Item 2. Management’s Discussion and Analysis
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 included elsewhere in this report. Management’s Discussion and Analysis of Financial Conditions and Results of Operations contain forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. See “Item 1 A. – 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:
● Overview
● Market Conditions and Industry Trends
● Key Business Metrics
● Recent Business Developments
● Results of Operations
● Non-U.S. 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.
OVERVIEW
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 model, 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.
Strategy
Our strategy is to grow organically in North America and certain international markets by increasing our independent agent and broker network. 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 associated businesses.
Throughout 2021, we continued to make progress in achieving our strategic goals, including an 82% increase in our agent count, going from 35,877 agents as of September 30, 2020 to 65,269 agents as of September 30, 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. Changes in these conditions can have a positive or negative impact on our business. The economic conditions influencing the housing markets primarily include economic growth, interest rates, unemployment, consumer confidence, mortgage availability and supply and demand.
In periods of economic growth, demand typically increases resulting in accelerated home sales transactions and rising home sales prices. Similarly, a decline in economic growth, increasing interest rates and declining consumer confidence generally decreases demand. 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 period ended September 30, 2021, the COVID-19 pandemic has continued to be contained due to the rate of inoculation and efficacy of vaccines. However, there is still volatility and uncertainty surrounding the outlook of the global economy due to inconsistencies in lifting restrictions across geographic markets and new variants to the virus. We believe that the economy will continue
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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 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. As of September 2021, existing home sales increased 7% on a seasonally adjusted annual rate. This is mostly driven by some improvement in supply; however, housing inventory is still down year-over-year. While the demand is driving home prices up, more buyers are waiting on more inventory and prices to stabilize. According to NAR housing statistics, total housing inventory at the end of September 2021 was down 13.0% from the same time in prior year with only 2.4 months of inventory supply, while the existing-home median price reached a historic record high of $352.8 as of September 2021, which is a 13.3% increase from the same period in 2020. The demand for homebuying remains high. NAR reported that pending home sales rebounded in August by 8%, which is a positive indicator of continued housing demand. This 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 microeconomic environments but sees 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 through the third quarter of 2021 with a year-over-year increase in revenue of 127% and an increase in agent count of 82%. However, the Company continues to monitor the continued course of COVID-19, specifically in key areas of operations and the spread of new variants and the overall economic conditions affecting the real estate market through the end 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 continued overall uncertainty of the overall economy, fewer individuals are listing their homes. Additionally, construction of new homes has slowed due to increased costs of raw materials, tight labor market, and delays in the supply chains as the global economy continues to recover. Due to these factors, and others, year-over-year inventory has decreased further. According to NAR, inventory of existing homes for sale in the U.S. was 1.27 million as of September 2021 (preliminary) compared to 1.46 million at the end of September 2020. NAR indicated the need for new home construction due to the high demand of homes and the record-low inventory levels.
Mortgage Interest Rates
According to NAR, mortgage interest rates on commitments for 30-year, conventional, fixed-rate mortgages averaged 2.9% for the third quarter of 2021 compared to 3.0% for the third quarter of 2020. Mortgage rates are forecasted to increase minimally to 3.3% throughout the end of 2021, with an expected increase in interest rates in 2022 to 3.6%. Low mortgage rates are expected to continue to contribute to overall high demand for homebuying.
Housing Affordability Index
According to NAR, the composite housing affordability index decreased to 151.3 for August 2021 (preliminary) from 165.8 for August 2020. The housing affordability index continues to be at 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% down payment and ability to qualify for a mortgage. The favorable housing affordability index is due to favorable mortgage rate conditions. However, the steady year-over- year decline is attributable to the increase in the average home price due to low inventory levels driving up demand.
Home Sales Transactions
According to NAR, seasonally adjusted existing home sale transactions increased to 6.3 million for September 2021 (preliminary) compared to 6.4 million for September 2020. NAR anticipates transactions to continue with current pace; however, due to low inventory levels, recovery may not be sustainable.
According to NAR, the nationwide existing home sales median price for September 2021 (preliminary) was $352.8 compared to $311.5 in September 2020. Due to low supply and high demand, the average sale price is expected to continue to increase, year over year, through the end of 2021.
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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 September 30,
Nine Months Ended September 30,
2021
2020
2021
2020
(in thousands, except transactions and agent count)
Performance:
Agent count
65,269
35,877
65,269
35,877
Transactions
130,029
75,392
319,338
156,927
Volume
$ 46,623,702
$ 23,608,704
$ 111,248,926
$ 47,562,826
Revenue
$ 1,110,480
$ 564,017
$ 2,694,200
$ 1,188,963
Gross margin
7.2%
8.3%
7.9%
9.2%
Adjusted EBITDA
$ 23,054
$ 21,818
$ 64,857
$ 41,193
(1) Adjusted EBITDA is not a measurement of our financial performance under generally accepted accounting principles in the U.S. and should not be considered as an alternative to net income, operating income, or any other measures derived in accordance with U.S. GAAP. 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 buyers 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, India, Mexico, Portugal, France, Puerto Rico, Brazil, Italy, Hong Kong, Colombia, Spain, Israel, Panama and Germany. 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 macroeconomic factors affecting the real estate industry in general. 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 NAR, as disproportionate variances are representative of company-specific improvements or shortfalls to the norm. Our home sale transaction 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, amortization, or stock compensation 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 September 30, 2021 and 2020, gross margin was 7.2% and 8.3%, respectively. For the nine months ended September 30, 2021 and 2020, gross margin was 7.9% and 9.2%, respectively. Gross margin decreased year-over-year primarily due to rising home prices and increased demand which resulted in agents reaching their commission capping requirements sooner, entitling them to a higher percentage of the home sale commission. We continue to monitor our gross margin through efforts to improve our cost structure.
Management also reviews Adjusted EBITDA, 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 and nine months ended September 30, 2021 and 2020 due to our revenue growth and improved leverage of our cost structure.
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RECENT BUSINESS DEVELOPMENTS
Real Estate Brokerage Initiatives
Global Expansion of Our Real Estate Cloud Brokerage
During the fourth quarter of 2020, the Company expanded into South Africa, India, Mexico, Portugal and France. In addition, the Company expanded into Puerto Rico, Brazil, Italy, Hong Kong, Colombia, Spain, Israel, Panama, and Germany in the first nine months 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 existing international markets.
Agent 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. NPS is a measure of customer satisfaction and is measured on a scale between -100 and 100. An NPS above 50 is considered excellent. The Company’s cumulative agent NPS was 71 through the third quarter of 2021. Whether the overall question is "How likely are you to recommend eXp to your colleagues, friends, or family?" or more granular inquiries as to specific workflows or service offerings, we believe this will ensure we are delivering on the most important values to our agents and employees. 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 of transparency. While we strive for high satisfaction, it is equally important to investigate a low or unfavorable trending of NPS scores. 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. We then take that information and translate it into action with an effort to remediate the specific root cause(s) driving the lower score. 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 continues to be a 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. 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. 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 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 services. Given the current environment due to the COVID-19 pandemic, there is an acute need for virtual workplace collaboration. For the period ended September 30, 2021, Virbela continues to see growing demand from organizations exploring remote and hybrid operating models, including global Fortune-2000 firms with the need to connect distributed teams. As a result, Virbela continues to invest in product and infrastructure improvements, along with new feature development. Lastly, we expect to continue to service existing and new business-to-business enterprise-level contracts in the coming year.
Affiliated Services
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. We anticipate continued growth and investment in these service offerings through 2021; however, actual performance will depend directly on utilization by eXp Realty agents and brokers and the on-going and fluctuating government implemented restrictions due to the COVID-19 pandemic. Overall, these services are de minimis to our overall operations.
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Results of Operations
Three Months Ended September 30, 2021 compared to the Three Months Ended September 30, 2020
Three Months Ended
% of
Three Months Ended
% of
Change
2021 vs. 2020
September 30, 2021
Revenue
September 30, 2020
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 1,110,480
100%
$ 564,017
100%
$ 546,463
97%
Operating expenses
Commissions and other agent-related costs
1,030,937
93%
517,169
92%
513,768
99%
General and administrative expenses
64,615
6%
30,130
5%
34,485
114%
Sales and marketing expenses
3,761
-%
1,495
-%
2,266
152%
Total operating expenses
1,099,313
99%
548,794
97%
550,519
100%
Operating income
11,167
1%
15,223
3%
(4,056)
(27)%
Other expense
Other expense, net
239
-%
80
-%
159
199%
Equity in losses of unconsolidated affiliates
(2)
-%
-
-%
(2)
N/A
Other expense, net
237
-%
80
-%
157
196%
Income before income tax expense
10,930
1%
15,143
3%
(4,213)
(28)%
Income tax (benefit) expense
(12,884)
(1)%
225
-%
(13,109)
(5,826)%
Net income
23,814
2%
14,918
3%
8,896
60%
Add back: Net loss attributable to noncontrolling interest
7
-%
52
-%
(45)
(87)%
Net income attributable to eXp World Holdings, Inc.
23,821
2%
14,970
3%
8,851
59%
Adjusted EBITDA (1)
$ 23,054
2%
$ 21,818
4%
$ 1,236
6%
Earnings per share
Basic
$ 0.16
$ 0.11
$ 0.05
45%
Diluted
$ 0.15
$ 0.10
$ 0.05
50%
Weighted average shares outstanding
Basic
146,862,978
138,513,465
Diluted
157,345,924
150,917,721
(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. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S. GAAP Financial Measures.”
Revenue
Our total revenues were $1.1 billion for the three months ended September 30, 2021 compared to $564.0 million for the same period in 2020, an increase of $546.5 million, or 97%. Total revenues increased for the third 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 $359 during the three months ended September 30, 2021 from $313 for the same period in 2020.
Commission and Other Agent Related Costs
Commission and other agent-related costs were $1.0 billion for the three months ended September 30, 2021 compared to $517.2 million for the same period in 2020, an increase of $513.8 million, or 99%. Commissions and other agent related costs increased as a result of an increase in our agent count and closed transactions compared to the same period in 2020. Rising home prices and increased demand also contributed to agents reaching their commission capping requirements sooner, entitling them to a higher percentage of the home sale commission.
General and Administrative Expense
General and administrative expenses were $64.6 million for the three months ended September 30, 2021 compared to $30.1 million for the same period in 2020, an increase of $34.5 million or 114%. General and administrative expenses include costs related to wages,
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including stock compensation, and other general overhead expenses. General and administrative expenses increased primarily as a result of an increase of $21.3 million in compensation and personnel related expenses including salaries, employee benefits, and payroll taxes and payroll processing fees, an increase of $3.3 million in computer and software expenses, and an increase of $4.7 million in stock compensation expense. These increased costs are a result of the Company’s growth in agent count and real estate transaction volumes, and the investment of employee and technology in supporting the growth in 2021.
Sales and Marketing
Sales and marketing expenses increased to $3.8 million for the three months ended September 30, 2021 compared to $1.5 million the same period in 2020. This is due to an increase of $1.2 million in advertising as we continue to expand our real estate operations and software services.
Other Expense
There were no significant changes in other expense for the three months ended September 30, 2021 compared to the same period in 2020.
Income Tax Benefit (Expense)
The Company’s provision for (benefit from) income taxes amounted to ($12.9) million and $0.2 million for the three months ended September 30, 2021 and 2020, respectively, which represented effective tax rates of negative 117.90% and 1.38%, respectively. The increase in income tax benefit was primarily attributable to the release of the valuation allowance and higher deductible stock-based compensation.
Nine Months Ended September 30, 2021 compared to the Nine Months Ended September 30, 2020
Nine Months Ended
% of
Nine Months Ended
% of
Change
2021 vs. 2020
September 30, 2021
Revenue
September 30, 2020
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 2,694,200
100%
$ 1,188,963
100%
$ 1,505,237
127%
Operating expenses
Commissions and other agent-related costs
2,481,254
92%
1,079,739
91%
1,401,515
130%
General and administrative expenses
171,636
6%
82,145
7%
89,491
109%
Sales and marketing expenses
8,701
-%
3,326
-%
5,375
162%
Total operating expenses
2,661,591
99%
1,165,210
98%
1,496,381
128%
Operating income
32,609
1%
23,753
2%
8,856
37%
Other expense
Other expense, net
159
-%
129
-%
30
23%
Equity in losses of unconsolidated affiliates
5
-%
34
-%
(29)
(85)%
Total other expense, net
164
-%
163
-%
1
1%
Income before income tax expense
32,445
1%
23,590
2%
8,855
38%
Income tax (benefit) expense
(33,258)
(1)%
295
-%
(33,553)
(11,374)%
Net income
65,703
2%
23,295
2%
42,408
182%
Add back: Net loss attributable to noncontrolling interest
14
-%
115
-%
(101)
(88)%
Net income attributable to eXp World Holdings, Inc.
65,717
2%
23,410
2%
42,307
181%
Adjusted EBITDA (1)
$ 64,857
2%
$ 41,193
3%
$ 23,664
57%
Earnings per share
Basic
$ 0.45
$ 0.17
$ 0.28
165%
Diluted
$ 0.42
$ 0.16
$ 0.26
163%
Weighted average shares outstanding
Basic
145,610,008
135,207,101
Diluted
157,838,134
147,091,720
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(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. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S. GAAP Financial Measures.”
Revenue
Our total revenues were $2.7 billion for the nine months ended September 30, 2021 compared to $1.2 billion for the same period in 2020, an increase of $1.5 billion, or 127%. Total revenues increased for the nine month period 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 $348 during the nine months ended September 30, 2021 from $303 for the same period in 2020.
Commission and Other Agent Related Costs
Commission and other agent-related costs were $2.5 billion for the nine months ended September 30, 2021 compared to $1.1 billion for the same period in 2020, an increase of $1.4 billion, or 130%. Commissions and other agent related costs increased as a result of an increase in our agent count and closed transactions compared to the same period in 2020. Rising home prices and increased demand also contributed to agents reaching their commission capping requirements sooner, entitling them to a higher percentage of the home sale commission.
General and Administrative Expense
General and administrative expenses were $171.6 million for the nine months ended September 30, 2021 compared to $82.1 million for the same period in 2020, an increase of $89.5 million or 109%. 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 $53.3 million in personnel related expenses including salaries, employee benefits, and payroll taxes and payroll processing fees, an increase of $9.1 million in computer and software expenses, and an increase of $13.2 million in stock compensation expense. These increased costs are a result of the Company’s growth in agent count and real estate transaction volumes, and the investment of employee and technology in supporting the growth in 2021.
Sales and Marketing
Sales and marketing expenses increased to $8.7 million from $3.3 million for the nine months ended September 30, 2021 compared to the same period in 2020, an increase of $5.4 million or 162%. This is due to an increase of $2.0 million in advertising and lead capture costs as we continue to expand our real estate operations and software services.
Other Expense
There were no significant changes in other expense for the nine months ended September 30, 2021 compared to the same period in 2020.
Income Tax Benefit (Expense)
The Company’s provision for (benefit from) income taxes amounted to ($33.3) million and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively, which represented an effective tax rate of negative 102.46% and 1.22%, respectively. The decrease in income tax expense was primarily attributable to the release of the valuation allowance and higher deductible stock-based compensation.
NON-U.S. GAAP FINANCIAL MEASURES
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. GAAP financial measure, to understand and evaluate our core operating performance. This non-GAAP financial measure, which may be different than similarly titled measures used by other companies, is presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S.GAAP.
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, 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
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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. GAAP measure of Adjusted EBITDA to assist investors in seeing our financial performance through the eyes of management, and because we believe this measure provides an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.
Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of Adjusted EBITDA compared to Net Income (Loss), the closest comparable U.S. GAAP measure. Some of these limitations are that:
● 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; and
● 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,
Nine Months Ended September 30,
2021
2020
2021
2020
Net income
$ 23,814
$ 14,918
$ 65,703
$ 23,295
Other expense, net
237
80
164
163
Income tax (benefit) expense
(12,884)
225
(33,258)
295
Depreciation and amortization (1)
1,694
1,005
4,511
2,785
Stock compensation expense (2)
6,817
3,711
18,129
10,476
Stock option expense
3,376
1,879
9,608
4,179
Adjusted EBITDA
$ 23,054
$ 21,818
$ 64,857
$ 41,193
(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 business acquisitions.
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, 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 September 30, 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 September 30, 2021 relating to capital expenditures, commitments, or human capital (except commissions to agents and brokers concurrent with settled real estate transactions). The cash requirements for the upcoming fiscal year relating to our leases and our debt associated with acquisitions is insignificant. 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 installment payments during 2021.
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
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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. As of September 30, 2021, our cash and cash equivalents totaled $98.1 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, 2021 and December 31, 2020:
September 30, 2021
December 31, 2020
Current assets
$ 306,141
$ 212,225
Current liabilities
(189,480)
(96,650)
Net working capital
$ 116,661
$ 115,575
For the nine months ended September 30, 2021, net working capital increased to $116.7 million, or 1%, compared to December 31, 2020 primarily due to an increase in agent and commission receivables directly related to the increase in revenue.
Cash Flows
The following table presents our cash flows for the nine months ended September 30, 2021 and 2020:
Nine Months Ended September 30,
2021
2020
Cash provided by operating activities
$ 198,413
$ 89,206
Cash used in investment activities
(13,663)
(5,651)
Cash used in financing activities
(145,144)
(16,514)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash
(60)
(129)
Net change in cash, cash equivalents and restricted cash
$ 39,546
$ 66,912
For the nine months ended September 30, 2021, cash provided by operating activities increased $109.2 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 nine months ended September 30, 2021, cash used in our investing activities increased due to higher capital expenditures and acquisition-related payments.
For the nine months ended September 30, 2021, the increase in cash flows used in financing activities primarily were related to repurchases of our common stock and payment of cash dividend, partially offset by proceeds received from the exercise of stock options.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
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. There were no changes to critical accounting policies or estimates as reflected in our 2020 Annual Report. 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.
Item 3.
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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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.