continued inventory shortage of homes.

The demand for home buying remains at an all-time high.

The NAR reported that pending home sales also continued to decrease for the second consecutive month of declining contract activity, however this is attributable to low inventory.

Th NAR index measures housing contract activity and is based on signed real estate contracts for existing single-family homes and condos.

The Company continues to monitor the macro and micro economic environment but see the demand for housing continuing throughout the year due to continued low interest rates and overall promising economic outlook.

The Company is positioned to continue to grow in light of a series of fluctuations in economic activity.

The Company continued its growth trajectory though the first quarter of 2021 with a year over year increase in revenue of 115% and an increase in agent count of 77%.

However, depending on the continued course of the COVID-19 pandemic, specifically in key areas of operations, it is too early to predict the full extent of the effects the COVID-19 pandemic will have on the Company as we progress through the remainder of 2021.

Regardless of whether the housing market continues to grow or slows, we believe that we are positioned to leverage our low-cost, high-engagement model, affording agents and brokers increased income and ownership opportunities while offering a scalable solution to brokerage owners looking to survive and thrive in a series of fluctuations in economic activity.

National Housing Inventory

Throughout 2020 and into 2021, increased demand and low mortgage interest rates caused inventory levels to decline to record lows.

With government implemented actions in response to COVID-19 in 2020 and overall uncertainty, fewer individuals are listing their homes and construction of new homes has slowed.

Due to these factors, year over year inventory has decreased further.

According to the NAR, inventory of existing homes for sale in the U.S.

was 1.5 million as of September 2020 (preliminary) compared to 1.8 million at the end of September 2019.

The NAR indicated the need for new home construction due to the high demand of homes and the record-low inventory levels.

Mortgage Rates

According to the NAR, mortgage rates on commitments for 30-year, conventional, fixed-rate mortgages averaged 3.0% for the third quarter of 2020, compared to 3.7% for the third quarter of 2019.

Mortgage rates are forecasted to decrease to 2.9% throughout 2020 and increase minimally to 3.2% in 2021.

Mortgage rates are expected to remain low through 2021.

was 1.1 million as of March 2021 (preliminary) compared to 1.5 million at the end of March 2020.

The NAR indicated the need for new home construction is robust due to the high demand of homes and the record-low inventory levels.

Mortgage Interest Rates

According to the NAR, mortgage interest rates on commitments for 30-year, conventional, fixed-rate mortgages averaged 2.9% for the first quarter of 2021 compared to 3.5% for the first quarter of 2020.

Mortgage rates are forecasted to increase minimally to 3.0% throughout 2021.

Mortgage rates are expected to remain low throughout 2021.

Low mortgage rates are expected to continue to contribute to overall high demand for home-buying.

Housing Affordability Index

Also, according to the NAR, the composite housing affordability index decreased to 158.9 for August 2020 (preliminary) from 159.9 for August 2019.

According to the NAR, the composite housing affordability index decreased to 173.1 for February 2021 (preliminary) from 175.6 for February 2020.

The housing affordability index continues to be at historically favorable levels.

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The favorable housing affordability index is due to favorable mortgage rate conditions.

However, as housing prices continue to climb due to low inventory and high demand, and the increase in the unemployment rate compared to prior year it is still too early to predict the extent of the effects of these factors and the ongoing COVID-19 pandemic will have on unemployment and housing affordability.

However, as housing prices continue to climb due to low inventory and high demand and in light of the higher unemployment rate and the ongoing COVID-19 pandemic, it is still too early to predict the extent to which the effects of these factors will have on long-term unemployment and housing affordability.

Home Sales Transactions

According to the NAR, existing home sale transactions for September 2020 (preliminary) increased to 6.5 million compared to 5.4 million for September 2019.

For the nine months ended September 30, 2020, eXp Realty settled home sales units were 156,927 (whole units) resulting in sales volume of $47.6 billion.

Our home sale transactions growth was directly related to the growth of our agent base, which increased 56% from 23,034 agents the prior comparative period.

The NAR anticipates transactions to continue with pace however due to low inventory level recovery may not be sustainable.

Existing Home Sales Price

According to the NAR, nationwide existing home sales average price for September 2020 (preliminary) was $312 compared to $272 in September 2019.

During this same period, eXp Realty homes sales price averaged $313 in the third quarter of 2020 compared to $289 in the third quarter of 2019.

Due to low supply and high demand, the average sale price is expected to increase through 2021.

However, it is still too early to predict the extent of the effects of the ongoing COVID-19 pandemic will have on home sales prices.

Continued Accelerated Growth

Our strength is attracting real estate agent and broker professionals that have contributed to our growth.

As of September 30, 2020, we have grown our agent and broker base 56% to 35,877 agents and brokers compared to 23,034 as of September 30, 2019.

The following table sets forth the number of transactions, sales volume and commission revenue earned on real estate transactions:

Nine Months Ended September 30,

(in thousands, except transactions)

We continue to increase our presence in the United States and Canada through the execution of our growth strategies, and in the fourth quarter of 2019, we expanded operations to the U.K.

and Australia.

The Company is expecting to expand into other countries, including Mexico, South Africa, France, India, and Portugal, by the end of 2020.

According to the NAR, seasonally adjusted existing home sale transactions for the three months ended March 2021 (preliminary) increased to 6.0 million compared to 5.4 million for the same period in 2020.

The NAR anticipates transactions to continue with pace;

however, due to low inventory levels, recovery may not be sustainable.

According to the NAR, nationwide existing home sales average price for March 2021 (preliminary) was $329 compared to $281 in March 2020.

Due to low supply and high demand, the average sale price is expected to continue to increase through the remainder of

However, it is still too early to predict the extent of the effects of the ongoing COVID-19 pandemic will have on long-term home sales prices.

KEY BUSINESS METRICS

Management uses our results of operations, financial condition, cash flows, and key business metrics related to our business and industry to evaluate our performance and make strategic decisions.

The following table outlines the key business metrics that we periodically review:

Three Months Ended March 31,

(in thousands, except transactions and agent count)

Adjusted EBITDA

(1) Adjusted EBITDA is not a measurement of our financial performance under generally accepted accounting principles in the U.S.GAAP and should not be considered as an alternative to net income, operating income, or any other measures derived in accordance with U.S.

For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S.

GAAP Financial Measures”.

We periodically evaluate trends in certain metrics to track the Company’s performance.

Our strength is attracting real estate agent and broker professionals that contribute to our growth.

Brokerage real estate transactions are recorded when our agents and brokers represent buyer and/or sellers in the purchase or sale, respectively, of a home.

The number of real estate transactions is a key driver of our revenue and profitability.

Real estate transaction volume represents the total sales value for all homes sold by our agents and brokers and is influenced by several market factors, including, but not limited to, the pricing and quality of our services and market conditions that affect home sales, such as macroeconomic factors, local inventory levels, mortgage interest rates, and seasonality.

Real estate transaction revenue represents the commission revenue earned by the Company for closed brokerage real estate transactions.

We continue to increase our agents and brokers significantly in the United States and Canada through the execution of our growth strategies.

Since 2019, we expanded operations to the U.K., Australia, South Africa, Portugal, France, India, Mexico, Puerto Rico, Brazil, Italy, and Hong Kong.

The rate of growth of our agent and broker base is difficult to predict and is subject to many factors outside of our control, including actions taken by our competitors and macroeconomic factors affecting the real estate industry in general.

The Company’s agent base and transactions have not been significantly impacted throughout the global COVID-19 pandemic, however the full effect on these factors will continue to depend on the duration and severity of the COVID-19 pandemic.

Agent Ownership

The Company maintains an equity incentive program whereby agents and brokers of eXp Realty can become eligible for awards of the Company’s common stock through the achievement of production and agent attraction benchmarks.

Under our equity incentive program, agents and brokers who qualify are issued shares of the Company’s common stock.

The Company also administers a program whereby agents and brokers can establish a direct ownership interest in the Company as a stockholder.

Agents and brokers can elect to receive 5% of their commission payable in the form of Company common stock which, as of January 2020, is now issued at a 10% discount to market on the date of issuance.

This agent equity program continues to be another element in creating a culture of agent-ownership.

With the favorable economic outlook and our unique business model, we anticipate to continuously grow for the remainder of the year.

Settled home sales transactions and volume resulted from closed real estate transactions and typically change directionally with changes in the market’s existing home sales transactions as reported by the NAR, as disproportionate variances are representative of company-specific improvements or shortfalls to the norm.

Our home sale transactions growth was directly related to the growth of our agent base over the prior comparative period.

We utilize gross margin, a financial statement measure based on U.S.

GAAP to assess eXp’s financial performance from period to period.

Gross margin is calculated from U.S.

GAAP reported amounts and equals the difference between revenue and cost of sales (i.e., gross profit) as a percentage of total revenue.

Commissions and other agent-related costs represent the cost of sales for the Company.

The cost of sales does not include depreciation or amortization expenses as the Company’s assets are not directly used in the production of revenue.

Gross margin is based on the information provided in our results of operations or our consolidated statements of comprehensive income (loss), and is an important measure of our potential profitability and brokerage performance.

For the three months ended March 31, 2021 and 2020, gross margin was 9.2% and 10.3%, respectively.

Gross margin decreased year-over-year which is mostly attributable increase in agent commission costs.

We continue to monitor our gross margin through efforts to improve our cost structure.

Management also reviews Adjusted EBTIDA, which is a non-U.S.

GAAP financial measure, to understand and evaluate our core operating performance.

Adjusted EBITDA has grown significantly for the three months ended March 31, 2021 and 2020 due to our revenue growth and improved leverage of our cost structure.

RECENT BUSINESS DEVELOPMENTS

Real Estate Brokerage Initiatives

Global Real Estate Cloud Brokerage

In the fourth quarter of 2019, the Company announced its first international expansion outside of North America into Australia and the U.K.

During the third quarter of 2020, the Company announced its intention to expand its operations into France, India, Mexico, Portugal and South Africa by the end of the fiscal year, and, subsequent to quarter-end, the Company announced its entry into South Africa.

In addition to these new countries, the Company continues to also focus on growth in the United States and in Canada.

Global Expansion of Our Real Estate Cloud Brokerage

During the fourth quarter of 2020, the Company initiated operations in France, India, Mexico, Portugal, and South Africa.

In addition, operations commenced in Puerto Rico, Brazil, Italy, and Hong Kong in the first quarter of 2021.

The Company continues to pursue growth opportunities into new global markets.

In addition to the international expansion, the Company also continues to focus on growth in the United States and in Canada.

Agent and Employee Experience

The Company has embarked on an initiative to better understand both its agents and employee experience.

The Company has embarked on an initiative to better understand both its agents and employees’ experience.

In doing so, we have adopted many of the principles of the Net Promoter Score® (“NPS”) across many aspects of our organization.

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A NPS above 50 is considered excellent.

The Company’s agent NPS was 73 in the first quarter of 2021.

Whether it be the overall question "How likely are you to recommend eXp to your colleagues, friends, or family?"

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In turn, this often leads to enthusiastic fans of eXp who will promote our Company and continue leading us through strong organic growth.

This also ties into one of our core values, transparency.

While we strive for high satisfaction, a low or trending lower NPS is equally important to identify.

The Company’s agent NPS is 73 in the third quarter of 2020.

This also ties into one of our core values of transparency.

While we strive for high satisfaction, it is equally important to investigate a low or unfavorable trending of NPS.

As NPS scores are often leading indicators to agents and employees’ future actions, we are able to learn quickly what may be a ‘pain point’ or product that is not meeting its desired objective.

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This fast and iterative approach has already led to improvements in such parts of our business such as agent onboarding, commission transaction processing, and employee benefits.

Agent Ownership

The Company maintains an equity incentive program whereby agents and brokers of eXp Realty can become eligible to receive awards of the Company’s common stock through the achievement of production and agent attraction benchmarks.

The equity incentive program it continues to be key element in creating a culture of agent-ownership.

Our agent compensation plans represent a key lever in our strategy to attract and retain independent agents and brokers.

The costs attributable to these plans are also a significant component of our commission structure and results of operations.

Prior to January 1, 2020, we issued share-based compensation to our agents and brokers at a 20% discount to the market price of our common stock, which changed to a 10% discount for issuances beginning in January 2020.

Our operational strategy and the importance of the agent compensation plans to our strategy have not changed, however the financial impact of the change in the discount is expected to have a meaningful effect on our results of operations going forward.

Our stock repurchase program and agent growth incentive program are more fully disclosed in Note 6 – Equity of the Notes to the Condensed Consolidated Financial Statements.

Agents and brokers can elect to receive 5% of their commission payable in the form of Company common stock issued at a 10% discount.

Our operational strategy and the importance of the agent compensation plans to our strategy have not changed;

however, the financial impact of the change in the discount has had a meaningful effect on our results of operations.

Our stock repurchase program and agent growth incentive program are more fully disclosed in Note 8 – Stockholders’ Equity to the condensed consolidated financial statements.

Technology Products and Services

We continue developing the core VirBELA software platform and its underlying infrastructure to accommodate for the increasing use and scale required to support our eXp Realty division.

We continue developing the core Virbela software platform and its underlying infrastructure through our subsidiary, eXp World Technologies, LLC , to accommodate for the increasing use and scale required to support our eXp Realty division.

In 2019, we released a new product centered on the concept of an open campus whereby small and independent organizations may utilize sub spaces as part of a larger campus similar to collaborative environments that currently exist in the physical brick and mortar world.

In the first quarter of 2020, VirBELA began offering virtual events in conjunction with Event Farm Given the current environment due to the COVID-19 pandemic, there is an acute need for virtual meetings.

For the period ended September 30, 2020, VirBELA has seen an increase in demand for virtual events and collaborative spaces for remote teams and as a result has introduced new products and features including, an expo hall, a concert stage for virtual entertainment, VR support for

Oculus Rift and HTC VIVE, and screen sharing and video chat capabilities.

In the first quarter of 2020, Virbela began offering virtual events in conjunction with Event Farm, Inc.

Given the current environment due to the COVID-19 pandemic, there is an acute need for virtual workplace collaboration.

For the period ended March 31, 2021, Virbela has seen an increase in demand for virtual events and collaborative spaces for remote teams and as a result has introduced new products and features including, an expo hall, a concert stage for virtual entertainment, VR support for Oculus Rift and HTC VIVE, and screen sharing and video chat capabilities.

Lastly, we expect to continue to service existing and new business-to-business enterprise level contracts in the coming year.

On July 31, 2020, the Company acquired the equity ownership interests in Showcase Web Sites, L.L.C.

(“Showcase”) for cash consideration of $1.5 million and promissory notes in the aggregate principal amount of $1.5 million (the “Showcase Acquisition”).

Showcase is a technology company focused on agent website and consumer real estate portal technology.

With this acquisition, the Company will be able to strategically focus on creating consumer home-search technology for utilization by our independent agents and brokers, as well as continued services offerings to third party clients of Showcase.

Affiliated Services

Recent acquisitions and partnerships have allowed us to begin offering to customers more products and services complimentary to our real estate brokerage business.

Recent acquisitions and partnerships have allowed us to begin offering to customers more products and services complementary to our real estate brokerage business.

These affiliated services include mortgage origination, title, escrow, and settlement services, which we can now provide as a more inclusive offering in addition to our brokerage services.

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Results of Operations

Three Months Ended September 30, 2020 compared to the Three Months Ended September 30, 2019

Three Months Ended March 31, 2021 compared to the Three Months Ended March 31, 2020

Three Months Ended

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

(In thousands, except share amounts and per share data)

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Total operating expenses

Operating income (loss)

Other expense

Other expense, net

Total other expense, net

Income (loss) before income tax expense

Operating income

Other (income) expense, net

Income before income tax expense

Income tax expense

Net income (loss)

Net loss attributable to noncontrolling interest

Net income (loss) attributable to eXp World Holdings, Inc.

Net income attributable to eXp World Holdings, Inc.

Adjusted EBITDA (1)

Earnings (loss) per share

Earnings per share

Weighted average shares outstanding

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GAAP Financial Measures.”

Our total revenues were $564.0 million for the three months ended September 30, 2020 compared to $282.2 million for the same period in 2019, an increase of $281.8 million, or 100%.

Total revenues increased for the third quarter of 2020 primarily as a result of an increase in real estate brokerage commissions, which is directly attributable to increases in our agent count and closed transactions compared to the same period in 2019.

Additionally, the average home sale price for eXp closed transactions increased 8% to $313 during the three months ended September 30, 2020 from $289 for the same period in 2019.

Our total revenues were $583.8 million for the three months ended March 31, 2021 compared to $271.4 million for the same period in 2020, an increase of $312.4 million, or 115%.

Total revenues increased for the first quarter of 2021 primarily as a result of an increase in real estate brokerage commissions, which is directly attributable to increases in our agent count and closed transactions compared to the same period in 2020.

Additionally, the average home sale price for eXp closed transactions increased 15% to $332 during the three months ended March 31, 2021 from $290 for the same period in 2020.

Commission and Other Agent Related Costs

Commission and other agent-related costs were $517.2 million for the three months ended September 30, 2020 compared to $259.1 million for the same period in 2019, an increase of $258.0 million, or 100%.

Commission and other agent-related costs were $530.3 million for the three months ended March 31, 2021 compared to $243.4 million for the same period in 2020, an increase of $286.9 million, or 118%.

Commission and other agent related costs increased primarily as a result of a higher volume of settled real estate transactions related to the increase in our agent base.

General and Administrative Expense

General and administrative expenses were $30.1 million for the three months ended September 30, 2020 compared to $23.6 million for the same period in 2019, an increase of $6.5 million or 28%.

General and administrative expenses were $46.3 million for the three months ended March 31, 2021 compared to $26.9 million for the same period in 2020, an increase of $19.4 million or 72%.

General and administrative expenses include costs related to wages, including stock compensation, and other general overhead expenses.

General and administrative expenses increased primarily as a result of an increase of $4.2 million in compensation related expenses including salaries, employee benefits, and payroll taxes and processing, an increase of $0.9 million in computer and software expenses, and an increase of $1.0 million in stock compensation expense These increases are a result of the Company’s increase in employee and agent count and an increase in our stock price compared to the prior period in 2019.

This was offset by a decrease in travel expenses, $0.3 million due travel restrictions as a result of the COVID-19 pandemic.

General and administrative expenses increased primarily as a result of an increase of $11.8 million in compensation related expenses including salaries, employee benefits, and payroll taxes and processing, an increase of $2.2 million in computer and software expenses, and an increase of $4.0 million in stock compensation expense.

These increases are a result of the Company’s increase in employee and agent count and an increase in our stock price compared to the prior period in 2020.

Sales and Marketing

Sales and marketing expenses were relatively consistent at $1.5 million and $1.1 million for the three months ended September 30, 2020 compared to the same period in 2019.

Sales and marketing expenses increased at $2.3 million and $0.9 million for the three months ended March 31, 2021 compared to the same period in 2020 due to initiatives to continue growth, expand brand awareness, and additional marketing costs associated with new business lines.

Other Income (Expense)

There were no significant changes in other income (expense) for the three months ended September 30, 2020 compared to the same period in 2019.

Income Tax Benefit (Expense)

There were no significant changes in income tax expenses for the three months ended September 30, 2020 compared to the same period in 2019.

During the third quarter of 2020, the Coronavirus Aid, Relief, and Economic Security Act (“The CARES Act”) did not materially impact the Company’s results of operations.

Nine months Ended September 30, 2020 compared to the Nine months Ended September 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

(In thousands, except share amounts and per share data)

Statement of Operations Data:

Operating expenses

Commissions and other agent-related costs

General and administrative expenses

Sales and marketing expenses

Total operating expenses

Operating income (loss)

Other expense

Other expense, net

Equity in losses of unconsolidated affiliates

Total other expense, net

Income (loss) before income tax expense

There were no significant changes in other income (expense) for the three months ended March 31, 2021 compared to the same period in 2020.

Income Tax Expense

Net income (loss)

Net loss attributable to noncontrolling interest

Net income (loss) attributable to eXp World Holdings, Inc.

Adjusted EBITDA (1)

Earnings (loss) per share

Weighted average shares outstanding

(1) Adjusted EBITDA is not a measurement of our financial performance under U.S.

GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S.

For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S.

GAAP Financial Measures.”

Our total revenues were $1,189.0 million for the nine months ended September 30, 2020 compared to $705.9 million for the same period in 2019, an increase of $483.0 million, or 68%.

Total revenues increased primarily as a result of an increase in real estate brokerage commissions, which is directly attributable to increases in our agent count and closed transactions compared to the same period in 2019.

Additionally, the average home sale price for the nine-month period ended September 30, 2020 for eXp closed transactions increased 8% to $303 compared to $281 for the same period in 2019.

Commission and Other Agent Related Costs

Commission and other agent-related costs were $1,079.7 million for the nine months ended September 30, 2020 compared to $646.3 million for the same period in 2019, an increase of $433.5 million, or 67%.

Commission and other agent related costs increased primarily as a result of a higher volume of settled real estate transactions related to the increase in our agent base.

General and Administrative Expense

General and administrative expenses were $82.1 million for the nine months ended September 30, 2020 compared to $66.5 million for the same period in 2019, an increase of $15.6 million or 24%.

General and administrative expenses include costs related to wages, including stock compensation, and other general overhead expenses.

General and administrative expenses increased primarily as a result of an increase of $10.9 million in compensation related expenses including salaries, employee benefits, and payroll taxes and processing.

$1.9 million in professional services, and $1.9 million in computer and software expenses.

These increases are a direct result of the Company’s increase in employee and agent count from the prior period.

These expense increases are to support the Company’s sustained growth.

Sales and Marketing

Sales and marketing expenses were relatively consistent at $3.0 million for the nine months ended September 30, 2020 compared to the same period in 2019.

Other Income (Expense)

There were no significant changes in other income (expense) for the nine months ended September 30, 2020 compared to the same period in 2019.

Income Tax Benefit (Expense)

There were no significant changes in income tax expenses for the nine months ended September 30, 2020 compared to the same period in 2019.

At this time, the CARES Act has not materially impacted the Company’s results of operations.

The Company’s provision for income tax expense amounted to $0.2 million and less than $0.1 million for the three months ended March 31, 2021 and 2020, respectively, which represented an effective tax rate of 4.17% and 7.61%, respectively.

GAAP FINANCIAL MEASURES

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with U.S.

To supplement our consolidated financial statements, which are prepared and presented in accordance with U.S.

GAAP, we use Adjusted EBITDA, a non-U.S.

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We define the non-U.S.

GAAP financial measure of Adjusted EBITDA to mean net income (loss), excluding other income (expense), income tax benefit (expense), depreciation and amortization;

stock-based compensation expense, and stock option expense.

GAAP financial measure of Adjusted EBITDA to mean net income (loss), excluding other income (expense), income tax benefit (expense), depreciation, amortization, and impairment charges, stock-based compensation expense, and stock option expense.

We believe that Adjusted EBITDA provides useful information about our financial performance, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to a key metric used by our management for financial and operational decision-making.

We believe that Adjusted EBITDA helps identify underlying trends in our business that otherwise could be masked by the effect of the expenses that we exclude in Adjusted EBITDA.

In particular, we believe the exclusion of stock and stock option expenses, provides a useful supplemental measure in evaluating the performance of our operations and provides better transparency into our results of operations.

In particular, we believe the exclusion of stock and stock option expenses, provides a useful supplemental measure in evaluating the performance of our underlying operations and provides better transparency into our results of operations.

We are presenting the non-U.S.

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Some of these limitations are that:

● Adjusted EBITDA excludes stock-based compensation expense not related to the agent equity program (and related payroll tax expense) and stock option expense, which have been, and will continue to be for the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy;

● Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future.

The following tables present a reconciliation of Adjusted EBITDA to net income (loss), the most comparable U.S.

● Adjusted EBITDA excludes stock-based compensation expense related to our agent growth incentive program and stock option expense, which have been, and will continue to be for the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy;

● Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets, amortization of intangible assets, and impairment charges related to these long-lived assets, and, although these are non-cash charges, the assets being depreciated, amortized, or impaired may have to be replaced in the future.

The following tables present a reconciliation of Adjusted EBITDA to net loss, the most comparable U.S.

GAAP financial measure, for each of the periods presented:

Three Months Ended September 30,

Net income (loss)

Other expense, net

Income tax expense

Depreciation & amortization expense (1)

Stock compensation expense

Stock option expense

Adjusted EBITDA

(1) Note, amortization to stock payable is included in the “Other expense (income)” line item.

Nine Months Ended September 30,

Three Months Ended March 31,

Net income (loss)

Other expense, net

Other expense (income), net

Income tax expense

Depreciation & amortization expense (1)

Depreciation, amortization, and impairment expenses (1)

Stock compensation expense (2)

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Adjusted EBITDA

(1) Note, amortization to stock payable is included in the “Other expense (income)” line item.

(1) Amortization of stock liability is included in the “Other expense (income)” line item.

(2) This includes agent growth incentive stock compensation expense and stock compensation expense related to non-controlling interest.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are our cash and cash equivalents on hand and cash flows generated from our business operations.

Our ability to generate sufficient cash flow from operations or to access certain capital markets is necessary to fund our operations and capital expenditures and meet obligations as they become due.

As of September 30, 2020, our cash and cash equivalents totaled $91.9 million.

Cash equivalents are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily money market funds.

We hold no marketable securities.

For the nine month period ended September 30, 2020, the COVID-19 pandemic has not had a material impact on our operations, and we anticipate that our existing balances of cash and cash equivalents and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months.

Our future capital requirements depend on many factors, including our level of investment in technology and, our rate of growth into new markets.

Our capital requirements may also 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.

Additionally, as the impact of the COVID-19 on the economy and operations evolves, we will continuously assess our liquidity needs.

In the event of a sustained market deterioration, we may need or seek advantageously to obtain additional funding through equity or debt financing.

We currently do not hold any bank debt.

Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to fund our operations and capital expenditures, repurchase our common stock, and meet obligations as they become due.

At present, our cash and cash equivalents balances and cash flows from operations have strengthened primarily due to transaction volume growth and improved cost leverage over the prior five years attributable to the expansion of our independent agent and broker network and, to a lesser extent, increased average prices of home sales.

Currently, our primary use of cash on hand is to sustain and grow our business operations, including, but not limited to, commission and revenue share payments to agents and brokers and cash outflows for operating expenses.

Our current capital deployment strategy for 2021 is to utilize excess cash on hand to support our growth initiatives into select markets and enhance our technology platforms and for repurchases of our common stock.

As of March 31, 2021, the Company is not party to any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources.

In addition, the Company has no known material cash requirements as of March 31, 2021 relating to capital expenditures, commitments, or human capital (except as passthrough commissions to agents and brokers concurrent with settled real estate transactions).

The cash requirements for the upcoming fiscal year relate to our leases and our debt associated with acquisitions.

For information regarding the Company’s expected cash requirement related to leases, see Note 6 – Leases to the condensed consolidated financial statements.

Cash requirements associated with our acquisitions include a $1.0 million payment of cash or common stock of the Company to the previous owners of Virbela, LLC due in November 2021.

During the first quarter of 2021, the Company paid $1.5 million of principal amount outstanding for the full settlement of the promissory notes issued to the previous owners of Showcase, which were due in installments payments during 2021 and 2022.

We believe that our existing balances of cash and cash equivalents and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months.

Our future capital requirements will depend on many factors, including our level of investment in technology, our rate of growth into new markets, and cash used to repurchase shares of the Company’s common stock.

Our capital requirements may be affected by factors which we cannot control such as the changes in the residential real estate market, interest rates, and other monetary and fiscal policy changes to the manner in which we currently operate.

In order to support and achieve our future growth plans, we may need or seek advantageously to obtain additional funding through equity or debt financing.

We believe that our current operating structure will facilitate sufficient cash flows from operations to satisfy our expected long-term liquidity requirements beyond the next twelve months.

We currently do not hold any bank debt, nor have we issued any debt instruments through public offerings or private placements.

If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would likely suffer.

The Company issued unsecured promissory notes in the aggregate principal amount of $1.5 million in connection with the Showcase acquisition in July 2020.

The promissory notes accrue interest of 8% per annum, and interest is payable monthly beginning six months after the closing date.

The first installment payment of outstanding principal in the amount of $0.5 million is due on July 31, 2021, the first anniversary of the closing date, with the second installment payment for the remaining $1.0 million of outstanding principal payable on July 31, 2022, the second anniversary of the closing date.

For the three- and nine-month periods ended September 30, 2020, we purchased shares at an aggregate purchase price of $9,343 and $21,330, respectively pursuant to our stock repurchase plan.

These repurchases did not have a material effect on our liquidity or capital resources.

As of March 31, 2021, our cash and cash equivalents totaled $104.4 million.

Cash equivalents are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily money market funds.

We currently do not possess any marketable securities.

Net Working Capital

Net working capital is calculated as the Company’s total current assets less its total current liabilities.

The following table presents our net working capital as of September 30, 2020 and December 31, 2019:

September 30, 2020

The following table presents our net working capital as of March 31, 2021 and December 31, 2020:

March 31, 2021

December 31, 2020

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Net working capital

For the nine months ended September 30, 2020, net working capital increased $55.4 million, or 150%, compared to December 31, 2019 primarily due to an increase in cash generated from operations for the period ended September 30,2020.

The following table presents our cash flows for the nine months ended September 30, 2020 and 2019:

Nine Months Ended September 30,

For the three months ended March 31, 2021, net working capital remained relatively consistent at $115, with a decrease of $ 0.7 million, or 1%, compared to December 31, 2020 primarily due to the early payment of the Showcase acquisition promissory note of $1.5 million, most of which was classified as noncurrent liabilities.

The following table presents our cash flows for the three months ended March 31, 2021 and 2020:

Three Months Ended March 31,

Cash provided by operating activities

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Net change in cash, cash equivalents and restricted cash

For the nine months ended September 30, 2020, cash provided by operating activities increased $49.4 million compared to the same period in 2019.

The change resulted primarily from the increased volume of our sales transactions, decrease in net losses, increase in customer deposits and participation by our agents and brokers in our Agent Equity Program and Agent Growth Incentive Program.

For the nine months ended September 30, 2020, cash used in our investing activities were relatively flat compared to the prior year period.

For the nine months ended September 30, 2020, the increase in cash flows used in financing activities primarily were related to the repurchase of our common stock, partially offset by proceeds received from the exercise of stock options.

For the three months ended March 31, 2021, cash provided by operating activities increased $61.4 million compared to the same period in 2020.

The change resulted primarily from the increased real estate transactions volume, increase in customer deposits, and higher participation by our agents and brokers in our agent stock compensation programs.

For the three months ended March 31, 2021, cash used in our investing activities increased due to higher capital expenditures and acquisition-related payments.

For the three months ended March 31, 2021, the increase in cash flows used in financing activities primarily were related to repurchases of our common stock, partially offset by proceeds received from the exercise of stock options.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S.

GAAP requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in the preparation of the statements.

Accounting estimates are considered critical if the estimate requires us to use judgments and/or make assumptions about matters that were uncertain at the time the accounting estimate was made and if different accounting estimates could have been used in the reporting period or changes in the accounting estimates are likely to occur that would have a material impact on our financial condition, results of operations or cash flows.

The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020, which provides a description of our critical accounting policies.

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For additional information regarding our critical accounting policies and estimates, see the Critical Accounting Policies and Estimates section of MD&A included in our 2020 Annual Report.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in our exposures to market risk since December 31, 2020.

For details on the Company's interest rate and foreign currency exchange, see “Item 7A.

Quantitative and Qualitative Information About Market Risks” in our 2020 Annual Report.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis