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 2021 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, technology 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, 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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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 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 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 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. 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 is positioned to grow during fluctuations in economic activity. 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.
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 during fluctuations in economic activity.
National Housing Inventory
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. According to NAR, inventory of existing homes for sale in the U.S. 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. 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 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 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 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.
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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,
2022
2021
2022
2021
(in thousands, except transactions and agent count)
Performance:
Agent count
84,911
65,269
84,911
65,269
Transactions
138,354
130,029
402,691
319,338
Volume
$ 50,392,432
$ 46,623,702
$ 149,666,700
$ 111,248,926
Revenue
$ 1,238,975
$ 1,110,480
$ 3,664,766
$ 2,694,200
Gross profit
93,122
79,543
283,836
212,946
Gross margin (%)
7.5%
7.2%
7.7%
7.9%
Adjusted EBITDA (1)
12,349
23,054
56,971
64,857
(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. 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. With our unique business model, we anticipate being able to continue to grow for the remainder of the year, despite the less favorable economic outlook.
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 profit and gross margin, financial statement measures based on generally accepted accounting principles in the U.S. (“U.S. GAAP”) to assess eXp’s financial performance from period to period.
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 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 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-
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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 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
Real Estate Brokerage Initiatives
Global Expansion of Our Real Estate Cloud Brokerage
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. 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
The Company has embarked on an initiative to better understand both its agents’ and employees’ experiences. 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 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?" 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.
The NPS measure is an important vehicle for delivering on our core value of transparency. While we strive for high satisfaction, it is equally important to investigate a low or unfavorable trending of NPS. As NPS scores are often leading indicators to agents and employees’ future actions, we are able to learn quickly what may be a ‘pain point’ or product that is not meeting its desired objective. 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 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. Under our equity incentive program, agents and brokers who qualify may be issued awards of shares of the Company’s common stock, and it continues to be another element in creating a culture of agent-ownership.
Our agent compensation plans represent a key level 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 at a discount.
Technology Products and 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. 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.
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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 largely on utilization by eXp and non eXp Realty agents.
Results of Operations
Three Months Ended September 30, 2022 compared to the Three Months Ended September 30, 2021
Three Months Ended
% of
Three Months Ended
% of
Change
2022 vs. 2021
September 30, 2022
Revenue
September 30, 2021
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 1,238,975
100%
$ 1,110,480
100%
$ 128,495
12%
Operating expenses
Commissions and other agent-related costs
1,145,853
92%
1,030,937
93%
114,916
11%
General and administrative expenses
89,460
7%
64,615
6%
24,845
38%
Sales and marketing expenses
3,636
-%
3,761
-%
(125)
(3)%
Total operating expenses
1,238,949
100%
1,099,313
99%
139,636
13%
Operating income
26
-%
11,167
1%
(11,141)
(100)%
Other expense
Other expense, net
(78)
-%
239
-%
(317)
(133)%
Equity in (income) losses of unconsolidated affiliates
329
-%
(2)
-%
331
(16,550)%
Other expense, net
251
-%
237
-%
14
6%
Income (loss) before income tax expense
(225)
-%
10,930
1%
(11,155)
(102)%
Income tax benefit
(4,627)
-%
(12,884)
(1)%
8,257
(64)%
Net income
4,402
-%
23,814
2%
(19,412)
(82)%
Add back: Net loss attributable to noncontrolling interest
-
-%
7
-%
(7)
(100)%
Net income attributable to eXp World Holdings, Inc.
4,402
-%
23,821
2%
(19,419)
(82)%
Adjusted EBITDA (1)
$ 12,349
1%
$ 23,054
2%
($ 10,705)
(46)%
Earnings per share
Basic
$ 0.03
$ 0.16
($ 0.13)
(81)%
Diluted
$ 0.03
$ 0.15
($ 0.12)
(80)%
Weighted average shares outstanding
Basic
151,826,315
146,862,978
Diluted
155,915,307
157,345,924
(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 $1,239.0 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.
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Commission and Other Agent-Related Costs
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.
General and Administrative Expense
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 $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 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 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.
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Nine Months Ended September 30, 2022 compared to the Nine Months Ended September 30, 2021
Nine Months Ended
% of
Nine Months Ended
% of
Change
2022 vs. 2021
September 30, 2022
Revenue
September 30, 2021
Revenue
$
%
(In thousands, except share amounts and per share data)
Statement of Operations Data:
Revenues
$ 3,664,766
100%
$ 2,694,200
100%
$ 970,566
36%
Operating expenses
Commissions and other agent-related costs
3,380,930
92%
2,481,254
92%
899,676
36%
General and administrative expenses
256,173
7%
171,636
6%
84,537
49%
Sales and marketing expenses
11,546
-%
8,701
-%
2,845
33%
Total operating expenses
3,648,649
100%
2,661,591
99%
987,058
37%
Operating income
16,117
-%
32,609
1%
(16,492)
(51)%
Other expense
Other expense, net
394
-%
159
-%
235
148%
Equity in (income) losses of unconsolidated affiliates
1,213
-%
5
-%
1,208
24160%
Total other (income) expense, net
1,607
-%
164
-%
1,443
880%
Income (loss) before income tax expense
14,510
-%
32,445
1%
(17,935)
(55)%
Income tax benefit
(8,115)
-%
(33,258)
(1)%
25,143
(76)%
Net income
22,625
1%
65,703
2%
(43,078)
(66)%
Add back: Net loss attributable to noncontrolling interest
18
-%
14
-%
4
29%
Net income attributable to eXp World Holdings, Inc.
22,643
1%
65,717
2%
(43,074)
(66)%
Adjusted EBITDA (1)
$ 56,971
2%
$ 64,857
2%
($ 7,886)
(12)%
Earnings per share
Basic
$ 0.15
$ 0.45
($ 0.30)
(67)%
Diluted
$ 0.14
$ 0.42
($ 0.28)
(67)%
Weighted average shares outstanding
Basic
150,622,845
145,610,008
Diluted
156,434,440
157,838,134
(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 $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 $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.
General and Administrative Expense
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. General and administrative expenses increased primarily as a result of an increase of $56.6 million in compensation and personnel related expenses including salaries, employee benefits, and payroll taxes and, an increase of $6.6 million in expenses, primarily driven by agent-related seminars and conferences, an increase of $6.8 million in
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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 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 $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 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.
NON-U.S. GAAP FINANCIAL MEASURES
To supplement our condensed 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 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.
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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,
2022
2021
2022
2021
Net income
$ 4,402
$ 23,814
$ 22,625
$ 65,703
Other expense, net
251
237
1,607
164
Income tax benefit
(4,627)
(12,884)
(8,115)
(33,258)
Depreciation and amortization (1)
2,767
1,694
7,154
4,511
Stock compensation expense (2)
5,800
6,817
22,828
18,129
Stock option expense
3,756
3,376
10,872
9,608
Adjusted EBITDA
$ 12,349
$ 23,054
$ 56,971
$ 64,857
(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. 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 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 capital requirements may be affected by factors which we cannot control such as the changes in the residential real estate market, interest rates, and other monetary and fiscal policy changes to the manner in which we currently operate. In order to support and achieve our future growth plans, we may need or seek advantageously to obtain additional funding through equity or debt financing. We believe that our current operating structure will facilitate sufficient cash flows from operations to satisfy our expected long-term liquidity requirements beyond the next twelve months.
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, 2022 and December 31, 2021:
September 30, 2022
December 31, 2021
Current assets
$ 320,186
$ 319,315
Current liabilities
(180,370)
(186,814)
Net working capital
$ 139,816
$ 132,501
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.
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Cash Flows
The following table presents our cash flows for the nine months ended September 30, 2022 and 2021:
Nine Months Ended September 30,
2022
2021
Cash provided by operating activities
$ 187,324
$ 198,413
Cash used in investment activities
(18,890)
(13,663)
Cash used in financing activities
(156,376)
(145,144)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash
(771)
(60)
Net change in cash, cash equivalents and restricted cash
$ 11,287
$ 39,546
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
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, 2021, which provides a description of our critical accounting policies. There were no changes to critical accounting policies or estimates as reflected in our 2021 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 2021 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, 2021. For details on the Company's interest rate and foreign currency exchange, see “Item 7A. Quantitative and Qualitative Information About Market Risks” in our 2021 Annual Report.
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.