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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-03-11 · 111 added, 148 removed, 258 unchanged (50% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to inform the reader about matters affecting the financial condition and results of operations of eXp World Holdings, Inc.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to inform the reader about material information relevant to an assessment of the financial condition and results of operations of eXp World Holdings, Inc.

and its subsidiaries for the three-year period ended December 31, 2021.

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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.

During 2020, we believe that we made progress towards achieving our strategic goals, including an increase in our agent count of 63%.

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

During 2021, we believe that we made progress towards achieving our strategic goals, including a significant increase in our agent base and real estate transactions year over year, as well as opening new business operation in nine countries.

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.

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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 increasing home sales transactions and home sales prices.

In periods of economic growth, demand typically increases resulting in higher home sales transactions and 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 year ended December 31, 2020, the COVID-19 pandemic materially and adversely affected 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 year ended December 31, 2020 has been less significant than anticipated.

For the year ended December 31, 2021, the effects of the COVID-19 pandemic on business worldwide lessened, however the full magnitude and duration of the impact from COVID-19 are not fully known and cannot be reasonably estimated as the global economy continues to recover and adapt.

The impact to the Company for the year ended December 31, 2021 has been minimal to date.

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”), 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.

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, adjusted for seasonality, totaled 6.8 million in 2020, up 22.2% from 2019 and the most annual home sales since the 2008 recession.

However, housing inventory declined to 1.07 million and a 1.9-month supply, which are both historic lows.

The NAR reported that pending home sales slipped 0.3% in December 2020, indicating a slowing in contract activity, mostly impacted by seasonally activity and inventory levels.

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 performed better than expected throughout 2020.

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 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.

According to the National Association of Realtors (“NAR”), the housing market is the strongest it has been in 15 years and the economy has recovered from the initial downturn during the beginnings of the COVID-19 pandemic in 2021.

Due to the low interest rate environment and continued increase in demand for homes, the market has expanded significantly.

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

These low mortgage rates, which are the lowest in recent history, are allowing more buyers to enter the market.

According to the NAR housing statistics, existing home sales, adjusted for seasonality, totaled 6.2 million in 2021, down 7.1% from 2020 and the most annual home sales since 2006.

However, at the end of December 2021, housing inventory declined to 910,000 and a 1.8-month supply, which are both historic lows.

The NAR reported that pending home sales fell 3.8% in December 2021, indicating a slowing in contract activity, mostly impacted by inventory levels.

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

The Company performed well throughout 2021 and is well positioned for continued growth.

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 of the COVID-19 pandemic will have on our Company moving into 2022.

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 prosper in a series of fluctuations in economic activity.

National Housing Inventory

Prior to December 31, 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.

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

In 2021, supply chain constraints including delays in sourcing building materials and labor shortages resulted in slowed construction of new homes.

These tightened supply conditions, when coupled with elevated housing demand due to low interest rates, caused inventory levels to decline to record lows.

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

was 1.1 million as of December 2020 (preliminary) compared to 1.4 million at the end of December 2019.

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

was 910,000 at the end of December 2021 compared to 1,060,000 at the end of December 2020.

The NAR indicated the need for new home construction due to the high demand of homes and the record-low inventory levels, and noted supply chain bottlenecks are expected to ease in 2022.

Mortgage Rates

According to the NAR, mortgage rates on commitments for 30-year, conventional, fixed-rate mortgages averaged 3.1% for the 2020, compared to 3.9% for 2019.

Mortgage rates are forecasted to decrease to 3.0% throughout 2021 and increase minimally to 3.4% in 2022.

Mortgage rates are expected to remain low through 2021.

According to the NAR, mortgage rates on commitments for 30-year, conventional, fixed-rate mortgages averaged 3.0% in 2021, compared to 3.1% for 2020.

Mortgage rates are expected to remain low through 2022 but are forecasted to increase to an average of 3.6% for 2022.

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

Housing Affordability Index

According to the NAR, the composite housing affordability index increased to 171.8 for December 2020 (preliminary) from 167.2 for December 2019.

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

According to the NAR, the composite housing affordability index decreased to 147.8 for December 2021 (preliminary) from 172.5 for December 2020.

Although home prices have increased, 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 percent down payment and ability to qualify for a mortgage.

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Existing Home Sales Transactions and Prices

According to the NAR, seasonally adjusted existing home sale transactions for the year ended December 2020 (preliminary) increased to 6.8 million compared to 5.5 million for the year ended December 2019.

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

According to the NAR, nationwide existing home sales average price for December 2020 (preliminary) was $309 compared to $275 in December 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.

According to the NAR, seasonally adjusted existing home sale transactions for the year ended December 2021 (preliminary) decreased to 6.2 million compared to 6.7 million for the year ended December 2020.

The NAR anticipates transactions to decrease slightly in 2022 due to higher mortgage rates.

According to the NAR, nationwide existing home sales average price for December 2021 (preliminary) was $358,000, up 15.8% from $309,200 in December 2020.

Due to high demand and modest expected increase in supply, the average sale price is expected to increase through 2022.

However, it is still too early to predict the extent of the effects of the ongoing COVID-19 pandemic will have on the economy and 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:

The following table outlines the key business metrics that we periodically review to track the Company’s performance:

Year Ended December 31,

(Dollar amounts in thousands)

(in thousands, except transactions and agent count)

$ 156,101,836

Gross profit ($)

Gross margin (%)

Adjusted EBITDA (1)

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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.

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

In the fourth quarter of 2019, we expanded operations to the U.K.

and Australia.

By the end of 2020, the Company expanded into other countries, including Mexico, South Africa, France, India, and Portugal.

During 2020, we expanded operations to the South Africa, India, Mexico, Portugal and France.

By the end of 2021, the Company expanded into other countries, including 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 actions taken by our competitors and macroeconomic factors affecting the real estate industry in general.

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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 measures based on generally accepted accounting principles in the U.S.

We utilize gross profit and gross margin, financial statement measures based on generally accepted accounting principles in the 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.

Gross profit is calculated from U.S.

GAAP reported amounts and equals the difference between revenue and cost of sales.

Gross margin is the calculation of 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.

Gross profit 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 years ended December 31, 2021, 2020 and 2019, gross profit was $296.0 million, $159.6 million, and $84.1 million, respectively.

The gross profit increased year-over-year due to significant growth of real estate transaction volumes.

For the years ended December 31, 2021, 2020 and 2019, gross margin was 7.8%, 8.9% and 8.6%, respectively.

Gross margin has improved each year due to efforts to improve our cost structure, including lower revenue share costs relative to total revenue and the reduction of the discount for shares issued under our agent equity program effective January 1, 2020.

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

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.

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 years ended December 31.

2020, 2019, and 2018 due to our revenue growth and improvements in our cost structure.

Adjusted EBITDA has grown significantly for the years ended December 31, 2021, 2020 and 2019 due to our revenue growth and improvements in our cost structure.

RECENT BUSINESS DEVELOPMENTS

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

In 2020, the Company continued its international expansion into France, India, Mexico, Portugal and South Africa.

Throughout 2021, the Company initiated operations in Puerto Rico, Brazil, Italy, Hong Kong, Colombia, Spain, Israel, Panama and Germany.

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

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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 of transparency.

The NPS measure is an important vehicle for delivering on our core values of transparency.

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

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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.

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

Agent Ownership

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Technology Products and Services

We continue developing the core Virbela software platform and its underlying infrastructure through our subsidiary, eXp World Technologies, LLC (“World Tech”), 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 workplace collaboration.

For the year ended December 31, 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.

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 all of 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 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 continue developing the core Virbela enterprise metaverse technology through our subsidiary, eXp World Technologies, LLC (“World Tech”), to accommodate for the increasing use and scale required to support all eXp subsidiaries and a growing number of enterprise customers worldwide.

Upon Facebook's announcement to shift its name to Meta, Virbela has seen increased interest from Fortune 2000 enterprises looking to become both customers and partners as they invest in metaverse technologies and build out their own strategies.

Enterprise readiness was a core product focus in 2021 (e.g., scale, reliability, security, and privacy).

In 2021, Virbela

also released a new product called Frame into beta.

Frame is a metaverse collaboration technology that is accessible from any device with a browser (e.g., mobile, personal computer, virtual reality device, tablet).

In 2022, we expect to continue to service existing and new business-to-business enterprise level contracts, solidify channel partnerships, and bring the Frame product out of beta.

Affiliate and Media Services

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

These affiliate and media 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 2022;

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.

On December 4, 2020, the Company acquired all of the equity ownership interests in Success Enterprises LLC (“Success”) and its related media properties, including SUCCESS ® print magazine, SUCCESS.com, SUCCESS ® newsletters, podcasts, digital training courses and affiliated social media accounts across platforms for cash consideration of $8.0 million.

With the addition of Success, eXp intends to blend its technology and content to enhance the personal development platform for entrepreneurs and sales professionals.

however, actual performance will depend directly on utilization by eXp Realty agents.

In July of 2021, the Company formed SUCCESS Lending, a residential lending joint venture with Kind Partners, LLC, a subsidiary of Kind Lending, LLC.

With the formation of SUCCESS Lending, the Company intends to provide more enhanced services and products to customers.

RESULTS OF OPERATIONS

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Total operating expenses

Operating income (loss)

Operating income

Other expense, net

Income (loss) before income tax expense

Income tax expense

Net income (loss)

Equity in losses of unconsolidated affiliates

Total other expense, net

Income before income tax expense

Income tax (benefit) expense

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 (2)

Earnings per share (2)

Weighted average shares outstanding

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(2) Earnings per share and weighted average shares outstanding have been adjusted for the impact of the two-for-one stock split in the form of a stock dividend effected on February 12, 2021 (the “Stock Split”) for all periods presented.

Our total revenues were $1,798.3 million in 2020 compared to $979.9 million in 2019, an increase of $818.3 million, or 84%.

Total revenues increased primarily as a result of higher volume of real estate brokerage commissions, which is directly related to our increase in agent count of 63% compared to 2019.

Higher average home sales price also contributed to the increase of revenue marginally.

Our total revenues were $3.8 billion in 2021 compared to $1.8 billion in 2020, an increase of $2.0 billion, or 110%.

Total revenues increased primarily as a result of higher volume of real estate brokerage commissions, which is primarily attributable to growth in agent base and increased home sales prices.

Commission and Other Agent Related Costs

Commission and other agent-related costs were $1,638.7 million in 2020 compared to $895.9 million in 2019, an increase of $742.8 million, or 83%.

Commission and other agent-related costs were $3.5 billion in 2021 compared to $1.6 billion in 2020, an increase of $1.8 billion, or 112%.

Commission and other agent related costs include sales commissions paid and are reduced by agent related fees.

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The Company had an increase in stock compensation expense of $15.6 million.

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

These increases are a direct result of the Company’s increase in employee count.

Employees increased from 900 in 2020 to 1,669 in 2021, representing growth in headcount of 85%.

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Sales and marketing costs include lead capture costs and promotional materials.

Sales and marketing expenses increased primarily as a result of an increase in advertising costs of $0.7 million.

Sales and marketing expenses increased primarily as a result of an increase in lead costs of $1.2 million, internet advertising costs of $3.0 million, and advertising costs of $2.1 million.

Other Expense, Net

Other expense includes amortization expense of the present value adjustment to our stock payable and start-up costs.

Other expense includes start-up costs and amortization expense of the present value adjustment to our stock payable.

There were no significant changes in other expense in 2021 compared to 2020.

Income Tax Benefit (Expense)

The Company’s provision for income taxes amounted to $0.4 million, a decrease of $0.1 million, or 17%, for the year ended December 31, 2020 compared to the same period in 2019.

The decrease in income tax expense was primarily attributable to the geographic mix of earnings.

Higher deductible share-based compensation expenses represented most of the decrease in effective tax rate, partially offset by the change in valuation allowance on deferred tax assets and higher state taxes incurred in 2020 compared to 2019.

The Company’s provision for income taxes amounted to a benefit of $47.5 million, a benefit increase of $47.9 million for the year ended December 31, 2021.

The increase in income tax benefit was primarily attributable to the release of the valuation allowance and higher deductible share-based compensation expenses.

Refer to Critical Accounting Policies and Estimates within this MD&A and Note 12 – Income Taxes to the consolidated financial statements for further information.

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As of December 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 December 31, 2020 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.

In addition to, the Company has no known material cash requirements as of December 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 legal settlement costs.

For information regarding the Company’s expected cash requirement related to leases, see Note 9 – Leases to the consolidated financial statements.

Cash requirements associated with our acquisitions include a $0.5 million cash payment related to the principal amount of promissory notes issued to the previous owners of Showcase and a $1.0 million payment of cash or common stock of the Company to the previous owners of Virbela both due in 2021.

A final cash payment of $1.0 million for the settlement of the promissory notes issued to the previous owners of Showcase will be due in 2022.

For information regarding the Company’s expected cash requirement related to settlement costs, see Note 13 – Commitments and Contingencies.

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 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.

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Net working capital

As of December 31, 2020, net working capital increased $78.7 million, or 214%, compared to the comparable prior year period, primarily due to an increase in cash and cash equivalents of $60.1 million and accounts receivable of $48.8 million resulting from pending real estate transactions.

In correlation to the number of pending real estate transactions, accrued expenses increased $31.7 million, which included higher commissions payable of $20.7 million.

As of December 31, 2021, net working capital increased $16.9 million, or 15%, compared to the prior year period, primarily due to an increase in cash and cash equivalents of $8.1 million and accounts receivable of $56.5 million resulting from increased real estate transactions.

In correlation to the number of real estate transactions, accrued expenses increased $48.9 million, which included higher commissions payable of $25.2 million.

The change in working capital is also due to an increase in legal contingencies of $10.4 million.

The following table presents our cash flows for the periods presented:

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For the year ended December 31, 2021, cash provided by operating activities increased $127.2 million compared to the same period in 2020.

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

The change resulted primarily from the increased volume in our real estate sales transactions, improved cost leverage, and higher participation by our agents and brokers in our agent stock compensation programs.

See Note 10 – Stockholders’ Equity to the consolidated financial statements for further details related to this program.

For the year ended December 31, 2020, cash used in our investing activities increased primarily due to higher cash used for business acquisitions of approximately $9.0 million and an increase of $1.4 million in capital expenditures.

As we continue to develop and refine our cloud-based platforms and continue to accelerate our business in innovative ways, we expect to continue to use our existing cash resources on similar expenditures for the next twelve months.

For the year ended December 31, 2020, the decrease in cash flows used in financing activities primarily related to higher proceeds received from the exercise of stock options of $4.6 million, partially offset by higher repurchases of our common stock of $2.3 million compared to the prior year period.

As we continue to scale our Company in the future and increase market share, we expect to continue invest in the business and drive strong growth in the U.S.

and international markets.

For the year ended December 31, 2021, cash used in our investing activities increased primarily due an increase of $7.0 million in capital expenditures and an increase of $3.0 million invested in unconsolidated entities in the current year offset by a decrease in payments for business acquisitions by $8.0 million from prior year.

As we continue to develop and refine our cloud-based platforms and accelerate our business in innovative ways, we expect to continue to use our existing cash resources on similar expenditures for the next twelve months.

For the year ended December 31, 2021, the cash used in financing activities primarily related to higher repurchases of our common stock of $142.6 million compared to the prior year period.

As we continue to scale our Company by investing in people, systems and processes, we expect to increase market share, agent base and real estate transactions volume in the US and Canada and selectively grow in the international markets.

These operating ambitions are not forecasts and do not reflect our expectations, but rather are aspirational targets for future performance that may never be realized.

These statements involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to vary materially from those expressed in them.

Factors include, among others, (i) changes in demand

for the Company’s services and changes in consumer behavior;

Factors include, among others, (i) changes in demand for the Company’s services and changes in consumer behavior;

(ii) macroeconomic conditions beyond our control;

(iii) the Company’s ability to effectively maintain its infrastructure to support its operations and initiatives;

(iv) the impact of governmental regulations related to the Company’s operations;

(iv) the impact of

governmental regulations related to the Company’s operations;

and (v) other factors, as described in this Annual Report on Form 10-K in Part II, Item 1A, “Risk Factors.”

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A hypothetical change of 10% in the accrual for estimated revenue would have impacted total revenue by approximately $1.0 million and pre-tax income by approximately $0.2 million for the year ended December 31, 2021.

Although all differences in the historical reported amounts (including the most recent fiscal year) have been immaterial, estimated revenue could materially differ from actual results and could have an adverse impact to the Company’s results of operations and financial condition.

Technology Services and Products

The Company earns a de minimis amount of subscription revenue that is derived from fees from users to access the Company’s virtual reality software platform.

The terms of our subscriptions do not provide customers the right to take possession of the software.

Subscription revenue is generally recognized ratably over the contract term.

Professional services revenue is derived from implementation and consulting services.

Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended (labor hours) input method.

Software subscription and professional services revenue accounts for approximately 1% of all revenue for each of the years ended December 31, 2020, 2019, and 2018.

Accounts receivable and expected credit losses

The Company’s accounts receivable includes agent non-commission based fees, agent short-term advances, and commissions receivable for real estate property settlements.

The majority of the Company’s accounts receivable is derived primarily from real estate property settlements, which are in-substance guaranteed because they represent commission payments on closed transactions.

The accounts receivable are typically unsecured.

The allowance for credit losses is our estimate based on identified potentially uncollectible amounts and consideration of historical experience of losses incurred.

We periodically perform detailed reviews to assess the adequacy of the allowance.

We exercise significant judgment in estimating the timing, frequency and severity of losses.

The Company uses the aging schedule method to estimate current expected credit losses (“CECL”) based on days of delinquency, including information about past events and current economic conditions.

The Company’s accounts receivable is separated into the aforementioned three categories to evaluate the allowance under the CECL impairment model.

The receivables in each category share similar risk characteristics.

The Company analyzed uncollectable accounts for the three categories of receivables and concluded that only agent non-commission based fees receivables and agent short-term advances carry any risk of expected credit losses.

Current economic conditions and forecasts of future economic conditions do not affect expected credit losses on uncollectable real estate property settlements, and the Company has no historical experience or expectation of losses related to these receivables.

A hypothetical change of 10% in expected credit losses related to agent non-commission based fees receivables and agent short-term advances would have impacted our pre-tax income by approximately $0.2 million for the year ended December 31, 2020.

Although we experienced higher rates of delinquency on agent fees and advances receivable and recognized greater expected losses during 2020, the Company typically has not experienced material uncollectible accounts (including the most fiscal recent year).

However, future experience could materially differ from historical results and could have an adverse impact to the Company’s results of operations, financial condition, and cash flows.

Business combinations and goodwill

The Company accounts for business combinations using the acquisition method of accounting, under which the consideration for the acquisition is allocated to the assets acquired and liabilities assumed.

The Company recognizes identifiable assets acquired and liabilities assumed at the fair values as of the acquisition date.

The Company recognizes identifiable assets acquired and liabilities

assumed at the fair values as of the acquisition date.

Acquisition-related costs, such as due diligence, legal and accounting fees, are expensed as incurred and not considered in determining the fair value of the acquired assets.

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Goodwill impairment

We review goodwill for impairment on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that would more likely than not indicate that the fair value of the goodwill is below its carrying value.

Goodwill is not amortized, but is subject to impairment testing.

We review goodwill for impairment on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that indicate goodwill may be impaired.

We assess goodwill for possible impairment by performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.

No additional impairment steps are necessary if we qualitatively determine that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount.

An impairment loss for goodwill would be recognized based on the difference between the carrying value and its estimated fair value, which would be determined based on either discounted future cash flows or another appropriate fair value method.

Due to the impacts of the COVID-19 pandemic on the general economy, we performed this assessment at each interim period during 2020 as well.

However, based on the Company’s performance, we believed that an impairment was remote during the year.

The evaluation of goodwill for impairment requires management to use significant judgments and estimates in accordance with U.S.

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If this were to occur, we would be required to record a non-cash charge to earnings for the write-down in the value of the goodwill, which could have a material adverse effect on our results of operations and financial position but not our cash flows from operations.

During the fourth quarter of 2020, we performed an assessment of the fair value of goodwill related to World Tech.

Due to the timing of the recent acquisitions of Showcase and Success, management did not identify any new events or changes in circumstances that would more likely than not indicate that the fair value of the goodwill acquired for each business combination is below its carrying value.

During the fourth quarter of 2021, we performed an assessment of goodwill related to our previous business acquisition.

To perform these assessments, we identified and analyzed macroeconomic conditions, industry and market conditions, and company-specific factors.

Taking into consideration these factors, we estimated the potential change in the fair value of goodwill compared with our most recent quantitative impairment test for World Tech.

Taking into consideration these factors, we determined that it was not more likely than not that the fair value of our reporting unit for which goodwill has been assigned was less than its carrying amount.

As a result of the analysis performed, management believes the estimated fair value of the reporting units continue to exceed their carrying values by a substantial margin and does not represent a more likely than not possibility of potential impairment.

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Our assumptions, judgments, and estimates relative to the value of our deferred tax assets take into account predictions of the amount and category of future taxable income.

As of December 31, 2020, based on our assessment of the realizability of the net deferred tax assets, we continue to maintain a full valuation allowance against all of our federal and state net deferred tax assets.

If our valuation allowance were released due to a change in the likelihood of our deferred tax assets as of December 31, 2020, our income tax benefit and net income would have increased by up to $22.1 million.

Management has evaluated our recent profitability trends and believes that, if current trends persist, there is a reasonable possibility that within the next 12 months, sufficient positive evidence may become available to allow us to reach the conclusion that a significant portion of the valuation allowance will no longer be needed.

Release of the valuation allowance would result in the recognition of certain DTAs and a decrease to income tax expense for the period the release is recorded.

However, the exact timing and amount of the valuation allowance to be released are subject to change based on the positive evidence, including, but not limited to, the level of expected profitability, that we are able to actually achieve in future periods.

As of December 31, 2021, based on our assessment of the realizability of the net deferred tax assets, we reached the conclusion that our net deferred tax assets will most likely be fully realized and therefore we recorded a valuation allowance release of $22.1 million, resulting in recognition of deferred tax assets and a tax benefit of the period.

Although management believes that the judgment and estimates involved are reasonable and that the necessary provisions related to income taxes have been recorded, changes in circumstances or unexpected events could adversely affect our financial position, results of operations, and cash flows.

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Due to the difficulty in estimating costs of resolving legal claims, actual costs could have a material adverse impact on our results of operations and cash flow, if we were to become a party to a material legal action.

S ee Note 13 – Commitments and Contingencies to the consolidated financial statements for further information related to our litigation.

GAAP FINANCIAL MEASURES

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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.

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.

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Year Ended December 31,

Net income (loss)

Other expense (income), net

Income tax expense

Depreciation, amortization, and impairment expenses (1)

Other expense, net

Income tax (benefit) expense

Depreciation and amortization

Stock compensation expense

1 unchanged sentence

Adjusted EBITDA

(1) Stock payable amortization is included in other expense (income).

Impairment expense relates to 2020 write off of an intangible asset related to a discontinued internally developed software project.

There were no impairment charges recognized during 2019 or 2018.

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

The primary driver for the changes in Adjusted EBITDA was improved net income attributable to the increase in revenue from the higher volume of real estate sales transactions.

During the years ended December 31, 2020 and 2019, net income increased by $40.5 million and net losses decreased by $12.9 million, respectively.

During the years ended December 31, 2021 and 2020, net income increased by $50.2 million.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis