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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-25 · 202 added, 141 removed, 228 unchanged (60% of the section changed)

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Discussions of 2020 items and comparisons between 2021 and 2020 financial results can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 (the “2021 MD&A”).

The 2020 MD&A is incorporated by reference herein from Part II, Item 7 of our Annual Report on Form 10-K dated March 11, 2021 (Commission File No.

The 2021 MD&A is incorporated by reference herein from Part II, Item 7 of our Annual Report on Form 10-K dated February 25, 2022 (Commission File No.

This MD&A is divided into the following sections:

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● Results of Operations

● Business Segment Disclosures

● Liquidity and Capital Resources

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

We operate one of the world’s fastest growing real estate brokerage businesses utilizing a cloud-based model that enables a variety of businesses to operate remotely and supported by a technology platform that allows our independent agents and brokers the ability to provide a suite of more efficient and cost-effective services to home buyers and sellers.

eXp is a diversified portfolio of service-based businesses whose operations benefit substantially from utilizing our enabling technology platform.

Effective in December 2022, the Chief Operating Decision Maker (“CODM”) began managing the business and allocating resources as four separate operating segments.

The change to business segments aligns with how the CODM assesses performance and allocates resources for the Company’s business segments.

Information provided herein reflects the impact of this change for all periods presented.

See additional information in Note 14 –Segment Information .

eXp manages its operations in four operating business segments:

North American Realty;

International Realty;

and Other Affiliated Services.

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

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

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

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

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

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

During 2022, we believe that we made progress towards achieving our strategic goals, including a 21% increase in our agent base year over year and an increase of 15% of real estate transactions year over year, as well as opening new business operations in six 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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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, 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 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.

In 2022, the existing home sales market declined 16%, according to the National Association of Realtors (“NAR”), which is the lowest the market has been since 2014.

Due to the increasing interest rates and increasing inflation, the market began a contraction trend beginning in the second quarter of 2022.

According to NAR housing statistics, existing home sales continued to decline for the 11 th straight month to a seasonally adjusted rate of 4.02 million in 2022, down 34.0% from the same period in 2021.

NAR reported that pending home sales increased by 2.5% in December 2022 compared to November 2022, after six consecutive months of decreases.

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.

The Company believes that it continues to be well positioned for growth in the current economic climate.

We have a strong base of agent support, which should drive organic market share growth, retention and productivity.

Additionally, we have an efficient operating model with lower fixed costs driven by our cloud-based model, with no brick-and-mortar locations.

Regardless of whether the housing market continues to slow or grow, we continue to 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

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.

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 970,000 at the end of December 2022 compared to 910,000 at the end of December 2021.

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 3.0% 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.

The sharp increase in mortgage rates is negatively impacting the demand for homebuying.

Based on Freddie Mac data, the average rate for a 30-year, conventional fixed rate mortgage was 6.42% in December 2022 compared to 3.1% in 2021.

As inflation continues to moderate into 2023, mortgage rates are expected to decline, which we expect to boost homebuyer demand and homebuilder sentiment.

Housing Affordability Index

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.

According to NAR, the composite housing affordability index decreased to 95.5 for December 2022 (preliminary) from 142.2 for December 2021.

As home prices and interest rates have increased, the housing affordability index has become unfavorable.

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.

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

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

The unfavorable housing affordability index is due to increased mortgage rate conditions and low inventory levels, driving increases in the average home price.

Existing Home Sales Transactions and 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.

According to NAR, seasonally adjusted existing home sale transactions for the year ended December 2022 (preliminary) decreased to 4.02 million compared to 6.09 million for the year ended December 2021.

NAR anticipates transactions to decrease slightly in 2023 due to higher mortgage rates.

According to NAR, nationwide existing home sales average price for December 2022 (preliminary) was $366,900, up 2.3% from $358,000 December 2021.

Historically, management made operating decisions and assessed performance based on product lines with three operating segments and one single reportable segment.

Effective in December of 2022, as a result of the growth in international operations and changes in the North American markets, the Company revised the presentation of segment information to align with changes to how the CODM manages the business and allocates resources as four operating segments.

The Company determines an operating segment if a component (i) engages in business activities from which it earns revenues

and incurs expenses, (ii) has discrete financial information and is (iii) regularly reviewed by the CODM, who is Glenn Sanford, Chief Executive Officer, eXp World Holdings and eXp Realty, to make decisions regarding resource allocation for the segment and assess its performance.

Once operating segments are identified, the Company performs an analysis to determine if aggregation of operating segments is applicable.

This determination is based upon a quantitative analysis of the current and historic revenues and profitability for each operating segment, together with a qualitative assessment to determine if operating segments have similar operating characteristics.

Based on this analysis, in December 2022, we determined that there are four operating segments and three reportable segments.

The CODM uses Adjusted Segment EBITDA as a key metric to evaluate the operating and financial performance of a segment, identify trends affecting the segments, develop projections and make strategic business decisions.

The Company has four reportable segments as follows:

North American Realty, International Realty and Virbela and Other Affiliated Services.

We report corporate expenses, as further detailed below, as “Corporate expenses and other.” All segments follow the same basis of presentation and accounting policies.

See Note 2 of the Notes included herein for the Company’s significant accounting policies.

Corporate expenses include costs incurred to operate the corporate parent of eXp, including expenses incurred in connection with strategic resources provided to the agents, as well as certain other centrally managed expenses that are not allocated to the operating segments, including administrative, brokerage operations and legal functions.

The following discussion focuses on the operating performance of the Company for the years ended December 31, 2022 and 2021 and the financial condition of the Company as of December 31, 2022.

KEY BUSINESS METRICS

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Year Ended December 31,

(in thousands, except transactions and agent count)

$ 187,252,204

Gross profit ($)

$ 156,101,836

Gross margin (%)

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

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

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 are key drivers 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 volume represents the total sales value for all homes bought and 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, 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.

We are continuing to expand our agent base internationally, as well.

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

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

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

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

Settled home purchases and 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.

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.

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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 (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 on our consolidated statements of comprehensive income and is an important measure of our potential profitability and brokerage performance.

For the years ended December 31, 2022, 2021 and 2020, gross profit was $366.9 million, $296.0 million and $159.6 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 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.

Gross profit increased year-over-year primarily due to growth in agent base, an increase of real estate transactions and increased home sales prices compared to 2021 For the years ended December 31, 2022, 2021 and 2020, gross margin was 8.0%, 7.8% and 8.9%, respectively.

Gross margin in 2022 increased narrowly from 2021 was primarily due to a slightly more favorable company commission of real estate transactions.

Gross margin decreased from 2020 to 2021 primarily due to rising home prices and increased demand which resulted in agents reaching their transactions 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, 2021, 2020 and 2019 due to our revenue growth and improvements in our cost structure.

For the year ended December 31, 2022, Adjusted EBITDA declined due to increased general and administrative costs resulting from the Company’s increase in employee count to continue to support our agent growth strategy and increased costs related to entering international markets.

Adjusted EBITDA has grown significantly for the years ended December 31, 2021 and 2020 due to our revenue growth and higher leverage of our cost structure.

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.

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

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

North American Realty Initiatives

The Company continues to also focus on growth in the United States and in Canada.

On July 1, 2022, the Company acquired Zoocasa.

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

This acquisition enables eXp to further its presence in Canadian markets.

The United States and Canada operations are aggregated together to be reported as the North American Realty segment, due to similarities in markets and management strategies.

International Realty Initiatives

Throughout 2022, we commenced operations in the Dominican Republic, Greece, New Zealand, Chile and Poland.

In addition, in 2022 we announced operations in Dubai, which is expected to be fully operational in 2023.

In previous years, the Company expanded internationally into France, India, Mexico, Portugal, South Africa, Puerto Rico, Brazil, Italy, Hong Kong, Colombia, Spain, Israel, Panama and Germany.

The Company continues to pursue growth opportunities and increase market share in the countries where operations began in recent years.

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.

In 2021, we enhanced scale, reliability, security and privacy of our core product to improve the Enterprise readiness.

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 such as mobile, personal computer, virtual reality device and tablet.

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.

Other Affiliated Services

On December 4, 2020, the Company acquired 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.

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

The Company continues to invest in Success to create a better experience for our agents and other entrepreneurs.

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, 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 2023;

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

Company-Wide Initiatives

Agent and Employee Experience

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

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

Effective January 1, 2020, we issued share-based compensation to our agents and brokers at a 10% discount to the market price of our common stock.

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

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

Our stock repurchase program and agent growth incentive program are more fully disclosed in Note 10 – Stockholders’ Equity to the consolidated financial statements.

Technology Products and Services

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.

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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Operating income

Other expense, net

Equity in losses of unconsolidated affiliates

Total other expense, net

Other (income) expense

Other (income) expense, net

Equity in losses of unconsolidated subsidiaries

Total other (income) expense, net

Income before income tax expense

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GAAP Financial Measures”.

(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 $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.

Our total revenues were $4.6 billion in 2022 compared to $3.8 billion in 2021, an increase of $827.0 million, or 22%.

Total revenues increased primarily as a result of higher volume of real estate brokerage commissions, which is attributable to growth in our agent base, an increase of real estate transactions and increased home sales prices compared to 2021.

Commission and Other Agent-Related Costs

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 were $4.2 billion in 2022 compared to $3.5 billion in 2021, an increase of $756.1 million, or 22%.

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

Commission and other agent related costs increased primarily as a result of an increase in settled real estate transactions and growth in our agent base.

Commission and other agent-related costs increased primarily as a result of growth in agent base, increased real estate transactions and increased home sales prices compared to 2021.

General and Administrative Expense

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The Company had an increase in stock compensation expense of $7.7 million.

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%.

These increases are a direct result of the Company’s increase in employee count to continue to support our agent growth strategy.

Employees increased from 1,669 in 2021 to 2,016 in 2022, representing an increase in headcount of 21%.

The Company’s agent base increased by 21%.

Also, in support of the Company’s business operations, computer and software costs increased $9.7 million compared to prior year, mostly consisting of online subscriptions and security and virus protection.

Finally, $19.5 million of the increase in general and administrative expenses is related to professional fees including accounting, legal, and other consulting.

These increases are directly related to the Company’s continued revenue growth, international expansion and new business ventures.

Also, in support of the Company’s business operations, computer and software costs increased $9.4 million compared to prior year, mostly consisting of online subscriptions.

Finally, $5.2 million of the increase in general and administrative expenses is related to increased agent-related seminars and conferences.

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

Sales and Marketing

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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 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 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.

Sales and marketing expenses increased primarily as a result of an increase in lead costs of $1.7 million and advertising costs of $1.7 million.

Other (Income) Expense, Net

Other (income) expense in 2022 and 2021 includes interest income, equity in losses of unconsolidated subsidiaries, start-up costs and, amortization expense of the present value adjustment to our stock payable in 2021.

There were no significant changes in other (income) expense in 2022 compared to 2021.

Income Tax Benefit (Expense)

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.

The Company's provision for income taxes amounted to a benefit of ($10.8) million, a benefit decrease of $36.7 million for the year ended December 31, 2022.

The decrease in income tax benefit was primarily attributable to the release of the valuation allowance in prior year and lower deductible share-based compensation expenses.

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

BUSINESS SEGMENT DISCLOSURES

See Note 14 – Segment Information to the consolidated financial statements for additional information regarding our business segments.

The following table reflects the results of each of our reportable segments during the years ended December 31, 2022, 2021 and 2020:

Year Ended December 31,

(In thousands)

Statement of Operations Data:

North American Realty

International Realty

Other Affiliated Services

Segment eliminations

Total Consolidated Revenues

Adjusted Segment EBITDA (1)

North American Realty

International Realty

Other Affiliated Services

Corporate expenses and other

Total Reported Adjusted EBITDA

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

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

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

GAAP Financial Measures”.

Management evaluates the operating results of each of its reportable segments based upon revenue and Adjusted Segment EBITDA.

Adjusted Segment EBITDA is defined by us as net income before depreciation and amortization, interest expense, net, income taxes and other items that are not core to the operating activities of the Company.

The Company’s presentation of Adjusted Segment EBITDA may not be comparable to similar measures used by other companies.

2022 Compared to 2021

North American Realty revenue increased 22% in 2022 compared to 2021 primarily due to increased real estate transactions driven by higher agent count.

Adjusted EBITDA decreased (12)% due to increases in selling, general and administrative expenses related to the continued expansion of the business, partially offset by an increase in gross profit.

International Realty revenue increased 102% in 2022 vs 2021 primarily due to increased real estate transactions driven by a higher agent count and increased productivity in previously launched markets.

Adjusted EBITDA (loss) increased 50% in 2022 vs 2021 due to continued expansion efforts in new markets and growing selling, general and administrative expenses to support the incremental production in existing operations.

Virbela revenue decreased (2)% due to the post-COVID 19 work environment of return to the office and hybrid work initiatives globally.

Management shifted focus from small- to-medium sized business (“SMB”) market and one-time events to long-term enterprise monthly recurring revenue (“MRR”).

MRR revenue increased 13% from 2021 to 2022.

Adjusted EBITDA (loss) decreased (24)% primarily due to workforce reductions and decrease in marketing and advertising expenses, as we shift our focus to technology improvements and expanding our Software as a Service (“SaaS”) customers.

Other Affiliated Services revenue increased 76% due to expansion of SUCCESS ® Coaching and SUCCESS ® Media, primarily SUCCESS ® magazine.

The increases in revenue directly contributed to Adjusted EBITDA (loss) decrease of (22)%.

Corporate expenses and other contain the costs incurred to operate the corporate parent of eXp Realty.

The increase in these costs (increase in Adjusted EBITDA (loss) of 22% in 2022 compared to 2021) reflect increased insurance costs as we expand our business globally and software investments.

2021 Compared to 2020

North American Realty revenue increased 109% in 2021 compared to 2020 primarily due to increased real estate transactions driven by higher agent count.

Adjusted EBITDA increased 59% due to increases in gross profit, partially offset by increases in selling, general and administrative expenses related to the continued expansion of the business.

International Realty revenue increased 788% in 2021 vs 2020 primarily due to the entrance into nine new markets as well as previously launched markets gaining traction.

Adjusted EBITDA (loss) increased 466% in 2021 vs 2020 due to the continued expansion efforts in these new markets as well as growing selling, general and administrative expenses to support the incremental production in existing operations.

Virbela revenue increased 50% due to the COVID 19 pandemic remote work expansion changes around the world.

Both one-time events and long-term enterprise monthly recurring revenue (“MRR”) grew as a result of the global pandemic.

MRR revenue increased 50% from 2020 to 2021.

Adjusted EBITDA (loss) increased 152% directly related to increased personnel as we support the expansion of our Software as a Service (“SaaS”) customers.

Other Affiliated Services revenue increased 786% due to the acquisition of SUCCESS Enterprises and expansion of the SUCCESS ® Coaching and SUCCESS ® Media, primarily SUCCESS ® magazine.

Increased personnel costs to grow the business to scale directly contributed to Adjusted EBITDA (loss) increase of 774%.

Corporate expenses and other contain the costs incurred to operate the corporate parent of eXp Realty.

The increase in these costs (increase in Adjusted EBITDA (loss) of 56% in 2021 compared to 2020) reflect additional executive compensation & travel related to the expansion of the business along with legal expenses.

LIQUIDITY AND CAPITAL RESOURCES

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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 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 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.

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.

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

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

We believe that our current operating structure will facilitate sufficient cash flows from operations to satisfy our expected long-term liquidity requirements beyond the next 12 months.

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

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We currently do not possess any marketable securities.

During 2022, our unconsolidated joint venture, SUCCESS Lending, obtained $25 million in revolving warehouse credit lines from each of Flagstar Bank FSB and Texas Capital Bank, which represent off-balance sheet arrangements for the Company.

The Company’s capital liability under the warehouse credit lines is limited to $3.25 million in the aggregate.

We do not believe these off-balance sheet arrangements 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.

For information regarding the warehouse credit agreements, see Note 13 – Commitments and Contingencies .

Net Working Capital

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Net working capital

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.

As of December 31, 2022, net working capital decreased ($4.7) million, or (4)%, compared to the prior year, primarily due to a decrease in accounts receivable of ($46.2) million, partially offset by an decrease in accrued liabilities of ($32.7) million and an increase in cash and cash equivalents of $13.4 million.

The decrease of accounts receivable and accrued liabilities was due to lower real estate transactions in the fourth quarter 2022 compared to the fourth quarter 2021.

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

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Net change in cash, cash equivalents and restricted cash

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, 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, 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.

For the year ended December 31, 2022, cash provided by operating activities decreased ($36.4) million compared to the same period in 2021.

The change resulted primarily from increased general and administrative expenses and investment in international markets, partially offset by increased gross profit and favorable working capital.

For the year ended December 31, 2022, cash used in our investing activities decreased primarily due a decrease of ($1.4) million in capital expenditures and a decrease of $2.5 million invested in unconsolidated subsidiaries in the current year offset by an increase in payment for business acquisitions (Zoocasa in 2022) by $7.4 million from prior year.

For the year ended December 31, 2022, cash used in financing activities primarily related to higher repurchases of our common stock of $7.5 million compared to the prior year period and increased dividends paid of $13.7 million compared to 2021.

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 U.S.

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.

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(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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The Company estimates the share-based liability based on estimated performance probabilities based on our most recent estimates on probable achievement of the performance measures established under our agent growth incentive program.

These estimates calculated based on the agent’s historical performance for each award type.

These estimates are calculated based on the agent’s historical performance for each award type.

Also, the requisite service period at the grant date of performance awards is estimated based on the probability of the period of time it will take an agent to meet the performance metric.

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Revenue recognition

The Company generates substantially all of its revenue from real estate brokerage services and generates a de minimis portion of its revenues from software subscription and professional services.

Real Estate Brokerage Services

The Company generates substantially all of its revenue from North American Realty and International Realty and generates a de minimis portion of its revenues from software subscription and professional services.

North American Realty and International Realty

The Company serves as a licensed broker in the areas in which it operates for the purpose of processing real estate transactions.

The Company is contractually obligated to provide services for the fulfillment of transfers of real estate between buyers and sellers.

The Company provides these services itself and controls the services necessary to legally represent the transfer of the real estate.

The Company provides these services itself and controls the services necessary to legally represent the transfer of real estate.

Correspondingly, the Company is defined as the principal.

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Additionally, provisions for anticipated differences between consideration due and amounts expected to be received are estimated and recorded to revenue.

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.

Business combinations and goodwill

The accrual for estimated revenue was immaterial for the years ended December 31, 2022 and 2021.

Business combinations

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.

Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors.

Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding significant changes or planned changes in the use of the assets, as well as industry and economic conditions.

These assumptions and estimates include projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates and other market factors.

Significant assumptions used in determining the allocation of fair value include the following valuation techniques:

Significant assumptions used

in determining the allocation of fair value include the following valuation techniques:

the cost approach, the income approach and the market approach, which are determined based on cash flow projections and related discount rates, industry indices, market prices regarding replacement cost and comparable market transactions.

At the acquisition date, the Company recognizes the identifiable acquired assets, liabilities, and contingent liabilities (identifiable net assets) of the subsidiaries on the basis of fair value.

Recognized assets and liabilities may be adjusted during a maximum of one year from the acquisition date (the “measurement period”), depending on new information obtained about the facts and circumstances in existence at the acquisition date.

At the acquisition date, the Company recognizes the identifiable acquired assets, liabilities assumed and contingent liabilities (identifiable net assets) of the acquired company on the basis of fair value.

Recognized assets and liabilities assumed may be adjusted during a maximum of one year from the acquisition date (the “measurement period”), depending on new information obtained about the facts and circumstances in existence at the acquisition date.

If current expectations of future growth rates are not met or market factors outside of our control change significantly, then our goodwill or intangible assets may become impaired.

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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.

No additional impairment steps are necessary if we qualitatively determine that it is 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.

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Although we currently believe the estimates used in the evaluation of goodwill are reasonable, differences between actual and expected net sales, operating results and cash flows and/or changes in the discount rates used could cause these assets to be deemed impaired.

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 2021, we performed an assessment of goodwill related to our previous business acquisition.

During the fourth quarter of 2022, we performed an assessment of goodwill.

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 is below its carrying value.

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

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.

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

The goodwill analysis did not result in an impairment charge.

Also, a reasonable hypothetical change in assumptions, such as a 1% change in the discount rate or a 10% change in the projected cash flows, would not have resulted in an impairment charge for the year ended December 31, 2021.

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax basis of assets and liabilities.

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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, 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.

As of December 31, 2022, 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 no valuation allowance was recorded.

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.

See Note 12 – Income Taxes to the consolidated financial statements for further information related to our income tax positions.

We recognize expense for legal claims when payments associated with the claims become probable and can be reasonably estimated.

We recognize expenses for legal claims when payments associated with the claims become probable and can be reasonably estimated.

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.

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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.

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.

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

Adjusted Segment EBITDA is defined as operating profit plus depreciation and amortization and stock-based compensation expenses.

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

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Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S.

There are a number of limitations related to the use of Adjusted EBITDA compared to Net Income (Loss), the closest comparable U.S.

There are a number of limitations related to the use of Adjusted EBITDA compared to net income, the closest comparable U.S.

GAAP measure.

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

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

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

GAAP financial measure, for each of the periods presented:

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Other expense, net

Income tax (benefit) expense

Income tax benefit

Depreciation and amortization (1)

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Adjusted EBITDA

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, 2021 and 2020, net income increased by $50.2 million.

The primary driver for the changes in Adjusted EBITDA was lower net income attributable to the increased general and administrative costs resulting from the Company’s increase in employee count to continue to support our agent growth strategy and increased costs related to entering international markets and investments in Virbela.

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