What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-02 compared with 2022-08-03 · 94 added, 91 removed, 224 unchanged (45% of the section changed)

21 unchanged sentences

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

Throughout 2021, and during the first half of 2022, we continued to make progress in achieving our strategic goals, including a 42% increase in our agent count, going from 58,263 agents as of June 30, 2021 to 82,856 agents as of June 30, 2022.

Throughout 2021, and during the first nine months of 2022, we continued to make progress in achieving our strategic goals, including a 30% increase in our agent count, going from 65,269 agents as of September 30, 2021 to 84,911 agents as of September 30, 2022.

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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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 June 30, 2022, the effects of the COVID-19 pandemic on business worldwide have lessened, however the global economy continues to recover from and adapt to the COVID-19 pandemic.

As COVID-19 continues to be contained and the impact of the pandemic wanes, the economy is expected to rebound as public health restrictions on businesses and individuals are lifted and as people become comfortable engaging in public activities.

According to the National Association of Realtors (“NAR”), as of 2021, the housing market was the strongest it had been in 15 years, however during the first six months of 2022, activity in the housing market has slowed.

For the period ended September 30, 2022, the effects of the COVID-19 pandemic on business worldwide have lessened, and the global economy continues to recover from the COVID-19 pandemic and has begun to experience elements of inflation.

As the impact of the COVID-19 pandemic wanes, the U.S.

economy has experienced inflationary pressures and has begun to slowdown, including contraction in certain real estate markets.

According to the National Association of Realtors (“NAR”), as of 2021, the housing market was the strongest it had been in 15 years, however during the first nine months of 2022, activity in the housing market has slowed.

Due to a rise in interest rates and home prices in a short span of time, housing affordability continues to impact potential home buyers.

According to the NAR housing statistics, existing home sales, adjusted for seasonality, further decreased in June 2022 to an adjusted annual rate of 5.1 million, down 14.2% from one year ago while the median home sale price increased to $416.0 (preliminary), or 13.4% from June 2021.

As of June 30, 2022, housing inventory increased to 1.26 million, a 3.0-month supply, compared to a 2.5-month supply a year ago.

The NAR reported that pending home sales declined 8.6% from May to June.

According to the Fannie Mae data, existing home sales, adjusted for seasonality, further decreased in the third quarter of 2022 to an adjusted annual rate of 4.7 million, down 22.1% from one year ago while the median home sale price increased to $319.5 (preliminary), or 13.6% from September 2021.

As of August 31, 2022, housing inventory increased to 1.28 million, a 3.1-month supply, compared to a 2.4-month supply a year ago.

The NAR reported that pending home sales declined 2.0% from July to August.

Year over year, however, contract activity has also decreased, primarily related to rising interest rates.

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The Company is positioned to grow during fluctuations in economic activity.

The Company continued its growth trajectory during the first six months of 2022 with a year-over-year increase in revenue of 53% and an increase in agent count of 42%.

The Company continued its growth trajectory during the first nine months of 2022 with a year-over-year increase in revenue of 36% and an increase in agent count of 30%.

However, the Company continues to monitor the overall economic climate, specifically in key areas of operations, affecting the real estate market through the end of 2022.

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National Housing Inventory

Throughout 2022, increased mortgage interest rates and higher home prices have caused inventory levels to rise.

Throughout 2022, increased mortgage interest rates and higher home prices have caused inventory levels (as measured in months of supply) to rise.

Construction of new homes continues to slow also due to rising mortgage rates, and the strained availability of labor and materials.

Despite these factors, and others, year-over-year inventory has increased.

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

was 1.3 million as of June 2022 (preliminary) compared to 1.2 million at the end of June 2021.

was 3.1 months as of September 2022 (preliminary) compared to 2.4 months at the end of September 2021.

Mortgage Interest Rates

The sharp increase in mortgage rates have begun to negatively impact the demand for homebuying.

As stated in a recent NAR publication, the average rate for a 30-year, conventional, fixed rate mortgage was 5.5% in June vs 3.0% in all of 2021 based on Freddie Mac data.

Based on Freddie Mac data, the average rate for a 30-year, conventional, fixed rate mortgage was 6.7% in September 2022 vs 3.0% in September 2021.

Housing Affordability Index

According to NAR, the composite housing affordability index decreased to 102.5 for May 2022 (preliminary) from 148.2 for May 2021.

The housing affordability index levels are continuing to decline.

According to NAR, the composite housing affordability index decreased to 104.4 for August 2022 (preliminary) from 145.6 for August 2021.

The housing affordability index levels are continuing to decline on a year over year basis, but increased month over month in July and August 2022 (preliminary).

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 has been declining over the last several months due to increasing mortgage rates and low inventory levels driving increases in the average home price.

The favorable housing affordability index has been declining year over year over the last several months due to increasing mortgage rates and low inventory levels driving increases in the average home price.

Home Sales Transactions

According to NAR, seasonally adjusted existing home sale transactions decreased to an annual rate of 5.1 million in June 2022 (preliminary) compared to 6.0 million for 2021.

According to NAR, the nationwide existing home sales median price for June 2022 (preliminary) was $416.0 compared to $367.0 in June 2021.

This marks 124 consecutive months of year-over-year increases, the longest-running streak on record.

According to Fannie Mae data, seasonally adjusted existing home sale transactions decreased to an annual rate of 4.7 million in September 2022 (preliminary) compared to 6.1 million in September 2021.

According to Fannie Mae data, the nationwide existing home sales median price for 2022 (preliminary) was $319.5 compared to $281.3 in September 2021.

KEY BUSINESS METRICS

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

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands, except transactions and agent count)

$ 149,666,700

$ 111,248,926

Gross margin (%)

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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.

During 2020 and 2021, we expanded operations to the South Africa, India, Mexico, Portugal, France, Puerto Rico, Brazil, Italy, Hong Kong, Colombia, Spain, Israel, Panama and Germany.

In 2022, the Company has expanded into The Dominican Republic, Greece, and New Zealand.

During 2020 and 2021, we expanded operations to South Africa, India, Mexico, Portugal, France, Puerto Rico, Brazil, Italy, Hong Kong, Colombia, Spain, Israel, Panama and Germany.

In 2022, the Company has expanded into The Dominican Republic, Greece, New Zealand, Chile, and Poland.

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.

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

For the three months ended June 30, 2022 and 2021, gross profit was $107.3 million, and $79.9 million, respectively.

For the three months ended June 30, 2022, and 2021, gross margin was 7.6% and 8.0%, respectively.

For the six months ended June 30, 2022 and 2021, gross profit was $190.7 million, and $133.4 million, respectively.

For the six months ended June 30, 2022, and 2021, gross margin was 7.9% and 8.4%, respectively.

For the three months and six months ended June 30, 2022, gross profit increased year-over-year due to significant revenue growth related to increases in real estate transactions.

However, for the three months and six months ended June 30, 2022, 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.

For the three months ended September 30, 2022 and 2021 gross profit was $93.1 million, and $79.5 million, respectively.

For the three months ended September 30, 2022, and 2021, gross margin was 7.5% and 7.2%, respectively.

For the nine months ended September 30, 2022 and 2021, gross profit was $283.8 million, and $212.9 million, respectively.

For the nine months ended September 30, 2022 and 2021, gross margin was 7.7% and 7.9%, respectively.

For the three months and nine months ended September 30, 2022, gross profit continued to increase year-over-year due to significant revenue growth related to increases in real estate transactions.

However, for the three months ended September 30, 2022, gross margin increased year-over-year primarily due to increased transactions with a lower increase in commissions and agent-related costs due to a lower percentage of agents reaching their commission capping requirements, entitling them to a lower percentage of the home sale commission.

For the nine months ended September 30, 2022, 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 agents 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 six months ended June 30, 2022 compared to the same period in 2021 due to our revenue growth and improved leverage of our cost structure.

Adjusted EBITDA has declined for the nine months ended September 30, 2022 compared to the same period in 2021 due to higher operating costs partially offset by increased revenue.

RECENT BUSINESS DEVELOPMENTS

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

During the first and second quarter of 2022 we have commenced operations in The Dominican Republic, Greece, and New Zealand.

During the first nine months of 2022, we have commenced operations in The Dominican Republic, Greece, New Zealand, Chile, and Poland.

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

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

Recent Acquisition

On July 1, 2022, the Company acquired Zoocasa Realty Inc.

Zoocasa is a consumer real estate research portal that offers proprietary home search tools, market insights and a connection to local real estate experts.

Agent and Employee Experience

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An NPS above 50 is considered excellent.

The Company’s agent NPS was 68 in the second quarter of 2022.

The Company’s agent NPS was 71 in the third quarter of 2022.

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

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however, actual performance will depend largely on utilization by eXp and non eXp Realty agents.

In July of 2021, the Company formed SUCCESS Lending, LLC (“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 mortgage services and products to customers.

Results of Operations

Three Months Ended June 30, 2022 compared to the Three Months Ended June 30, 2021

Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021

Three Months Ended

June 30, 2022

June 30, 2021

September 30, 2022

September 30, 2021

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

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Other expense

Other (income) expense, net

Equity in losses of unconsolidated affiliates

Other expense, net

Income before income tax expense

Income tax (benefit) expense

Equity in (income) losses of unconsolidated affiliates

Other expense, net

Income (loss) before income tax expense

Income tax benefit

Net loss attributable to noncontrolling interest

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GAAP Financial Measures.”

Our total revenues were $1,415.1 million for the three months ended June 30, 2022 compared to $999.9 million for the same period in 2021, an increase of $415.2 million, or 42%.

Total revenues increased for the second quarter of 2022 primarily as a result of an increase in real estate brokerage commissions, which is directly attributable to increases in our agent count, closed transactions and rising home price compared to the same period in 2021.

Our total revenues were $1,239.0 million for the three months ended September 30, 2022 compared to $1,110.5 million for the same period in 2021, an increase of $128.5 million, or 12%.

Total revenues increased for the third quarter of 2022 primarily as a result of an increase in real estate brokerage commissions, which is directly attributable to increases in our agent count, closed transactions and rising home price compared to the same period in 2021.

Commission and Other Agent-Related Costs

Commission and other agent-related costs were $1,307.8 million for the three months ended June 30, 2022 compared to $920.0 million for the same period in 2021, an increase of $387.8 million, or 42%.

Commission and other agent-related costs were $1,145.9 million for the three months ended September 30, 2022 compared to $1,030.9 million for the same period in 2021, an increase of $114.9 million, or 11%.

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 2021.

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 $91.4 million for the three months ended June 30, 2022 compared to $60.7 million for the same period in 2021, an increase of $30.7 million or 51%.

General and administrative expenses were $89.5 million for the three months ended September 30, 2022 compared to $64.6 million for the same period in 2021, an increase of $24.8 million or 38%.

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 $19.6 million in compensation and personnel related expenses including salaries, employee benefits, and payroll taxes and, an increase of $3.9 million in expenses, primarily driven by agent related seminars and conferences, an increase of $1.7 million in computer and software expenses, and an increase of $3.9 million in stock compensation expense.

General and administrative expenses increased primarily as a result of an increase of $18.8 million in compensation and personnel related expenses including salaries, employee benefits, and payroll taxes and, an increase of $1.9 million in expenses, primarily driven by agent-related seminars and conferences, and an increase of $2.5 million in computer and software expenses.

These increased costs are a result of the Company’s growth in agent count and real estate transaction volumes, and the investment in employees and technology to support continued growth.

Sales and Marketing

Sales and marketing expenses increased to $4.2 million for the three months ended June 30, 2022 compared to $2.7 million the same period in 2021.

The increase of $1.5 million is due to increased advertising as we continue to expand our real estate operations and software services.

Sales and marketing expenses decreased to $3.6 million for the three months ended September 30, 2022 compared to $3.8 million the same period in 2021.

The decrease of ($0.1) million is due to decreased advertising to offset the beginning of the contraction in the real estate market.

Other Expense

There were no significant changes in other expense for the three months ended June 30, 2022 compared to the same period in 2021.

Income Tax Benefit (Expense)

The Company’s provision for income taxes amounted to $1.66 million expense and ($20.6) million benefit for the three months ended June 30, 2022 and 2021, respectively, which represent an effective tax rates of positive 15.16% and negative 125.8%, respectively.

The decrease in income tax benefit was primarily attributable to release of the valuation allowance in 2021.

Six Months Ended June 30, 2022 compared to the Six Months Ended June 30, 2021

Six Months Ended

June 30, 2022

June 30, 2021

There were no significant changes in other expense for the three months ended September 30, 2022 compared to the same period in 2021.

Income Tax Benefit

The Company’s provision for income taxes amounted to ($4.63) million expense and ($12.89) million benefit for the three months ended September 30, 2022 and 2021, respectively, which represent an effective tax rates of positive 2,055.8% and negative 117.9%, respectively.

The decrease in income tax benefit was primarily attributable to lower tax benefit from operations and lower deductible stock-based compensation in 2022.

Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021

Nine Months Ended

September 30, 2022

September 30, 2021

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

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Operating income

Other (income) expense, net

Equity in losses of unconsolidated affiliates

Other expense

Other expense, net

Equity in (income) losses of unconsolidated affiliates

Total other (income) expense, net

Income before income tax expense

Income tax (benefit) expense

Income (loss) before income tax expense

Income tax benefit

Net loss attributable to noncontrolling interest

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GAAP Financial Measures.”

Our total revenues were $2,425.8 million for the six months ended June 30, 2022 compared to $1,583.7 million for the same period in 2021, an increase of $842.1 million, or 53%.

Total revenues increased for the first six months of 2022 primarily as a result of an increase in real estate brokerage commissions, which is directly attributable to increases in our agent count, closed transactions and rising home price compared to the same period in 2021.

Our total revenues were $3,664.8 million for the nine months ended September 30, 2022 compared to $2,694.2 million for the same period in 2021, an increase of $970.6 million, or 36%.

Total revenues increased for the first nine months of 2022 primarily because of an increase in real estate brokerage commissions, which is directly attributable to increases in our agent count, closed transactions and rising home price compared to the same period in 2021.

Commission and Other Agent-Related Costs

Commission and other agent-related costs were $2,235.1 million for the six months ended June 30, 2022 compared to $1,450.3 million for the same period in 2021, an increase of $784.8 million, or 54%.

Commission and other agent-related costs were $3,380.9 million for the nine months ended September 30, 2022 compared to $2,481.3 million for the same period in 2021, an increase of $899.7 million, or 36%.

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 2021.

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 $166.7 million for the six months ended June 30, 2022 compared to $107.0 million for the same period in 2021, an increase of $59.7 million or 56%.

General and administrative expenses were $256.2 million for the nine months ended September 30, 2022 compared to $171.6 million for the same period in 2021, an increase of $84.5 million or 49%.

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

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computer and software expenses, and an increase of $6.0 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 in employee and technology to support continued growth

These increased costs are a result of the Company’s investment in employee and technology to support continued growth of our agents and real estate transaction volume.

Sales and Marketing

Sales and marketing expenses increased to $7.9 million for the six months ended June 30, 2022 compared to $4.9 million the same period in 2021.

The increase of $3.0 million is due to increased advertising as we continue to expand our real estate operations and software services.

Sales and marketing expenses increased to $11.5 million for the nine months ended September 30, 2022 compared to $8.7 million the same period in 2021.

The increase of $2.8 million in sales and marketing was due to continued expansion of our real estate operations and software services, however, we tempered our marketing expenses in the third quarter of 2022, due to the slow-down in real estate transactions.

Other Expense

There were no significant changes in other expense for the six months ended June 30, 2022 compared to the same period in 2021.

Income Tax Benefit (Expense)

The Company’s provision for (benefit from) income taxes amounted to ($3.49) million and ($20.4) million for the six months ended June 30, 2022 and 2021, respectively, which represent an effective tax rate of negative 23.81% and 95.1%, respectively.

The decrease in income tax benefit was primarily attributable to the release of the valuation allowance in 2021 and lower deductible stock based compensation in 2022.

There were no significant changes in other expense for the nine months ended September 30, 2022 compared to the same period in 2021.

Income Tax Benefit

The Company’s provision for benefit from income taxes amounted to ($8.12) million and ($33.26) million for the nine months ended September 30, 2022 and 2021, respectively, which represent an effective tax rate of negative 56.2% and 102.5%, respectively.

The decrease in income tax benefit was primarily attributable to the release of the valuation allowance in 2021, lower Pretax from operations and lower deductible stock-based compensation in 2022.

GAAP FINANCIAL MEASURES

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GAAP financial measure, for each of the periods presented:

Three Months Ended June 30,

Six Months Ended June 30,

Other (income) expense, net

Income tax (benefit) expense

Three Months Ended September 30,

Nine Months Ended September 30,

Other expense, net

Income tax benefit

Depreciation and amortization (1)

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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.

In addition, in July 2022, the Company used $9.7 million of cash, net of cash acquired, to purchase Zoocasa.

Our current capital deployment strategy for 2022 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 June 30, 2022, the Company is party to off-balance sheet arrangements, see Note 11 – Commitments and Contingencies for details of these arrangements.

In addition, the Company has no known material cash requirements as of June 30, 2022, relating to capital expenditures, commitments, or human capital (except as passthrough commissions to agents and brokers concurrent with settled real estate transactions).

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

As of September 30, 2022, the Company is party to off-balance sheet arrangements, see Note 11 – Commitments and Contingencies for details of these arrangements.

In addition, the Company has no known material cash requirements as of September 30, 2022, relating to capital expenditures, commitments, or human capital (except as passthrough commissions to agents and brokers concurrent with settled real estate transactions).

For information regarding the Company’s expected cash requirement related to settlement costs, see Note 11 – 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 is calculated as the Company’s total current assets less its total current liabilities.

The following table presents our net working capital as of June 30, 2022 and December 31, 2021:

June 30, 2022

The following table presents our net working capital as of September 30, 2022 and December 31, 2021:

September 30, 2022

December 31, 2021

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Net working capital

For the six months ended June 30, 2022, net working capital increased to $24.0 million, or 18%, compared to December 31, 2021 primarily due to an increase in agent and commission receivables directly related to the increase in revenue.

The following table presents our cash flows for the six months ended June 30, 2022 and 2021:

Six Months Ended June 30,

For the nine months ended September 30, 2022, net working capital increased $7.3 million, or 6%, compared to December 31, 2021 primarily due to an increase in agent and commission receivables directly related to the increase in revenue.

The following table presents our cash flows for the nine months ended September 30, 2022 and 2021:

Nine Months Ended September 30,

Cash provided by operating activities

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Net change in cash, cash equivalents and restricted cash

For the six months ended June 30, 2022, cash provided by operating activities decreased ($2.1) million compared to the same period in 2021.

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

For the six months ended June 30, 2022, cash used in our investing activities increased due to higher capital expenditures.

For the six months ended June 30, 2022, the increase in cash flows used in financing activities primarily were related to the payment of cash dividends in the first half of 2022 which was absent in the first half of 2021.

For the nine months ended September 30, 2022, cash provided by operating activities decreased ($11.1) million compared to the same period in 2021.

The change resulted primarily from the increased real estate transactions volume, and higher participation by our agents and brokers in our agent stock compensation programs as well as increases in our general and administrative expenses, partially offset by decrease in customer deposits.

Excluding the impact of the changes in customer deposits, operating cash flows improved in the first nine months of 2022, primarily due to increased revenue and agent equity stock compensation.

For the nine months ended September 30, 2022, cash used in our investing activities increased primarily due to increased acquisitions and capital expenditures.

For the nine months ended September 30, 2022, the increase in cash flows used in financing activities primarily were related to an increase in the payment of cash dividends from 2021 to 2022.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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-Q

Item 2. Management’s Discussion and Analysis