UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20192020
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________ to ______________________
Commission File Number: 000‑53300001‑38493
EXP WORLD HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
| 98-0681092 |
(State or other jurisdiction |
| (IRS Employer |
of incorporation) |
| Identification No.) |
2219 Rimland Drive, Suite 301
Bellingham, WA 98226
(Address(Address of principal executive offices and Zip Code)
Registrant’s telephone number, including area code: (360) 685‑4206
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Common Stock, par value $0.00001 per share | EXPI | NASDAQ |
(Title of Each Class) | (Trading Symbol) | (Name of each exchange on which registered) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.
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Large accelerated filer [ ] |
| Accelerated filer [X] |
| Non-accelerated filer [ ] |
| Smaller reporting company [ |
Emerging Growth Company [ ] |
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If an emerging growth company, indicate by check mark if the registrant has selected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act).
Yes [ ] No [X]
There were, 61,676,92467,111,935 shares of the registrant’s Common Stock, $.00001$0.00001 par value, of the registrants outstanding as ofApril 30, 2019. March 31, 2020.
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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2
Certain statements contained in this report on Form 10‑Q constituteThis Quarterly Report and our other public filings contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. Forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,” “may,” “will,” “would,” “potential” and similar expressions to future periods. Forward-looking statements are not based on historical facts but rather represent current expectations and assumptions. Forward-looking statements include statements we make about matters such as: future revenues; future industry market conditions; future changes in our capacity and operations; future operating and overhead costs; operational and management restructuring activities (including implementation of methodologies and changes in the board of directors); future employment and contributions of personnel; tax and interest rates; capital expenditures and their impact on us; productivity, business process, rationalization, investment, acquisition and acquisition integrations, consulting, operational, tax, financial and capital projects and initiatives; contingencies; changes in the regulatory environment; and future working capital, costs, revenues, business opportunities, cash flows, margins, earnings and growth.
Forward-looking statements relate to the future and are subject to many risks, assumptions, and uncertainties, including those risks set forth in this report and as described in our Annual Report on Form 10-K, Part I, Item IA Risk Factors of our Annual Report on Form 10‑K for our prior fiscal year ended December 31, 2018 filed with the SEC on March 18, 2019.incorporated by reference. Although we believe the expectations reflected in the forward-looking statements are reasonable, actual results, developments and business decisions could differ materially from those contemplated by such forward-looking statements. The environment forin which we operate in is highly competitive and rapidly changing and it is not possible for our management to predict all risks, as new risks emerge from time to time.
While no listtime, such as the rapidly evolving environment and uncertainties relating to the outbreak of uncertainties coulda novel strain of coronavirus, that causes COVID-19. The coronavirus continues to spread globally and was declared a pandemic by the World Health Organization in March 2020. Given the volatility of the global environment as a result of the ongoing COVID-19 pandemic, the effect of COVID-19 will not be complete, some factors that could cause actual results to differ materially from thosefully reflected in the forward-looking statements include the following, without limitation: current and future business and economic uncertainties may adversely affect our revenues, profitability and financial condition; changes in the residential mortgage markets and housing markets may adversely affect our earnings and financial condition; our earnings may decrease because of increases or decreases in interest rates; we are exposed to capital markets risk related to changes in foreign exchange rates which may adversely affect our results of operations and financial condition and cash flows; our business, financial condition and results of operations could be adversely affected by new government regulations; potential inability to attract and retain skilled personnel, including real estate agents, could harm our business; we may pursue strategic opportunities which could result in operating difficulties or dilution; assertions of claims, lawsuits and proceedings against us could harm our business, results of operations and reputation; changes in the United States or other monetary or fiscal policies and regulations that impact the real estate market; and our potential inability to list our securities on any securities exchange or market.performance until future periods.
All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future developments or otherwise, except as may be required by law.
3
PART I1 – FINANCIAL INFORMATION
Item 1. FINANCIAL1.FINANCIAL STATEMENTS
eXp World Holdings, Inc.EXP WORLD HOLDINGS, INC.
(Unaudited)CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2019(In thousands)
4
EXP WORLD HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETSSTATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data)
(UNAUDITED)
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| March 31, 2019 |
| December 31, 2018 | ||
ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
| $ | 20,771,971 |
| $ | 20,538,057 |
Restricted cash |
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| 4,193,802 |
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| 2,502,591 |
Accounts receivable, net of allowance of $297,567 and $484,441, respectively |
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| 29,693,641 |
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| 17,428,091 |
Prepaids and other assets |
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| 1,792,756 |
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| 1,857,988 |
TOTAL CURRENT ASSETS |
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| 56,452,170 |
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| 42,326,727 |
Fixed Assets, net |
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| 3,153,814 |
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| 2,739,525 |
Operating lease right-of-use assets |
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| 291,689 |
|
| — |
Intangible assets, net |
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| 2,458,678 |
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| 2,531,669 |
Goodwill |
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| 8,248,107 |
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| 8,248,107 |
TOTAL ASSETS |
| $ | 70,604,458 |
| $ | 55,846,028 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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CURRENT LIABILITIES |
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Accounts payable |
| $ | 1,300,295 |
| $ | 1,758,377 |
Customer deposits |
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| 4,193,802 |
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| 2,502,591 |
Accrued expenses |
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| 30,764,719 |
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| 18,976,435 |
Current portion of long-term payable |
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| 974,659 |
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| 974,659 |
Current portion of lease obligation - operating lease |
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| 79,538 |
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| — |
TOTAL CURRENT LIABILITIES |
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| 37,313,013 |
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| 24,212,062 |
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Long-term payable, net of current portion |
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| 1,716,853 |
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| 1,654,337 |
Long term lease obligation - operating lease |
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| 212,214 |
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| — |
TOTAL LIABILITIES |
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| 39,242,080 |
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| 25,866,399 |
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STOCKHOLDERS' EQUITY |
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Common Stock, $0.00001 par value 220,000,000 shares authorized; 61,499,843 issued and 61,142,091 outstanding at March 31, 2019, 60,609,102 issued and 60,609,102 outstanding at December 31, 2018 |
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| 612 |
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| 606 |
Additional paid-in capital |
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| 102,066,398 |
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| 90,755,616 |
Treasury stock, at cost: 357,752 shares held at March 31, 2019 |
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| (3,647,076) |
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| — |
Accumulated deficit |
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| (67,061,089) |
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| (60,765,266) |
Accumulated other comprehensive income (loss) |
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| 3,533 |
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| (11,327) |
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TOTAL STOCKHOLDERS' EQUITY |
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| 31,362,378 |
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| 29,979,629 |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY |
| $ | 70,604,458 |
| $ | 55,846,028 |
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| Three Months Ended March 31, | ||
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| 2020 |
| 2019 |
Revenues |
| $ 271,421 |
| $ 157,034 |
Operating expenses |
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Commissions and other agent-related costs |
| 243,406 |
| 142,542 |
General and administrative expenses |
| 26,860 |
| 19,701 |
Sales and marketing expenses |
| 944 |
| 889 |
Total operating expenses |
| 271,210 |
| 163,132 |
Operating income (loss) |
| 211 |
| (6,098) |
Other expense (income) |
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Other expense (income), net |
| 38 |
| 35 |
Equity in losses (earnings) of unconsolidated affiliates |
| 21 |
| - |
Total other expense (income), net |
| 59 |
| 35 |
Income (loss) before income tax expense |
| 152 |
| (6,133) |
Income tax expense |
| 11 |
| 163 |
Net income (loss) |
| 141 |
| (6,296) |
Net loss attributable to noncontrolling interest |
| 24 |
| - |
Net income (loss) attributable to eXp World Holdings, Inc. |
| $ 165 |
| $ (6,296) |
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Earnings per share |
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Basic |
| $ 0.00 |
| $ (0.10) |
Diluted |
| $ 0.00 |
| $ (0.10) |
Weighted average shares outstanding |
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Basic |
| 65,890 |
| 60,749 |
Diluted |
| 71,593 |
| 60,749 |
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Comprehensive income (loss): |
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Net income (loss) |
| $ 141 |
| $ (6,296) |
Comprehensive loss attributable to noncontrolling interests |
| 24 |
| - |
Net income (loss) attributable to eXp World Holdings, Inc. |
| 165 |
| (6,296) |
Other comprehensive income (loss): |
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Foreign currency translation (loss) gain, net of tax |
| (297) |
| 15 |
Comprehensive loss attributable to eXp World Holdings Inc. |
| $ (132) |
| $ (6,281) |
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See Notes to the Condensed Consolidated Financial Statements
5
EXP WORLD HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSEQUITY
(UNAUDITED)
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| Three Months Ended March 31, | ||||
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| 2019 |
| 2018 | ||
Revenues |
| $ | 157,033,632 |
| $ | 61,962,531 |
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Operating expenses |
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Commissions and other agent-related costs |
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| 142,542,405 |
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| 55,701,516 |
General and administrative |
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| 19,700,772 |
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| 16,281,113 |
Sales and marketing |
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| 888,850 |
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| 645,797 |
Total operating expenses |
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| 163,132,027 |
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| 72,628,426 |
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Net loss from operations |
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| (6,098,395) |
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| (10,665,895) |
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Other income and (expenses) |
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Other income and (expenses) |
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| (80,976) |
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| — |
Interest income (expense) |
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| 46,245 |
|
| — |
Total other income and (expenses) |
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| (34,731) |
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| — |
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Loss before income tax expense |
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| (6,133,126) |
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| (10,665,895) |
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Income tax expense |
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| (162,697) |
|
| (30,450) |
Net loss |
| $ | (6,295,823) |
| $ | (10,696,345) |
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Net loss per share attributable to common shareholders |
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Basic from continuing operations |
| $ | (0.10) |
| $ | (0.19) |
Diluted from continuing operations |
| $ | (0.10) |
| $ | (0.19) |
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Weighted average shares outstanding |
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Basic |
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| 60,749,378 |
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| 56,193,753 |
Diluted |
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| 60,749,378 |
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| 56,193,753 |
See Notes to the Condensed Consolidated Financial Statements
6
EXP WORLD HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)(In thousands)
(UNAUDITED)
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| Three Months Ended March 31, | ||||
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| 2019 |
| 2018 | ||
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Net loss |
| $ | (6,295,823) |
| $ | (10,696,345) |
Other comprehensive loss: |
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Foreign currency translation adjustments, net of tax |
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| 14,860 |
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| (1,275) |
Comprehensive loss |
| $ | (6,280,963) |
| $ | (10,697,620) |
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| Accumulated |
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| Additional |
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| Other |
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| Common Stock |
| Treasury Stock |
| Paid-In |
| Accumulated |
| Comprehensive |
| Noncontrolling |
| Total | ||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Income (Loss) |
| Interest |
| Equity |
Balance, December 31, 2018 |
| 60,609 |
| $ 1 |
| - |
| $ - |
| $ 90,756 |
| $ (60,765) |
| $ (11) |
| $ - |
| $ 29,981 |
Net loss |
| - |
| - |
| - |
| - |
| - |
| (6,296) |
| - |
| - |
| (6,296) |
Shares issued for stock options exercised |
| 134 |
| - |
| - |
| - |
| 216 |
| - |
| - |
| - |
| 216 |
Agent growth incentive stock compensation |
| 136 |
| - |
| - |
| - |
| 3,669 |
| - |
| - |
| - |
| 3,669 |
Stock option compensation |
| - |
| - |
| - |
| - |
| 1,215 |
| - |
| - |
| - |
| 1,215 |
Agent equity stock compensation |
| 620 |
| - |
| - |
| - |
| 6,210 |
| - |
| - |
| - |
| 6,210 |
Foreign currency translation gain (loss) |
| - |
| - |
| - |
| - |
| - |
| - |
| 15 |
| - |
| 15 |
Repurchase of common stock |
| - |
| - |
| 358 |
| (3,647) |
| - |
| - |
| - |
| - |
| (3,647) |
Balance, March 31, 2019 |
| 61,499 |
| $ 1 |
| 358 |
| $ (3,647) |
| $ 102,066 |
| $ (67,061) |
| $ 4 |
| $ - |
| $ 31,363 |
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| - |
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Balance, December 31, 2019 |
| 66,199 |
| $ 1 |
| 925 |
| $ (8,623) |
| $ 130,682 |
| $ (70,293) |
| $ 200 |
| $ 161 |
| $ 52,128 |
Net income (loss) |
| - |
| - |
| - |
| - |
| - |
| 165 |
| - |
| (24) |
| 141 |
Shares issued for stock options exercised |
| 1,785 |
| - |
| - |
| - |
| 1,828 |
| - |
| - |
| - |
| 1,828 |
Agent growth incentive stock compensation |
| 127 |
| - |
| - |
| - |
| 2,551 |
| - |
| - |
| - |
| 2,551 |
Stock option compensation |
| - |
| - |
| - |
| - |
| 1,073 |
| - |
| - |
| - |
| 1,073 |
Agent equity stock compensation |
| 917 |
| - |
| - |
| - |
| 8,794 |
| - |
| - |
| - |
| 8,794 |
Foreign currency translation gain (loss) |
| - |
| - |
| - |
| - |
| - |
| - |
| (297) |
| - |
| (297) |
Repurchase of common stock |
| - |
| - |
| 991 |
| (10,305) |
| - |
| - |
| - |
| - |
| (10,305) |
Contributions by noncontrolling interests |
| - |
| - |
| - |
| - |
| - |
| - |
| - |
| 87 |
| 87 |
Balance, March 31, 2020 |
| 69,028 |
| $ 1 |
| 1,916 |
| $ (18,928) |
| $ 144,928 |
| $ (70,128) |
| $ (97) |
| $ 224 |
| $ 56,000 |
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See Notes to the Condensed Consolidated Financial Statements
76
EXP WORLD HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
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| Accumulated |
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| Common Stock |
| Treasury Stock |
| Additional |
| Accumulated |
| Other Comprehensive |
| Total | ||||
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| Shares |
| Amount |
| Shares |
| Amount |
| Paid-In Capital |
| Deficit |
| Income (Loss) |
| Equity |
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Balance, December 31, 2017 |
| 54,980,272 |
| $ 550 |
| - |
| $ - |
| $ 36,848,041 |
| $ (32,596,374) |
| $ 8,454 |
| $ 4,260,671 |
Exercise of options |
| 1,071,407 |
| 10 |
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| 264,345 |
| - |
| - |
| 264,355 |
Stock compensation expense |
| 61,598 |
| 1 |
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| 8,279,108 |
|
|
| - |
| 8,279,109 |
Stock option expense |
| - |
| - |
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| 1,301,702 |
| - |
| - |
| 1,301,702 |
Agent equity program |
| 208,324 |
| 2 |
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| 2,370,002 |
| - |
| - |
| 2,370,004 |
Foreign currency translation gain |
| - |
|
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|
|
| - |
| - |
| (1,275) |
| (1,275) |
Net loss |
| - |
| - |
|
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|
|
| - |
| (10,696,345) |
| - |
| (10,696,345) |
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Balance, March 31, 2018 |
| 56,321,601 |
| $ 563 |
| - |
| $ - |
| $ 49,063,198 |
| $ (43,292,719) |
| $ 7,179 |
| $ 5,778,221 |
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Balance, December 31, 2018 |
| 60,609,102 |
| $ 606 |
| - |
| $ - |
| $ 90,755,616 |
| $ (60,765,266) |
| $ (11,327) |
| $ 29,979,629 |
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Exercise of options |
| 134,260 |
| 1 |
| - |
| - |
| 215,725 |
| - |
| - |
| 215,726 |
Stock compensation expense |
| 136,194 |
| 1 |
| - |
| - |
| 3,669,320 |
| - |
| - |
| 3,669,321 |
Stock option expense |
| - |
| - |
| - |
| - |
| 1,215,448 |
| - |
| - |
| 1,215,448 |
Agent equity program |
| 620,287 |
| 4 |
| - |
| - |
| 6,210,289 |
| - |
| - |
| 6,210,293 |
Foreign currency translation gain |
| - |
| - |
| - |
| - |
| - |
| - |
| 14,860 |
| 14,860 |
Repurchase of common stock |
| - |
| - |
| 357,752 |
| (3,647,076) |
| - |
| - |
| - |
| (3,647,076) |
Net loss |
| - |
| - |
| - |
| - |
| - |
| (6,295,823) |
| - |
| (6,295,823) |
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|
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|
|
|
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Balance, March 31, 2019 |
| 61,499,843 |
| $ 612 |
| 357,752 |
| $ (3,647,076) |
| $ 102,066,398 |
| $ (67,061,089) |
| $ 3,533 |
| $ 31,362,378 |
See Notes to the Condensed Consolidated Financial Statements
8
EXP WORLD HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
|
|
|
|
|
|
| ||||
|
| Three Months Ended March 31, |
|
|
|
| ||||
|
| 2019 |
| 2018 |
| Three Months Ended March 31, | ||||
|
|
|
|
|
|
| 2020 |
| 2019 | |
OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (6,295,823) |
| $ | (10,696,345) | ||||
Adjustments to reconcile net loss to cash provided by operating activities: |
|
|
|
|
|
| ||||
Net income (loss) |
| $ 141 |
| $ (6,296) | ||||||
Reconciliation of net loss to net cash provided by operating activities: |
|
|
|
| ||||||
Depreciation expense |
|
| 367,287 |
|
| 183,321 |
| 757 |
| 367 |
Amortization expense - intangible assets |
|
| 72,992 |
|
| — |
| 103 |
| 73 |
Stock compensation expense |
|
| 3,669,321 |
|
| 8,279,109 | ||||
Amortization expense - long-term payable |
| 64 |
| 63 | ||||||
Equity in loss of unconsolidated affiliates |
| 21 |
| - | ||||||
Agent growth incentive stock compensation expense |
| 3,519 |
| 3,669 | ||||||
Stock option expense |
|
| 1,215,448 |
|
| 1,301,702 |
| 1,073 |
| 1,215 |
Agent equity program |
|
| 6,210,293 |
|
| 2,370,004 | ||||
Change in stock payable |
|
| 62,516 |
|
| — | ||||
|
|
|
|
|
|
| ||||
Agent equity stock compensation expense |
| 8,794 |
| 6,210 | ||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| (12,263,873) |
|
| (2,175,888) |
| (6,433) |
| (12,264) |
Prepaids and other assets |
|
| 111,575 |
|
| (91,961) |
| (476) |
| 112 |
Customer deposits |
|
| 1,675,556 |
|
| 847,406 |
| 3,219 |
| 1,676 |
Accounts payable |
|
| 44,888 |
|
| 115,570 |
| 1,336 |
| 45 |
Accrued expenses |
|
| 11,787,112 |
|
| 4,655,504 |
| 5,371 |
| 11,787 |
Noncash lease expense |
|
| 63 |
|
| — | ||||
NET CASH PROVIDED BY OPERATING ACTIVITIES |
|
| 6,657,355 |
|
| 4,788,422 |
| 17,489 |
| 6,657 |
|
|
|
|
|
|
| ||||
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Purchase of fixed assets |
|
| (827,919) |
|
| (513,521) | ||||
Payment for business acquisition and intangibles |
|
| (500,000) |
|
|
| ||||
Purchases of property, plant and equipment |
| (1,355) |
| (828) | ||||||
Acquisition of businesses, net of cash acquired |
| - |
| (500) | ||||||
NET CASH USED IN INVESTING ACTIVITIES |
|
| (1,327,919) |
|
| (513,521) |
| (1,355) |
| (1,328) |
|
|
|
|
|
|
| ||||
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
Repurchase of common stock |
|
| (3,647,076) |
|
| — |
| (10,305) |
| (3,647) |
Proceeds from exercise of options |
|
| 215,726 |
|
| 264,355 |
| 1,828 |
| 216 |
|
|
|
|
|
|
| ||||
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES |
|
| (3,431,350) |
|
| 264,355 | ||||
|
|
|
|
|
|
| ||||
Transactions with noncontrolling interests |
| 87 |
| - | ||||||
NET CASH USED IN FINANCING ACTIVITIES |
| (8,390) |
| (3,431) | ||||||
Effect of changes in exchange rates on cash, cash equivalents and restricted cash |
|
| 27,039 |
|
| (23,033) |
| (710) |
| 27 |
|
|
|
|
|
|
| ||||
Net change in cash, cash equivalents and restricted cash |
|
| 1,925,125 |
|
| 4,516,223 |
| 7,034 |
| 1,925 |
|
|
|
|
|
|
| ||||
Cash, cash equivalents and restricted cash, beginning of period |
|
| 23,040,648 |
|
| 5,595,227 | ||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD |
| $ | 24,965,773 |
| $ | 10,111,450 | ||||
Cash, cash equivalents and restricted cash, beginning balance |
| 47,074 |
| 23,041 | ||||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, ENDING BALANCE |
| $ 54,108 |
| $ 24,966 | ||||||
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION: |
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 18,460 |
| $ | — |
| $ - |
| $ 18 |
Cash paid for income taxes |
| $ | 100,289 |
| $ | 30,450 |
| 30 |
| 100 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
Recognition of right of use assets and lease liability upon adoption of new accounting standard |
| $ | 317,629 |
| $ | — | ||||
Lease liabilities arising from obtaining right-of-use assets |
| $ - |
| $ 318 | ||||||
Termination of lease liabilities |
| 43 |
| - | ||||||
Fixed asset purchases in accounts payable |
| $ | 46,343 |
| $ | 71,890 |
| 109 |
| 46 |
|
|
|
|
|
See Notes to the Condensed Consolidated Financial Statements
97
Notes to the Condensed Consolidated Financial Statements
March 31, 2019(UNAUDITED)
(Unaudited)(Amounts in thousands, except per share data and as noted otherwise)
1. 1.DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
eXp World Holdings, Inc. (the(collectively with its subsidiaries, the “Company” or “we” or “eXp”) was incorporated in the State of Delaware on July 30, 2008. Through various operating subsidiaries, the Company primarily operates a cloud-based real estate brokerage operating throughout the United States, and most of the Canadian provinces. In the fourth quarter of 2019, the Company began operations in all U.S. States, the District of ColumbiaUnited Kingdom (U.K.) and the provinces of Alberta, British Columbia and Ontario, Canada.Australia. The Company focuses on a number of cloud-based technologies in order to grow an international brokerage without the burden of physical bricks and mortar or redundant staffing costs.
In the fourth quarter of 2019, the Company made capital contributions in consideration for an ownership interest in First Cloud Investment Group, LLC (“First Cloud”), a Nevada limited liability company, with the remaining ownership interest held by certain independent agents and brokers. First Cloud was organized for the purpose of managing IntroLend First Cloud, LLC (“IntroLend First Cloud”), a Delaware limited liability company and an indirect subsidiary of the Company that provides mortgage origination for end-consumers. Under the terms of the operating agreement, the Company is required to maintain at least a 50% equity ownership interest in First Cloud. During the start-up phase, eXp holds an interest in First Cloud greater than 50%. As eXp agents invest in First Cloud, agents’ interests will increase until the interest for both eXp and the aggregate agents’ interests each equal 50%. Refer to Note 11 – Variable Interest Entities for more information.
In the fourth quarter of 2019, the Company and its newly formed subsidiary, eXp Silverline Ventures, LLC, entered into an agreement to purchase a 50% ownership interest in Silverline Title & Escrow, LLC (“Silverline”) with the remaining ownership interest held by a third-party investment entity. Silverline represents an unconsolidated equity investment by eXp Silverline Ventures, LLC. Silverline is a title agency that performs, among other functions, core title agent services (for which liabilities arises), including the evaluation of searches to determine the insurability of title, the clearance of underwriting objections, the issuance of polices on behalf of insurance companies, and, where customary, the issuance of title commitments and the conducting of title searchers.
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10‑Q and Article 8‑0310-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.
These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019, filed with the SEC on March 18, 2019.
12, 2020 (“2019 Annual Report”). The Company’s condensed consolidated financial statements as of and for the three months ended March 31, 2020 are reported in thousands, whereas the Company’s consolidated financial statements as of and for the year ended December 31, 2019 were reported in whole dollars in the 2019 Annual Report.
In our opinion, the accompanying interim unaudited Condensed Consolidated Financial Statementscondensed consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Operating results for the three-month period ended March 31, 20192020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.2020.
2. SUMMARY2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of eXp World Holdings, Inc., its wholly-owned subsidiaries and its subsidiaries. All inter-company accountsthose entities where the Company has greater than 50% ownership or where the Company exercises control over the operations. If the Company has a variable interest in an entity but it is not the primary beneficiary of the entity or exercises control over the operations and has less than 50% ownership, it will use the equity method or the cost method of accounting for investments. The Company uses the equity method of accounting for entities in which the Company holds a 50% or less investment and exercises significant influence. Entities in which the Company has less than a 20% investment and where the Company does not exercise significant influence are accounted for under the cost method. Intercompany transactions have beenand balances are eliminated upon consolidation. See Note 11 – Variable Interest Entities.
8
Noncontrolling Interest
The Company determined that First Cloud is a variable interest entity (“VIE”), as the Company is the primary beneficiary that has both the power to direct the activities that most significantly impact the VIE and a variable interest that potentially could be significant to the VIE. The Company treats the interest in First Cloud that it does not own as non-controlling interest. The noncontrolling interest balance is adjusted each period to reflect the allocation of net income (loss) and other comprehensive income (loss) attributable to the noncontrolling interest, as shown in the condensed consolidated statements of comprehensive income (loss). The noncontrolling interest balance in the condensed consolidated balance sheets represents the proportional share of the equity of the joint venture entities, which is attributable to the minority shareholders.
Use of EstimatesEstimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principlesGAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to provisionsallowance for doubtful accounts, legal contingencies, income taxes, revenue recognition, stock-based compensation, expense accruals,goodwill, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and cash equivalents
10
three months or less to be cash equivalents. From time to time, the Company’s cash deposits exceed federally insured limits. The Company has not experienced any losses resulting from holding deposits in accounts in excess of federal insurance limits.
Restricted Cashcash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets that sum to the total of the same such amounts shown on the condensed consolidated statements of cash flows.
|
|
|
|
|
|
| December 31, 2019 |
| December 31, 2018 |
Cash and cash equivalents |
| $ 40,087 |
| $ 20,538 |
Restricted cash |
| 6,987 |
| 2,503 |
Total cash, cash equivalents, and restricted cash, beginning balance |
| $ 47,074 |
| $ 23,041 |
|
|
|
|
|
|
| March 31, 2020 |
| March 31, 2019 |
Cash and cash equivalents |
| $ 44,279 |
| $ 20,772 |
Restricted cash |
| 9,829 |
| 4,194 |
Total cash, cash equivalents, and restricted cash, ending balance |
| $ 54,108 |
| $ 24,966 |
|
|
|
|
|
Restricted cash consists of cash held in escrow by the Company’s brokers and agents on behalf of real estate buyers. The Company recognizes a corresponding customer deposit liability until the funds are released. RestrictedOnce the cash totaled $4,193,802 and $1,770,599 at March 31, 2019 and March 31, 2018, respectively.
|
|
|
|
|
|
|
|
| March 31, 2019 |
| March 31, 2018 | ||
Cash and cash equivalents |
| $ | 20,771,971 |
| $ | 8,340,851 |
Restricted cash |
|
| 4,193,802 |
|
| 1,770,599 |
Total cash, cash equivalents, and restricted cash |
| $ | 24,965,773 |
| $ | 10,111,450 |
Goodwill and Intangible Assets
Goodwill representstransfers from escrow, the excess ofCompany reduces the consideration paid over the estimated fair value of assets acquired and liabilities assumed in a business combination. We do not amortize goodwill but test goodwill for impairment on an annual basis in November of each year or when a triggering event occurs that would indicate a reduction in its fair value below its carrying value.
Acquired intangible assets with finite useful lives are amortized over their estimated useful lives and are reviewed for impairment annually in November of each year or when facts or circumstances suggest that the carrying value of these assets may not be recoverable.
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. If current expectations of future growth rates are not met or market factors outside of our control, such as discount rates, change significantly, then our goodwill or intangible assets may become impaired. Additionally, as goodwill and intangible assets associated with recently acquired businesses are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to impairment risk if business operating results or macroeconomic conditions deteriorate.respective customers’ deposit liability.
Stock based compensation
Stock-based compensation is comprised of agent growth incentive programs, agent equity program, and stock option awards. Stock-based compensation is more fully disclosed in Note 6 – Equity. The Company accounts for all stock-based compensation granted to employees and non-employees using a fair value method. Stock-based compensation awarded to employees isawards are measured at the grant date fair value and is recognized over the requisite service period of the awards, usually the vesting period, on a straight-line basis, net of forfeitures. Accruals of compensation cost for an award with a performance condition are based on the probable outcome of that performance condition. Compensation cost is accrued if it is probable that the performance condition will be achieved and is not accrued if it is not probable that the performance condition will be achieved. The Company reduces recorded stock-based compensation for forfeitures when they occur.
Recognition of compensation cost for an award with a performance condition is based on the probable outcome of that performance condition being met.
9
Goodwill
Goodwill represents the excess of the consideration paid over the estimated fair value of assets acquired and liabilities assumed in a business combination. The Company evaluates goodwill for impairment on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that would more likely than not indicate that the fair value of the goodwill is below its carrying value. Generally, this evaluation begins with a qualitative assessment to determine if the fair value of the reporting unit is more likely than not less than its carrying value. The test for impairment requires management to make judgments relating to future cash flows, growth rates and economic and market conditions. In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment loss has occurred.
Revenue Recognitionrecognition
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.
11
Real Estate Brokerage Services
The Company serves as a licensed broker in the areas in which it operates for the purpose of processing residential real estate transactions. The Company is contractually obligated to provide services for the fulfillment of transfers of residential real estate between buyers and sellers. The Company provides these services itself and controls the serviceservices necessary to legally transfer the residential real estate. Correspondingly, the Company is defined as the Principal.principal. The Company, as Principal,principal, satisfies its obligation upon the closing of a residential real estate transaction. As Principal,principal, and upon satisfaction of ourthe performance obligation, the Company recognizes revenue in the gross amount of consideration to which we expectthe Company expects to be entitled to.entitled.
Revenue is derived from assisting home buyers and sellers in listing, marketing, selling, and finding residential real estate. Commissions earned on real estate transactions are recognized at the completion of a residential real estate transaction once we havethe Company has satisfied ourthe performance obligation. Agent related fees are currently recorded as a reduction to commissions and other agent related costs.
Software Subscription and Professional Services
Subscription revenue is derived from fees from our customers to access the Company’s virtual reality software platform. The terms of our subscriptions do not provide customers the right to take possession of the software. Subscription revenue is generally recognized ratably over the contract term.
Professional services revenue is derived from implementation and consulting services. Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended (labor hours) input method.
Software subscription and professional services revenue accounts for less than 1% of all revenue for the three months ended March 31, 2020 and 2019.
The Company does not currently collect sales and use taxes on fees from agents and brokers and assumes responsibility to pay these costs to the appropriate taxing authorities.
Disaggregated revenue
The Company primarily operates as a real estate brokerage firm. The vast majority of the Company’s revenue is derived from providing a single service, real estate brokerage services, to purchasers and sellers of homes in the U.S. See Note 10 – Segment information for details regarding segment and geographic information.
Management believes that no disaggregation of revenue from services to customers currently exists that would provide additional insight into the future recognition of revenue and cash flows.
10
Recently Adopted Accounting Principles and Change in Accounting Principle and Recently Adopted Accounting Principles
In FebruaryJune 2016, the Financial Accounting Standards Board (FASB)(“FASB”) issued Accounting Standards Update (ASU) No. 2016-02,(“ASU”) 2016-13, LeasesFinancial Instruments – Credit Losses (Topic 842)326) (“ASU 2016-13”). ASU 2016-02 is intended2016-13 modifies the measurement of expected credit losses of certain financial instruments, requiring entities to improveestimate an expected lifetime credit loss on financial reporting of leasing transactions by requiring organizations that lease assetsassets. The ASU amends the impairment model to recognize assetsutilize an expected loss methodology and liabilitiesreplaces the incurred loss methodology for the rightsfinancial instruments including trade receivables. The amendment requires entities to consider other factors, such as economic conditions and obligations created by leases that extend more than twelve months on the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU No. 2018-11 – Leases (Topic 842) – Targeted Improvements. The amendments in ASU No. 2018-11 provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with GAAP (Topic 840, Leases). An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements in Topic 840 (for example, they do not create interim disclosure requirements that entities previously were not required to provide).
future economic conditions. The Company adopted ASU No. 2016-022016-13 effective January 1, 2019 using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date2020 and prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of this adoption. This standardconcluded it did not have a material impact on either the Company’s balance sheets orfinancial position, results of operations, cash flows, from operations and hador related disclosures of the Company. There was no impact on the Company’s operating results. The most significant impact was the recognition of ROU assets and lease obligations on thebeginning balance sheetretained earnings upon adoption on January 1, 2019.
The Company elected to utilize the transition guidance accounting policy elections available including, not recording a Right-of-Use (ROU) lease asset and lease obligationof this ASU. See Note 3 – Expected Credit Losses for short term leases, to not separate lease and non-lease components, and apply a portfolio discount rate to all leases similar in nature and term.
12
With the adoption of ASU 2016-02, the Company determines if an arrangement is a lease at inception and performed a lease classification assessment. Based on this assessment, the Company concluded it only has operating leases. Leases are included in ROU lease assets, current portion of lease obligations, and long-term lease obligations on the Company’s balance sheet. As of March 31, 2019, the Company only has operating leases. Certain arrangements previously considered leases under Topic 840 were determined to not be leases under Topic 842. Lease expense for short-term leases is recorded in the Company’s Statements of Operations as incurred.
ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease. Operating ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. The Company has determined to not separate lease components from nonlease components in the lease payments for its office space leases, which are currently the only leases the Company has under Accounting Standards Codification (ASC) 842. The rate implicit in the lease was not readily determinable in the lease arrangements and as such, the Company used its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company calculated the rate utilizing the rate on our secured line of credit adjusted for the average lease term of 3 years. The ROU lease asset also includes any lease payments made and excludes lease incentives. The Company’s lease terms include options to extend the lease when it is reasonably certain that the Company will exercise its option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.
In January 2017, the FASB issued ASU No. 2017-04 – more information.Intangibles – Goodwill and Oher (Topic 350). This ASU eliminates Step 2 from the goodwill impairment test. Under ASU No. 2017-04, if a reporting unit’s carrying amount exceeds its fair value, the entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. Previously, if the fair value of a reporting unit was lower than its carrying amount (Step 1), an entity was required to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). Additionally, under ASU No. 2017-04, entities that have reporting units with zero or negative carrying amounts will no longer be required to perform the qualitative assessment to determine whether to perform Step 2 of the goodwill impairment test. As a result, reporting units with zero or negative carrying amounts will generally be expected to pass the simplified impairment test; however, additional disclosure will be required of those entities. This ASU is effective in fiscal years beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The new guidance must be adopted on a prospective basis. The Company adopted ASU No. 2017-04 effective January 1, 2019. The Company does not expect any significant adjustments to our financials or our disclosures under the new guidance.
Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which eliminatesremoves certain disclosure requirements forrelated to the fair value measurementshierarchy, such as removing the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements, such as disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurement. The Company adopted ASU 2018-13 on January 1, 2020 and concluded it did not have an impact on the Company’s consolidated financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15 – Intangibles – Goodwill and Other Internal-Use Software (Subtopic 350-40) – Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”).The amendments in this update apply to an entity who is a customer in a hosting arrangement accounted for as a service contract. The Update requires new or modifieda customer in a hosting arrangement to capitalize certain implementation costs. Costs associated with the application development stage of the implementation should be capitalized and costs with the other stages should be expensed. The Company adopted ASU 2018-15 on January 1, 2020 and concluded it did not have an impact on the Company’s consolidated financial statements and related disclosures.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2018-132019-12 – Income Taxes (Topic 740) (“ASU 2019-12”). ASU 2019-12 removes certain exceptions for investments, intraperiod allocations and interim calculations and adds guidance to reduce complexity in accounting for income taxes. ASU 2019-12 is effective for fiscal years, and interim periods within those fiscal years, beginning January 1,after December 15, 2020; early adoption is permitted. Certain changes are applied retrospectively to each period presented and others are to be applied either in the period of adoption or prospectively. The Company is still assessing the impact of ASU No. 2018-13. The Company does not expect the amendments of ASU No. 2018-132019-12 and the impact the amendments will have a significant impact on the Company’s consolidated financial statements and related disclosures.
13
.
3. ACQUISITIONS3.EXPECTED CREDIT LOSSES
VirBELA The Company is exposed to credit losses primarily through trade and other financing receivables arising from revenue transactions. The Company uses the aging schedule method to estimate current expected credit losses (“CECL”) based on days of delinquency, including information about past events and current economic conditions. The Company’s account receivable is separated into three categories to evaluate allowance under the CECL impairment model. The receivables in each category share similar risk characteristics. The three categories include agent non-commission based fees, agent short-term advances, and commissions receivable for real estate property settlements.
On November 29, 2018, (the “Acquisition Date”),The Company analyzed collectability for the three categories of receivables and concluded that only agent non-commission based fees receivables and agent short-term advances carry any risk of expected credit losses. Current economic conditions and forecasts of future economic conditions do not affect expected credit losses or collectability of real estate property settlements. The collection of these payments are in-substance guaranteed because they represent commission payments on closed transactions, and the Company has no historical experience or expectation of losses related to these receivables. Real estate property settlements totaled $31,503 as of March 31, 2020. As of March 31, 2020, agent non-commission based fees receivable and its newly formed subsidiary, eXp World Technologies, LLC (Purchaser) acquired substantially allshort-term advances totaled $3,270, of which the assetsCompany recognized expected credit losses of VirBELA, LLC (VirBELA), a California limited liability company. VirBELA provides a cloud-based environment focused on educational and innovative learning technologies to enhance global education experiences that empower individuals, teams, and organizations for clients in various industries. Its model allows for a level of engagement and participation that can typically only be achieved with face-to-face instruction. Its proprietary immersive 3D campus, which supports blended learning and big data assessment, is highly customizable to meet the branding and educational needs of clients. VirBELA developed the Company’s current cloud campus called eXp World, which provides 24/7 access to collaborative tools, training and socialization for the Company’s real estate agents and employees. The acquisition of VirBELA’s core group of products and services will allow eXp Realty to continue to accelerate its business in a sustainable and innovative way, which is consistent with eXp World Holdings’ vision to expand the product offering to agents, teams and others who could benefit from their own, always available environments for collaboration. $193.
The Company acquiredincreases the assets of VirBELAallowance for a total purchase price of $10,607,800, consisting of cash of $7,000,000 and shares of the Company’s common stock valued at $3,607,800. A cash payment of $6,500,000 was paid at closing and 97,371 shares ofexpected credits losses when the Company restricted common stock havingdetermines all or a valueportion of $1,000,000 was issued at closing. Ona receivable is uncollectible. The Company recognizes recoveries as a decrease to the acquisition date,allowance for expected credit losses.
Changes in the Company held $500,000 in accounts payable to secure the Seller’s performance of certain post close obligations. Duringallowance were not material for the three months ended March 31, 2019, the Seller performed its post close obligations and the $500,000 was paid to the Seller. The remaining shares of the Company’s common stock will be issued having a value of $1,000,000 on each of the first, second and third anniversaries of the Acquisition Date. The present value of future deliveries of eXp World Holdings, Inc. stock, calculated using a discount rate of 10%, is $2,607,800, which represents fair value as of the Acquisition Date. The discount of $392,200 will be amortized over the reporting periods using the effective interest method during Fiscal years 2019, 2020 and 2021. For the period ended March 31, 2019, the discount amortization was $62,516.
The following table shows the allocation of the purchase price of VirBELA, LLC to the acquired identifiable assets, and goodwill:
|
|
|
|
Accounts receivable |
| $ | 4,273 |
Inventory |
|
| 968 |
Fixed assets |
|
| 23,452 |
Intangible assets |
|
| 2,331,000 |
Goodwill |
|
| 8,248,107 |
Total purchase price |
| $ | 10,607,800 |
The Acquisition was accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. Under the acquisition method of accounting, the Company allocated the total purchase price to the tangible and identifiable intangible assets acquired based on their estimated fair values as of the acquisition date, as determined by management. The excess of the purchase price over the aggregate fair values of the identifiable assets was recorded as goodwill. Goodwill generated from the Acquisition was primarily attributable to an assembled workforce and planned expansion of VirBELA into new markets.
2020.
1411
The purchase price allocation to identifiable intangible assets acquired in the VirBELA acquisition was:
|
|
|
|
|
|
|
|
Tradename |
| $ | 1,169,000 |
Existing Technology |
|
| 297,000 |
Non-competition agreements |
|
| 125,000 |
Customer contracts |
|
| 740,000 |
Total intangible assets purchased |
| $ | 2,331,000 |
The allocation of the fair value of the acquired business was based on valuations of the estimated net fair value of the assets acquired. The fair value estimates of the assets acquired are subject to adjustment during the measurement period (up to one year from the Acquisition Date). For tax purposes, goodwill is amortized over 15 years and this amortization is tax deductible. The fair values of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. During the measurement period, we will adjust valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the Acquisition Date, if any, that, if known, would have resulted in revised values for these items as of that date. The impact of all changes, if any, that do not qualify as measurement period adjustments will be included in current period earnings.
The Company used carrying values as of the Acquisition Date to value trade receivables, inventory, and fixed assets, as we determined that they represented the fair value of those items at the Acquisition Date.
The Company valued the VirBELA tradename using an Income Approach known as the Relief from Royalty method. We applied a royalty rate of 1.0% to the VirBELA tradename. Once the royalty savings were calculated, we converted to a value using a discounted cash flow technique using a discount rate of 14.0%, to arrive at the estimated fair value. The VirBELA tradename is new and is not a mature brand name. Tradenames are being amortized over its estimated useful life of 10 years.
Similar to the valuation of tradenames, we valued existing technology using the Relief from Royalty method. We applied a royalty rate of 5.0% to the VirBELA technology. Once the royalty savings were calculated, we converted to a value using a discounted cash flow technique using a discount rate of 14.0% to arrive at the estimated fair value of existing technology. Existing technology is being amortized over its estimated useful life of five years. We estimated a useful life of five years since the software will continue to be modified and changed over the next several years making it significantly different than the software acquired today.
The Company valued non-competition agreements using a Loss Profits method. We prepared two projections of net income for the business. One projection which assumed the non-competition agreements were in place and one projection which assumed that no non-competition agreements were in place. The difference in cash flows from these two projections over the life of the non-competition agreements was discounted to present value at a rate of 14.0% to arrive at the estimated fair value of the non-competition agreements. Non-competition agreements are being amortized over their useful lives of three years which is equal to the contractual life of the non-competition agreements.
The Company valued customer contracts using the Multi-Period Excess Earnings Method (MPEEM). In the MPEEM, value is estimated as the present value of the benefits anticipated from ownership of the subject intangible asset in excess of the returns on the contributory assets required to realize those benefits. Taxes have been estimated based upon an effective total state and federal tax rate of 29.4% and the projected return on net assets was 14.0%. These inputs were used to determine an estimated fair value of customer contracts. Customer contracts are being amortized over their estimated useful lives of 10 years.
15
During the year ended December 31, 2018, the Company incurred total acquisition costs of $141,498. The acquisition costs were primarily related to legal, accounting and consulting services and were expensed as incurred through December 31, 2018 and are included in General and Administrative expenses in the Consolidated Statements of Operations.
From the Acquisition date, the results of operations of VirBELA have been included in and are immaterial to our condensed consolidated financial statements. Pro forma revenue and results of operations have not been presented, being the historical results of VirBELA are not material to our condensed consolidated statements of operations in any period presented.
4.FIXED ASSETS,PLANT, PROPERTY AND EQUIPMENT, NET
Fixed assets, net consisted of the following:
|
|
|
|
|
|
| ||||
|
| Three Ended March 31, | ||||||||
|
| As of |
| As of |
|
|
|
| ||
|
| March 31, 2019 |
| December 31, 2018 |
| March 31, 2020 |
| December 31, 2019 | ||
Computer hardware and software |
| $ | 4,727,360 |
| $ | 3,925,129 |
| $ 9,533 |
| $ 8,431 |
Furniture, fixture and equipment |
|
| 5,910 |
|
| 5,910 | ||||
Furniture, fixture, and equipment |
| 20 |
| 21 | ||||||
Total depreciable property and equipment |
|
| 4,733,270 |
|
| 3,931,039 |
| 9,553 |
| 8,452 |
Less: accumulated depreciation and amortization |
|
| (1,687,390) |
|
| (1,320,103) | ||||
Less: accumulated depreciation |
| (4,134) |
| (3,378) | ||||||
Depreciable property, net |
|
| 3,045,880 |
|
| 2,610,936 |
| 5,419 |
| 5,074 |
Assets under development |
|
| 107,934 |
|
| 128,589 |
| 466 |
| 354 |
Fixed assets, net |
| $ | 3,153,814 |
| $ | 2,739,525 | ||||
Property, plant and equipment, net |
| $ 5,885 |
| $ 5,428 | ||||||
|
|
|
|
|
Depreciation expense forFor the three months ended March 31, 20192020 and 20182019, depreciation expense was $367,287$757 and $183,321,$367, respectively.
5.GOODWILL AND INTANGIBLE ASSETS
Goodwill was $8,248,107$8,248 as of March 31, 20192020 and December 31, 2018.2019.
Goodwill was recorded in connection withDue to the acquisition of VirBELA in November 2018 and represents fair value asemergence of the acquisition date. No events have occurrednovel coronavirus, the Company reassessed its goodwill for impairment during the three months ended March 31, 2020. The current performance and expected forecast in relation to the results of the annual impairment test performed for 2019 indicated that indicated it was not more likely than not that goodwill was impaired.
16
Definite-LivedDefinite-lived intangible assets were as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of March 31, 2019 |
| March 31, 2020 |
| December 31, 2019 | |||||||||||||||
|
| Gross |
| Accumulated |
| Net Carrying |
| Gross |
| Accumulated |
| Net Carrying |
| Gross |
| Accumulated |
| Net Carrying | |||
|
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount |
| Amount |
| Amortization |
| Amount | |||
Trade name |
| $ | 1,169,000 |
| $ | (38,967) |
| $ | 1,130,033 |
| $ 1,169 |
| $ (156) |
| $ 1,013 |
| $ 1,169 |
| $ (127) |
| $ 1,042 |
Existing technology |
|
| 297,000 |
|
| (19,800) |
|
| 277,200 |
| 714 |
| (144) |
| 570 |
| 559 |
| (99) |
| 460 |
Non-competition agreements |
|
| 125,000 |
|
| (13,889) |
|
| 111,111 |
| 125 |
| (56) |
| 69 |
| 125 |
| (45) |
| 80 |
Customer contracts |
|
| 740,000 |
|
| (24,666) |
|
| 715,334 | ||||||||||||
Customer relationships |
| 740 |
| (98) |
| 642 |
| 740 |
| (80) |
| 660 | |||||||||
Software |
|
| 225,000 |
|
| — |
|
| 225,000 |
| 225 |
| - |
| 225 |
| 225 |
| - |
| 225 |
Total |
| $ | 2,556,000 |
| $ | (97,322) |
| $ | 2,458,678 | ||||||||||||
Licensing agreement |
| 210 |
| - |
| 210 |
| 210 |
| - |
| 210 | |||||||||
Total intangible assets |
| $ 3,183 |
| $ (454) |
| $ 2,729 |
| $ 3,028 |
| $ (351) |
| $ 2,677 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| As of December 31, 2018 | |||||||||||||||||||
|
| Gross |
| Accumulated |
| Net Carrying | |||||||||||||||
|
| Amount |
| Amortization |
| Amount | |||||||||||||||
Trade name |
| $ | 1,169,000 |
| $ | (9,742) |
| $ | 1,159,258 | ||||||||||||
Existing technology |
|
| 297,000 |
|
| (4,950) |
|
| 292,050 | ||||||||||||
Non-competition agreements |
|
| 125,000 |
|
| (3,472) |
|
| 121,528 | ||||||||||||
Customer contracts |
|
| 740,000 |
|
| (6,167) |
|
| 733,833 | ||||||||||||
Software |
|
| 225,000 |
|
| — |
|
| 225,000 | ||||||||||||
Total |
| $ | 2,556,000 |
| $ | (24,331) |
| $ | 2,531,669 | ||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
Definite-lived intangible assets were recorded in connection withare amortized using the acquisition of VirBELA in November 2018.straight-line method over its estimated useful life. Amortization expense for definite-lived intangible assets for three months ended March 31, 2020 and 2019 was $103 and 2018 were $72,991 and zero,$73, respectively. We estimate expected amortization related to definite-lived intangible assets at
As of March 31, 2019 will be:
|
|
|
|
Expected amortization |
|
|
|
Remaining 2019 |
| $ | 293,975 |
2020 |
|
| 366,967 |
2021 |
|
| 363,494 |
2022 |
|
| 250,300 |
2023 |
|
| 245,350 |
2024 and thereafter |
|
| 938,592 |
Total |
| $ | 2,458,678 |
6. STOCKHOLDERS’ EQUITY
As of March 31, 2019,2020, the Company had 61,499,84369,028 shares of common stock issued and 61,142,09167,112 shares outstanding.
The following provides a detailed descriptionCompany’s shareholder approved equity plans are administered under the 2013 Stock Option Plan and the 2015 Equity Incentive Plan. The purpose of the stock-based transactions completed duringequity plans is to retain the three months ended March 31, 2019:
During the three months ended March 31, 2019,services of valued employees, directors, officers, agents, and consultants and to incentivize such persons to make contributions to the Company repurchased 357,752 shares of common stock as part of the Company’s 2018 Share Repurchase Plan which resulted in a reduction to equity of $3,647,076.
17
During the three months ended March 31, 2019, the Company issued 134,260 shares of common stock upon the exercise of stock options and received cash consideration totaling $215,726 upon payment of the exercise price for the options.
During the three months ended March 31, 2019, the Company issued 620,287 shares of common stock in exchange for services totaling $6,210,293, which includes the expense activity in our Agent Equity Program.
During the three months ended March 31, 2019, the Company issued 136,194 shares of common stock in exchange for services totaling $3,669,321, which included the expense activity for our agent growth incentive programs.
During the three months ended March 31, 2018, the Company issued 208,324 shares of common stock in exchange for services totaling $2,370,004, which includes the expense activity in our 2015 Agent Equity Program.
During the three months ended March 31, 2018, the Company issued 61,598 shares of common stock in exchange for services totaling $8,279,109, which included the expense activity for our agent growth incentive programs.motivate excellent performance.
Agent Equity Program
The Company provides agents and brokers the opportunity to elect to receive 5% of commissions earned from each completed residential real estate transaction in the form of common stock. If agents and brokers elect to receive portions of their commissions in common stock, they are entitled to receive the equivalent number of shares of common stock, based on the fixed monetary value of the commission payable. The shares are issued atPrior to January 1, 2020, the Company recognized a 20% discount to market on the date of issuance. We recognize this 20% discountthese issuances as an additional cost of sales charge during the periods presented.
All agents and brokers Beginning in good standing withJanuary 2020, the Company are eligible to participate inamended the Agent Equity Program. To be considered in good standing, agentsPlan and brokers must be current in their financial obligations, including all fees,changed the discount on issued shares from 20% to the Company. In addition, all required licenses, local, state and national dues and subscriptions which are required to conduct real estate business in their state must be current and in effect.10%.
During the three months ended March 31, 20192020 and 2018,2019, the Company issued 620,287approximately 917 and 208,324 620 shares of common stock, respectively, to agents and brokers for total consideration of $6,210,293$8,794 and $2,370,004,$6,210, respectively, for the settlementnet of commissions payable.discount.
12
Agent Growth Incentive Program
The Company administers an equity incentive program whereby agents and brokers become eligible to receive awards of the Company’s common stock through agent attraction and performance benchmarks. Agents who qualify are awardedThe incentive program encourages greater performance and awards agents with common stock based on achievement of performance milestones.
Under Awards typically vest after performance benchmarks are reached and three years of subsequent service is provided to the incentive programs, the CompanyCompany. Share-based performance awards common stock to our agents and brokers that become issuable uponare based on a fixed-dollar amount of shares based on the achievement of certain milestones for bothperformance metrics. As such, the individual andawards are classified as liabilities until the recruited agents.
On December 27, 2018,number of share awards becomes fixed once the Company announced its Sustainable Equity Plan, which amendedperformance metric is achieved.For the Real Estatethree months ended March 31, 2020, the Company’s stock compensation attributable to the Agent Growth Incentive Program collectively referredwas $3,519, of which the total amount of stock compensation attributable to herein as our “agent growth incentive programs.” The primary changeliability classified awards was $1,043. Stock compensation expense related to the Agent Growth Incentive Program is included in general and administrative expense in the Company now issues agents a dollar valuecondensed consolidated statements of shares, rather than a number of shares for achieving performance milestones. The agent growth incentive programs is as follows:
|
|
18
|
|
|
|
|
|
All stock grants are priced based on the closing market price of eXp World Holdings, Inc. common stock on the last trading day of the qualification month. Awards vest over a three-year vesting period. Agents must remain with the company in good standing during the vesting period. For attraction awards, the sponsoring agent and the agent who joins and closed their first transaction must both remain in good standing with the company during the vesting period.
comprehensive income (loss).
The following table illustrates changes in the Company’s stock issuance activity for our agent growth incentive programs,compensation liability for the following periods:
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average | |
|
| Shares |
| Fair Value | ||
Balance, December 31, 2017 |
|
| 3,059,065 |
| $ | 7.60 |
Granted |
|
| 2,380,100 |
|
| 11.59 |
Issued |
|
| (889,769) |
|
| 12.16 |
Forfeited |
|
| (676,519) |
|
| 4.05 |
Balance, December 31, 2018 |
|
| 3,872,877 |
|
| 11.63 |
Granted |
|
| 461,051 |
|
| 8.77 |
Issued |
|
| (322,669) |
|
| 11.32 |
Forfeited |
|
| (217,891) |
|
| 2.73 |
Balance, March 31, 2019 |
|
| 3,793,368 |
|
| 11.46 |
The fair value of stock awards is based on the closing price of our common stock on the applicable grant date. As of three months ended March 31, 2019, the Company had unvested stock awards for 1,847,606 shares of common stock and awards expected to vest for 3,793,368 shares of common stock with unrecognized compensation costs totaling $21,420,010. The expense related to the agent growth incentive programs is recorded as stock compensation expense.2020:
Balance, December 31, 2019 | $ 277 | |
Estimated stock awards | 1,043 | |
Stock awards reclassified from liability to equity | (75) | |
Balance, March 31, 2020 | $ 1,245 | |
Stock Option Awards
During the three months ended March 31, 20192020, the Company granted 106,500152 stock options to employees with an estimated grant date fair value of $1,014,418.$8.82 per share. The assumptions used to estimate the grant date fair value of the awards issued for the three months ended March 31, 2019 include: expected volatility based on historical stock prices of 126.52%; an expected term of 6.25 years; risk free rates based on U.S. Treasury instruments for the expected term of approximately 2.6%; and no dividend payments.
19
The following table illustrates the Company’s stockwas calculated using a Black Scholes-Merton option activity for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted | ||||
|
|
|
|
|
|
|
| Average | ||||
|
|
|
| Weighted |
|
|
| Remaining | ||||
|
|
|
| Average |
|
|
| Contractual Term | ||||
|
| Options |
| Exercise Price |
| Intrinsic Value |
| (Years) | ||||
Balance, December 31, 2017 |
|
| 10,873,292 |
| $ | 1.50 |
| $ | 5.08 |
|
| 6.65 |
Granted |
|
| 870,000 |
|
| 10.86 |
|
| (3.78) |
|
| 9.34 |
Exercised |
|
| (2,594,050) |
|
| 0.78 |
|
| 11.90 |
|
| — |
Forfeited |
|
| (451,629) |
|
| 3.03 |
|
| 9.59 |
|
| — |
Balance, December 31, 2018 |
|
| 8,697,613 |
| $ | 2.08 |
| $ | 5.00 |
|
| 6.07 |
Granted |
|
| 106,500 |
|
| 10.64 |
|
| 0.23 |
|
| 9.96 |
Exercised |
|
| (169,318) |
|
| 1.28 |
|
| 9.40 |
|
| — |
Forfeited |
|
| (190,625) |
|
| 9.35 |
|
| 1.08 |
|
| — |
Balance, March 31, 2019 |
|
| 8,444,170 |
| $ | 2.04 |
| $ | 8.83 |
|
| 5.81 |
Exercisable at March 31, 2019 |
|
| 6,769,847 |
|
| 1.01 |
|
| 9.86 |
|
| 5.13 |
Vested at March 31, 2019 |
|
| 6,970,588 |
| $ | 1.09 |
| $ | 9.78 |
|
| 5.22 |
As of March 31, 2019, the total unrecognized compensation cost associated with options was approximately $9,785,458.pricing model.
Stock Repurchase Plan
OnIn December 27, 2018, the Company announced that ourCompany’s board of directors (“the Board”) approved a stock repurchase program authorizing usthe Company to purchase up to $25,000,000$25 million of ourits common stock.stock, which was later amended in November of 2019 to increase the authorized repurchase amount to $75 million. Purchases under the repurchase program may be made in the open market or through a 10b5-1 plan and are expected to comply with Rule 10b-18 under the Securities Exchange Act of 1934, as amended. The timing and amountnumber of shares repurchased will dependdepends upon market conditions. The repurchase program does not require the Company to acquire a specific number of shares. The cost of the shares that are repurchased will beis funded from available working capital.
The repurchase program began on January 2, 2019 and the Company will cease purchasing stock on the earliest to occur of (i) the date on which either the broker-dealer administering our repurchase plan or the Company terminates the plan , (ii) the date on which our share repurchase broker receives notice of the commencement or impending commencement of any proceedingswas discontinued in respect of or triggered by bankruptcy or insolvency, (iii) June 28, 2019 and (iv) the date that the aggregate price of all purchases reaches $7,500,000 (after including all commissions and other expenses of purchases). The Company may extend the repurchase program to repurchase the remaining $17,500,000 of our common stock authorized by our board of directors.March 2020.
For accounting purposes, common stock repurchased under ourthe stock repurchase programs is recorded based upon the settlement date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method. During the three months ended as of March 31, 20192020, the Company repurchased 357,752991 shares of common stock that are held in treasury.at a total cost of $10,305. These shares are considered issued but not outstanding. The total cost of the shares repurchased was $3,647,076.
20
7.FAIR VALUE MEASUREMENTSMEASUREMENT
ASC 820 definesThe fair value asof a financial instrument is the priceamount that wouldcould be received to sellupon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reportingmeasurement date. The methodology establishes consistencyFinancial assets are marked to bid prices and comparability by providing a three-tieredfinancial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The fair value hierarchy that prioritizes the inputsquality and reliability of the information used to valuation techniquesdetermine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three broad levels, which are described below:categories:
· | ||
|
| |
Level 1 | – Inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs). |
· | Level 2 | – Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or prices that vary substantially). |
· | Level 3 | – Inputs are unobservable inputs that reflect the entity's own assumptions in pricing the asset or liability (used when little or no market data is available). |
13
The Company holds funds in a money market account.account, which are considered Level 1 assets. The Company values its money market funds at fair value on a recurring basis.
The following table summarizesAs of March 31, 2020 and December 31, 2019, the fair value of the Company’s fair value measurements:money market funds was $18,350 and $18,281, respectively.
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|
|
| March 31, 2019 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Fair Value |
| Quoted Prices in Active Markets |
| Significant Other Observable Inputs |
| Significant Unobservable Inputs |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
| $ | 8,081,875 |
| $ | 8,081,875 |
| $ | — |
| $ | — |
|
Total Assets |
| $ | 8,081,875 |
| $ | 8,081,875 |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2018 | |||||||||||
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| Fair Value |
| Quoted Prices in Active Markets |
| Significant Other Observable Inputs |
| Significant Unobservable Inputs |
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Assets: |
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Money market funds |
| $ | 8,051,662 |
| $ | 8,051,662 |
| $ | — |
| $ | — |
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Total Assets |
| $ | 8,051,662 |
| $ | 8,051,662 |
| $ | — |
| $ | — |
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There have been no transfers between Level 1, Level 2 and Level 3 in the period presented.
21
8. DEBTThe Company did not have any Level 2 or Level 3 financial assets or liabilities in the period presented.
We have a $1,000,0008.DEBT
The Company cancelled its $1,000 line of credit maturing onin May 2019 that was scheduled to mature in August 29, 2019, with a variable interest rate computed on a 360‑day year. The variable interest rate isas the higher of either 1) the Prime Rate in effect on such day, 2) Daily One Month LIBOR plus one and one-half percent (1.5%), or 3) the Federal Funds Rate plus one and one-half percent (1.5%). The line of credit agreement requires us to comply with various financial covenants as well as customary affirmative and negative covenants that restrict our ability to, among other things, incur debt and liens, make significant investments, dispose of assets and make distributions without prior consent. The line of credit is secured by accounts receivable. The line of credit contains certain financial covenants, including a fixed charge coverage ratio and a tangible net worth. At March 31, 2019, we were in compliance with all of the financial covenants underCompany had not had any borrowings against the line of credit.
As of March 31, 2019, we had no amount outstanding under the line of credit.
9.LEASES
Operating leases
The Company adopted ASU No. 2016-02 – Leases (Topic 842) effective January 1, 2019 using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated. There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of this adoption. ASU No. 2018-11 – Leases (Topic 842) – Targeted Improvements permits an entity to apply the new leases standard at the date of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with ASC 840 – Leases.9.LEASES
The Company’s lease portfolio consists of office leases with lease terms ranging from less than 1one year to 7seven years, with the weighted average lease term being 3three years. The Company elected to utilize the practical expedient to expense leases with a lease term of less than 12 months in the period incurred.
Certain leases provide for increases in future lease payments once the term of the lease has expired, as defined in the lease agreements. These leases generally also include real estate taxes.
Information as Lessee under ASC 842Short term leases, having a lease term at commencement of 12 months or less, are not capitalized and the expenses are recognized in the period incurred.
Included below is other information regarding leases for the three months ended March 31, 2020 and 2019:
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| Three Months Ended March 31, | ||
|
| 2020 |
| 2019 |
Other information |
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|
Operating lease expense |
| $ 117 |
| $ 30 |
Short-term lease expense |
| 5 |
| 5 |
Cash paid for operating leases |
| 117 |
| 30 |
Weighted-average remaining lease term (years)– operating leases (1) |
| 4 |
| 3 |
Weighted-average discount rate – operating leases |
| 4.85% |
| 4.85% |
(1) | The Company’s lease terms include options to extend the lease when it is reasonably certain the Company will exercise its option. Additionally, the Company considered any historical and economic factors in determining if a lease renewal or termination option would be exercised. |
As of March 31, 2019,2020, maturities of lease liabilities by fiscal year were as follows:
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Remaining 2020 |
| $ 340 |
2021 |
| 361 |
2022 |
| 307 |
2023 |
| 182 |
2024 |
| 5 |
2025 and thereafter |
| 6 |
Total lease payments |
| 1,201 |
Less: interest |
| (83) |
Total operating lease liabilities |
| $ 1,118 |
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10.SEGMENT INFORMATION
Historically, management has not made operating decisions and assessed performance based on geographic locations. Rather, the chief operating decision maker makes operating decisions and assesses performance based on the products and services of identified operating segments. While management does consider real estate and brokerage services, acquired technology, and affiliated services to be identified operating segments, the profits and losses and assets of the acquired technology and affiliated services segment are not material.
Operating Segments
The Company primarily operates as a cloud-based real estate brokerage. The real estate brokerage business represents 99.9% and 99.8% of the total revenue of the Company as of March 31, 2020 and 2019, respectively. The real estate
14
brokerage business represents 93.7% and 95.8% of the total assets of the Company as of March 31, 2020 and December 31, 2019, respectively.
The Company offers software subscriptions to customers to access its virtual reality software platform. Additionally, the Company offers professional services for implementation and consulting services. However, as the technology segment is still primarily used as an internal resource for the operations of the Company, the operations and assets of the technology segment are not managed by the Company’s chief operating decision-maker as a separate reportable segment.
Services provided through First Cloud and eXp Silverline are in the emerging stages of development as contributing segments and are not material to the Company’s total revenue, total net income (loss) or total assets as of March 31, 2020.
The Company aggregates the identified operating segments for reporting purposes.
Geographical Information
The Company primarily operates within the real estate brokerage markets in the United States and Canada. During the fourth quarter of 2019, the Company expanded operations into the UK and Australia.
The Company’s management analyzes geographical locations on a forward-looking basis to identify growth opportunities. For the three months ended March 31, 2020 and 2019, approximately 4% and 2% of the Company’s total revenue was generated outside of the U.S., respectively. Assets held outside of the U.S. as of March 31, 2020 and December 31, 2019 were 4% and 9%, respectively.
The Company’s technology services and affiliated services are currently provided primarily in the U.S.
11.VARIABLE INTEREST ENTITIES
A company is deemed to be the primary beneficiary of a VIE and must consolidate the entity if the company has both the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company has concluded that First Cloud is a VIE and that it is the primary beneficiary as it has the power to direct the activities of First Cloud and has an economic interest that will absorb the losses and/or receive benefits that could be significant to the VIE. Accordingly, the Company consolidates the assets and liabilities and operating results of First Cloud in the condensed consolidated financial statements. The Company recognizes noncontrolling interest in the consolidated balance sheets. The income or loss allocations reflected on the condensed consolidated statements of comprehensive income (loss) may create volatility in the reported results of operations, including net losses attributable to common stockholders.
2215
Included belowThe financial information of First Cloud is other information regarding leases for the period ended March 31, 2019.
presented below.
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| March 31, 2020 |
| December 31, 2019 |
Assets |
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Cash |
| $ 371 |
| $ 424 |
Accounts Receivable |
| 4 |
| - |
Prepaids and other assets |
| 45 |
| 2 |
Total assets |
| $ 420 |
| $ 426 |
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Liabilities & Equity |
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Membership interests payable |
| 10 |
| 45 |
Accounts payable |
| 5 |
| 15 |
Total liabilities |
| 15 |
| 60 |
Equity |
|
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|
|
Members equity |
| 562 |
| 474 |
Accumulated deficit |
| (157) |
| (108) |
Total equity |
| 405 |
| 366 |
Total liabilities & equity |
| $ 420 |
| $ 426 |
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| Three Months Ended March 31, | ||
|
| 2020 |
| 2019 |
Revenues |
| $ 37 |
| $ - |
Expenses |
| 86 |
| - |
Net loss |
| $ (49) |
| $ - |
12.SUBSEQUENT EVENTS
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. COVID-19 has caused a global health emergency and was declared a pandemic by the World Health Organization in March 2020. In an effort to slow and contain the spread of COVID-19, local, state, and national governments implemented various measures, which have impacted businesses worldwide. As of the date of issuance of this Form 10-Q, the magnitude and duration of the impact from COVID-19 are unknown and cannot be reasonably estimated.
On April 8, 2020, the Company announced that Chief Executive Officer and Chairman and Chief Financial Officer of eXp and the Chief Executive Officer of eXp Realty LLC had agreed to voluntarily reduce their annual base salaries by 50%. In addition, the Company reduced the cash compensation payable to each independent director by 50%. These steps were taken in light of the business uncertainty created by the evolving COVID-19 pandemic.
(1)The Company also has implemented a series of cost-savings actions to preserve capital, including temporary employment furloughs and workforce reductions, temporary salary and work-week reductions for certain employees, marketing expense pullbacks, and delaying investments in certain strategic initiatives. TheThese measures will be assessed on an ongoing basis and may be extended and/or expanded.
As of the date of this quarterly report, the Company’s lease terms include options to extend the lease when it is reasonably certainresults of operations, liquidity and financial condition have not been significantly impacted; however, the Company will exercise its option. Additionally,continue to monitor events and/or changes in circumstances. While the Company considered any historicalis positioned to survive and thrive in a series of fluctuations in economic factorsactivity, it is too early to determine the impact the current economic situation will have on the Company’s results of operations or financial condition, and management’s judgment regarding the situation could change in determining if a lease renewal or termination option would be exercised.the future.
Information as Lessee under ASC 840
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, future minimum lease payments under ASC 840 for operating leases were as follows:
16
|
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Year ending December 31, |
|
|
|
2019 |
| $ | 451,710 |
2020 |
|
| 420,518 |
2021 |
|
| 237,142 |
2022 |
|
| 42,532 |
2023 and thereafter |
|
| 4,134 |
Total |
| $ | 1,156,036 |
The Company reassessed all of our leases to determine whether any expired or existing contracts were or contained a lease under ASC 842. Expired or existing contracts previously considered leases under ASC 840 no longer meet the definition of a lease under ASC 842 and therefore, have been excluded from future lease payments.
Item 2. MANAGEMENT’S2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to inform the reader about matters affecting the financial condition and results of operations of eXp World Holdings, Inc. (the “Holding Company” or “eXp”) and its subsidiaries (collectively, “we,” “us”, “our”, or the “Company”). The following discussion should be read together with our condensed consolidated financial statements and related notes included elsewhere within this report. Management’s Discussion and Analysis of Financial ConditionConditions and Results of Operations contain forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. See “Forward-Looking Statements” and “Part II – Item 1A. – Risk Factors” of this Quarterly Report and “Item 1 A. – Risk Factors” in our Annual Report on Form 10- K for the fiscal year ended December 31, 2018,2019, for a discussion of certain risks, uncertainties and assumptions associated with these statements.
23
All dollar amounts are in thousands except per share data and as otherwise noted.
OVERVIEW
We are a leading cloud-based international real estate brokerage and focus our operations on the development and use of cloud-based technologies in order to grow an international brokerage without the burden of bricks and mortar. We generate revenue primarily by serving as a licensed broker for the purpose of processing residential real estate transactions, from which we earn commissions. The Company in turn pays a portion of the commissions earned to the real estate agents and brokers.
Our strength is attracting real estate agent and broker professionals that have contributed to our growth. As of March 31, 2019, we have grown our agent and broker base 93%, to 17,929 agents compared to 9,290 as of the same period in the prior year.
The following table sets forth the number of transactions, sales volume and commission revenue earned on real estate transactions:
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Three Months Ended March 31, |
| Three Months Ended March 31, |
| Change | ||||||||||||
2019 |
| 2018 |
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| ||||||||
Number |
| Volume |
| Revenue |
| Number |
| Volume |
| Revenue |
| Number |
| Volume |
| Revenues |
22,307 |
| $ 5,779,069,429 |
| $ 157,033,632 |
| 9,473 |
| $ 2,324,591,650 |
| $ 61,962,531 |
| 12,834 |
| $ 3,454,477,779 |
| $ 95,071,101 |
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We continue to increase our presence in the United States and Canada through the execution of our growth strategies.
Agent Ownership
The Company maintains equity incentive programs whereby agents and brokers of eXp Realty can become eligible for awards of the Company’s common stock through the achievement of production and agent attraction benchmarks. Under the Sustainable Equity Program, agents and brokers who qualify can be issued shares of the Company’s common stock.
The Company also administers a program whereby agents and brokers could elect to receive 5% of their commission payable in the form of Company common stock which is issued at a 20% discount to market on the date of issuance. The agent equity program continues to be another element in creating a culture of agent-ownership.
RECENT BUSINESS DEVELOPMENTS
Initiatives
Customer and Employee Experience
The Company has recently embarked on an initiative to better understand both its customer and employee experience. In doing so, we are adopting many of the principles of the Net Promoter Score® (NPS) across many aspects of our organization. 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 customers and employees. In turn, this often leads to enthusiastic fans of eXp who will promote our Company and continue leading us through strong organic growth.
This also ties into one of our core values, transparency. While we strive for high satisfaction, a low or trending lower NPS score is equally important to identify. As NPS scores are often leading indicators to customers 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 that into action with an effort to remediate the specific root cause(s) driving the lower score. This fast and iterative approach has already led to improvements in such parts of our business such as agent onboarding, commission transaction processing, and employee benefits.
24
Open Platform Strategy
The Company continues to build out eXp Enterprise (Enterprise) which is our proprietary platform that manages all of eXp Realty’s critical processes and information, including onboarding new agents, transactions, commission payments and other back office processes. We recently decided to further embrace the concept of an open platform strategy as it relates to other key functionality and solutions which our agents and brokers utilize to run their businesses.
Why are we taking this approach? - First and foremost, we believe in the efficiency of choice and flexibility. We do not believe in a one size fits all when it comes to business solutions for every single eXp agent and broker. This approach validates the previous investments made by our agents and brokers as it relates to the specific solutions to run their individual businesses.
What specifically does this mean? - We will be building out Application Program Interfaces (API) which will allow for various third-party solutions to directly connect into Enterprise. Accordingly, this will allow our agents and brokers to choose which solution works best for them as it relates to their desired lead generation, customer relationship management, transaction management, Internet Data Exchange (IDX) websites, among others.
How will we deliver this concept? - In addition to building out the technological infrastructure we will also establish an eXp Partner Marketplace. This will allow for a validation process of potential third-party service providers as well as consistent utilization of APIs for seamless use of tools by our agents and brokers.
Equity
On December 27, 2018, the Company introduced its Sustainable Equity Plan for real estate agents and brokers at eXp Realty once the agent count was to exceed 16,000 agents which occurred in January of 2019.
Also, on December 27, 2018, the Company announced that its Board of Directors authorized a stock repurchase program to offset equity issuances for up to $25 million of company common stock. Our stock repurchase program and Sustainable Equity Plan are more fully disclosed in Note 6 – Stockholders’ Equity, of the Notes to the Condensed Consolidated Financial Statements.
VirBELA
We will continue developing the core platform and its underlying infrastructure to accommodate for the ever-increasing use and scale required to support our eXp Realty division. Also in development and coming to market soon is a new product centered around the concept of an open campus whereby small and independent organizations will utilize sub spaces as part of a larger campus similar to co-working environments that currently exist in the physical brick and mortar world. Lastly, we will continue to service existing and new business to business enterprise level contracts in the coming year.
Agile at Scale
The Company continues to focus and refine its efforts on our engagement strategy to build a positive employee experience to advance creativity, productivity and service quality to retain top performing talent with the overall goal of growing and improving overall profitability. We have been and will continue to form more and more smaller functional teams across the entire organization. This allows for faster identification of challenges and opportunities, autonomy and decision making, and execution affecting our customers and employees. This is tied together by ensuring all teams are aligned and working towards outcomes consistent with our vision, goals, and key results.
25
MARKET CONDITIONS AND INDUSTRY TRENDS
Home Sale TransactionsOur 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 increasing 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.
In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. This new coronavirus has caused a global health emergency and was declared a pandemic by the World Health Organization in March 2020. Risks relating to the spread of coronavirus pushed the Federal Reserve to cut interest rates as part of an emergency action to protect the economy from its impact. In an effort to contain and slow the spread of COVID-19, governments have implemented various measures, such as, ordering non-essential businesses to close, issuing travel advisories, cancelling large scale public events, ordering shelter-in-place for residents and requiring the public to practice social distancing.
The COVID-19 pandemic has materially and adversely affected businesses worldwide. The magnitude and duration of the impact from COVID-19 are unknown and cannot be reasonably estimated. We believe that once COVID-19 is contained the economy will rebound depending on the 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)(“NAR”), existing home sale transactionsthe coronavirus is leading to fewer homebuyers, as well as listings being delayed. The decline in consumer confidence and measures taken to prevent the spread of single family homes decreased 5.4% asCOVID-19 is bringing caution to buyers and sellers. The NAR is predicting COVID-19 could accelerate economic corrections and contribute to sharper but temporary drags on housing activity. While the effect of lower interest rates should offset some of the negative impacts on housing demand, it is too early to determine whether the lower interest rates can overcome the current economic concerns and rising uncertainty.
While the Company is positioned to survive and thrive in a series of fluctuations in economic activity, it is too early to predict the extent of the effects the COVID-19 pandemic will have on our Company.
Inventory
As of March 2019 (preliminary), compared31, 2020, increased demand and low mortgage rates have caused inventory levels to decline to record lows, which continues to be a challenge for home buyers. According to the same prior year period. During this same period, the average home sales price increased 3.8%. Continued inventory constraints due to increased demand may have contributed to the decline in home sales transactions.
Inventory
TheNAR, inventory of existing homes for sale in the U.S. increased 2.4%was 1.5 million as of March 31, 2019,2020 (preliminary) compared to 1.7 million at the same period prior year period. Theend of March 2019. As a result, inventory represents a nationalhas decreased to 3.4 average supplymonths of 3.9 monthssupply as of March 31, 2019,2020 (preliminary) from 3.8 average months’ supply at the end of March 2019. With government implemented actions in response to COVID-19, fewer individuals are listing their homes and as a result year over year inventory has decreased. However, the NAR indicated they expect inventory to slowly increase due to high demand as the economy steadily reopens.
17
Mortgage Rates
According to the NAR, mortgage rates on commitments for 30-year, conventional, fixed-rate mortgages averaged 3.7% for the first quarter of 2020, compared to 4.4% for the first quarter of 2019. Mortgage rates are forecasted to increase to 3.8% throughout 2020 and increase to 4.1% in 2021. Despite forecasts, mortgage rates continue to be volatile. Although the Federal Reserve cut interest rates in an effort to stabilize the economy in response to COVID-19, some lenders have increased interest rates in an effort to slow refinance activity. It is still too early to predict what impact fluctuations in interest rates will have on the housing market and the economy due to the current home sales pace which is upuncertainty resulting from 3.7 months as of December 31, 2018.the COVID-19 pandemic.
Housing Affordability Index
Also, according to the NAR, the composite housing affordability index increased to 156.9170.0 for February 20192020 (preliminary) from 152.5153.8 for March 2018. However, the2019. The housing affordability index continues to be at historically favorable levels. When the index is above 100, it indicates that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. The favorable housing affordability index is due in part to favorable mortgage rate conditions and low overall unemployment. Although mortgageunemployment during the first quarter. However, despite a cut in rates decreased approximately 3 basis points fromby the Federal Reserve in an effort to stabilize the economy, unemployment increased sharply in March 31, 20182020, and is expected to March 31, 2019,increase further as a result of the rates continueCOVID-19 pandemic. It is still too early to be at historically low levels.predict the extent of the effects COVID-19 will have on housing affordability.
Mortgage RatesHome Sales Transactions
According to the Federal Housing Finance Agency, mortgage rates on commitments for 30-year, conventional, fixed-rate first mortgages averaged 4.5% for 2018 and the rate decreased to 4.3% in March 2019 (preliminary). Mortgage rates are forecasted to increase to 4.6% in 2020. To the extent mortgage rates increase further, consumers continue to have financing alternatives such as adjustable rate mortgages or shorter-term mortgages which can be utilized to obtain a mortgage rate that is lower than a comparable 30-year fixed-rate mortgage.
While increasing mortgage rates and higher home prices may negatively impact housing affordability, demand remains favorable by rising wages, availability of alternative mortgage arrangements and improving consumer confidence.
Factors that may negatively affect growth in the housing industry include prolonged periods of slow economic growth, increased prevalence of unemployment, increasing mortgage interest rates, increase in home sales prices, insufficient inventory levels, regulations imposed by local, state and federal government agencies, geopolitical instability, first time home buyers inability to save due to increasing rent prices, other debt including credit cards and student loans, and adverse shifts in consumer attitudes towards home ownership.
Existing Home Sales
NAR, existing home sale transactions for month end March 20192020 (preliminary) decreased 5.4%increased to 5.3 million compared to 5.2 million compared tofor March 2019. During the same period in 2018. During this same period,first quarter of 2020, eXp Realty settled home sales units increased 136% to 22,340 and homewere 37,882 (whole units) resulting in sales volume increased 148% to $5.8 billion compared to the same period in 2018.of $11.0 billion. Our home sale transactions growth was directly related to the growth of our agent base, which increased 93% compared to the59% during this same period in 2018.
As of their most recent releases, NAR is forecasting existingperiod. While home sales transactions remained strong during the first quarter of 2020, home sales transactions are expected to decrease 0.7%decline as a result of government implemented actions and rising uncertainty among buyers and sellers. The NAR indicated that home sale transactions will continue to be temporarily interrupted for the remaindernext couple months. Beyond this, it is still too early to predict the full extent of 2019 and increase 3.0% in 2020.
26
COVID-19 on transactions.
Existing Home Sales Price
For the three months ended March 31, 2019, existingExisting home sales average price for month end March 2020 (preliminary) increased 3.8%,was $281 compared to $260 in March 2019. During this same period, eXp Realty homes sales price averaged $290 in the same prior year period.first quarter of 2020 compared to $259 in the first quarter of 2019. With rising uncertainly and fewer listings in an already housing shortage environment, home sale prices are likely to remain steady. However, it is still too early to predict the extent of the effects COVID-19 will have on home sales prices.
Continued Accelerated Growth
Our strength is attracting real estate agent and broker professionals that have contributed to our growth. As of March 31, 2020, we have grown our agent and broker base 59% to 28,449 agents and brokers compared to 17,929 as of the March 31, 2019.
The following table sets forth the number of transactions, sales volume and commission revenue earned on real estate transactions:
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Three Months Ended March 31, |
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(in thousands, except transactions) |
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2020 |
| 2019 |
| Change | ||||||||||||
Transactions |
| Volume |
| Revenue |
| Transactions |
| Volume |
| Revenue |
| Transactions |
| Volume |
| Revenues |
37,882 |
| $ 11,002,500 |
| $ 271,421 |
| 22,307 |
| $ 5,779,069 |
| $ 157,034 |
| 15,575 |
| $ 5,223,431 |
| $ 114,387 |
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We believe primary driverscontinue to increase our presence in the United States and Canada through the execution of our growth strategies, and in the fourth quarter of 2019, we expanded operations to the long-term demand for housingU.K. and theAustralia. The rate of growth of our companyagent 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 expects that the economic consequences of the COVID-19 pandemic will slow our agent growth rate and our transaction in the second
18
quarter, and possibly into the second half of 2020 depending on the duration of government implemented restrictions due to the COVID-19 pandemic.
Agent Ownership
The Company maintains an equity incentive program whereby agents and brokers of eXp Realty can become eligible for 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 are issued shares of the Company’s common stock.
The Company also administers a program whereby agents and brokers can establish a direct ownership interest in the Company as a stockholder. Agents and brokers can elect to receive 5% of their commission payable in the form of Company common stock which is issued at a 10% discount to market on the date of issuance. This agent equity program continues to be another element in creating a culture of agent-ownership.
RECENT BUSINESS DEVELOPMENTS
Real Estate Brokerage Initiatives
Global Real Estate Cloud Brokerage
In the fourth quarter of 2019, the Company announced its first international expansions outside of North America into Australia and the U.K. This is part of the Company’s initiative to operate as a Global Real Estate Cloud Brokerage. We look forward to our cloud campus being populated by real estate professionals from around the globe as they conduct business, collaborate with each other, and develop meaningful personal and professional relationships across borders and cultures. In addition to these new countries, the Company continues to also focus on growth in the United States. We continue to expand in Canada, and recently expanded in Nova Scotia.
Agent and Employee Experience
The Company has embarked on an initiative to better understand both its agents and employee experience. In doing so, we have adopted many of the principles of the Net Promoter Score® (NPS) across many aspects of our organization. NPS is a measure of customer satisfaction and is measured on a scale between -100 and 100. A NPS above 50 is considered excellent. 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.
This also ties into one of our core values, transparency. While we strive for high satisfaction, a low or trending lower NPS is equally important to identify. The Company’s agent NPS is 70 in the first quarter of 2020. As NPS scores are often leading indicators to agents and employees’ future actions, we are able to learn quickly what may be a ‘pain point’ or product that is not meeting its desired objective. We then take that information and translate it into action with an effort to remediate the specific root cause(s) driving the lower score. This fast and iterative approach has already led to improvements in such parts of our business such as agent onboarding, commission transaction processing, and employee benefits.
Equity
Our agent compensation plans represent a key lever in our strategy to attract and retain independent agents and brokers. The costs attributable to these plans are also a significant component of our commission structure and results of operations. 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. 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 is expected to have a meaningful effect on our results of operations going forward. Our stock repurchase program and agent growth incentive program are more fully disclosed in Note 6 – Equity of the Notes to the Condensed Consolidated Financial Statements.
Technology Products and Services
We continue developing the core VirBELA software platform and its underlying infrastructure to accommodate for the ever-increasing use and scale required to support our eXp Realty division. In 2019 we released a new product centered on the concept of an open campus whereby small and independent organizations may utilize sub spaces as part of a larger campus similar to collaborative environments that demand are housing affordability,currently exist in the general economic healthphysical brick and mortar world. In the
19
first quarter of 2020 VirBELA began offering virtual events in conjunction with Event Farm. Given the U.S. economy, demographic trends such as population growth,current environment due to the COVID-19 pandemic, there is an acute need for virtual meetings and VirBELA is poised to grow with the increase in household formation, mortgage rate levelsdemand. Lastly, we expect to continue to service existing and mortgage availability, job growth,new business-to-business enterprise level contracts in the inherent benefits of owning a home versus rentingcoming year.
Affiliated Services
Recent acquisitions and the influence of local housing dynamics of supply versus demand.
As of March 31, 2019, we believe that these factors are generally favorable. However, significant changespartnerships have allowed us to one orbegin offering to customers more of these drivers could cause the demand for housingproducts and services complimentary to slow, negatively affecting allour real estate brokerage firms, includingbusiness. These affiliated services include mortgage origination, title, escrow, and settlement services, which we can now provide as a more inclusive offering in addition to our brokerage services. We anticipate continued growth and investment in these service offerings in 2020; however, actual performance will depend directly on utilization by eXp Realty.
Regardless of whether the housing market continues to grow or slows, the Company is positioned to adhere to its low-cost, high-engagement model, affordingRealty agents and brokers increased incomebrokers and ownership opportunities while offering a scalable solutionthe duration of government implemented restrictions due to brokerage owners looking to survive and thrive in a series of fluctuations in economic activity.the COVID-19 pandemic.
Results of Operations
Below are key operating results for the three months endedThree Months Ended March 31, 20192020 compared to the three months endedThree Months Ended March 31, 2018:2019
|
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|
|
| Three Months Ended March 31, |
| Percentage of |
| Three Months Ended March 31, |
| Percentage of |
| Change |
| ||||||||
|
| 2019 |
| Revenue |
| 2018 |
| Revenue |
| Dollar |
| Percentage |
| ||||||
Revenue |
| $ | 157,033,632 |
|
| 100.0 | % | $ | 61,962,531 |
|
| 100.0 | % | $ | 95,071,101 |
|
| 153.4 | % |
Operating expenses: |
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Commission and other agent-related costs |
|
| 142,542,405 |
|
| 90.8 |
|
| 55,701,516 |
|
| 89.9 |
|
| 86,840,889 |
|
| 155.9 |
|
General and administrative |
|
| 19,700,772 |
|
| 12.5 |
|
| 16,281,113 |
|
| 26.3 |
|
| 3,419,659 |
|
| 21.0 |
|
Sales and marketing |
|
| 888,850 |
|
| 0.6 |
|
| 645,797 |
|
| 1.0 |
|
| 243,053 |
|
| 37.6 |
|
Total operating expenses |
|
| 163,132,027 |
|
| 103.9 |
|
| 72,628,426 |
|
| 117.2 |
|
| 90,503,601 |
|
| 124.6 |
|
Income (loss) from operations |
|
| (6,098,395) |
|
| (3.9) |
|
| (10,665,895) |
|
| (17.2) |
|
| 4,567,500 |
|
| 42.8 |
|
Other income (expense) |
|
| (80,976) |
|
| (0.1) |
|
| — |
|
| — |
|
| (80,976) |
|
| — |
|
Interest income (expense) |
|
| 46,245 |
|
| 0.0 |
|
| — |
|
| — |
|
| 46,245 |
|
| — |
|
Income (loss) before income tax expense |
|
| (6,133,126) |
|
| (3.9) |
|
| (10,665,895) |
|
| (17.2) |
|
| 4,532,769 |
|
| 42.5 |
|
Income tax (expense) benefit |
|
| (162,697) |
|
| (0.1) |
|
| (30,450) |
|
| (0.0) |
|
| (132,247) |
|
| 434.3 |
|
Net income (loss) |
| $ | (6,295,823) |
|
| (4.0) | % | $ | (10,696,345) |
|
| (17.3) | % | $ | 4,400,522 |
|
| 41.1 | % |
Adjusted EBITDA (1) |
| $ | (773,348) |
|
| (0.5) | % | $ | (901,763) |
|
| (1.46) | % | $ | 128,415 |
|
| 14.2 | % |
Earnings per share |
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Basic earnings (loss) per share |
| $ | (0.10) |
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|
|
| $ | (0.19) |
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|
| $ | 0.09 |
|
| 47.4 | % |
Diluted earnings (loss) per share |
| $ | (0.10) |
|
|
|
| $ | (0.19) |
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|
|
| $ | 0.09 |
|
| 47.4 | % |
Weighted average shares outstanding: |
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Basic |
|
| 60,749,378 |
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|
| 56,193,753 |
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Diluted |
|
| 60,749,378 |
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|
|
|
| 56,193,753 |
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|
| Three Months Ended |
| % of |
| Three Months Ended |
| % of |
| Change | ||
|
| March 31, 2020 |
| Revenue |
| March 31, 2019 |
| Revenue |
| $ |
| % |
|
| (In thousands, except per share data) | ||||||||||
Statement of Operations Data: |
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|
|
Revenues |
| $ 271,421 |
| 100% |
| $ 157,034 |
| 100% |
| $ 114,387 |
| 73% |
Operating expenses |
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|
|
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|
|
|
|
|
|
Commissions and other agent-related costs |
| 243,406 |
| 90% |
| 142,542 |
| 91% |
| 100,864 |
| 71% |
General and administrative expenses |
| 26,860 |
| 10% |
| 19,701 |
| 13% |
| 7,159 |
| 36% |
Sales and marketing expenses |
| 944 |
| -% |
| 889 |
| 1% |
| 55 |
| 6% |
Total operating expenses |
| 271,210 |
| 100% |
| 163,132 |
| 104% |
| 108,078 |
| 66% |
Operating income (loss) |
| 211 |
| -% |
| (6,098) |
| (4)% |
| 6,309 |
| (103)% |
Other expense (income) |
|
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|
|
Other expense (income), net |
| 38 |
| -% |
| 35 |
| -% |
| 3 |
| 7% |
Equity in losses (earnings) of unconsolidated affiliates |
| 21 |
| -% |
| - |
| -% |
| 21 |
| 100% |
Total other expense (income), net |
| 59 |
| -% |
| 35 |
| -% |
| 24 |
| 68% |
Income (loss) before income tax expense |
| 152 |
| -% |
| (6,133) |
| (4)% |
| 6,285 |
| (102)% |
Income tax expense |
| 11 |
| -% |
| 163 |
| -% |
| (152) |
| (93)% |
Net income (loss) |
| 141 |
| -% |
| (6,296) |
| (4)% |
| 6,437 |
| (102)% |
Net loss attributable to noncontrolling interest |
| 24 |
| -% |
| - |
| -% |
| 24 |
| 100% |
Net income (loss) attributable to eXp World Holdings, Inc. |
| 165 |
| -% |
| (6,296) |
| (4)% |
| 6,461 |
| (103)% |
Adjusted EBITDA (1) |
| $ 5,727 |
| 2% |
| $ (711) |
| -% |
| $ 6,438 |
| (905)% |
Earnings per share |
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Basic |
| $ 0.00 |
|
|
| $ (0.10) |
|
|
| $ 0.10 |
| (102)% |
Diluted |
| $ 0.00 |
|
|
| $ (0.10) |
|
|
| $ 0.10 |
| (102)% |
Weighted average shares outstanding |
|
|
|
|
|
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|
|
|
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|
|
Basic |
| 65,890 |
|
|
| 60,749 |
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Diluted |
| 71,593 |
|
|
| 60,749 |
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|
|
(1) | Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S. GAAP Financial Measure.” |
2720
(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-GAAP Financial Measure.”
Revenue
Our total revenues were $157$271.4 million for the three months ended March 31, 20192020 compared to $62.0$157.0 million for the same period in 2018,2019, an increase of $95.1$114.4 million, or 153.4%73%. Total revenues increased for the first quarter of 2020 primarily as a result of an increase in real estate brokerage commissions, which is directly relatedattributable to increases in our increase in agent count of 93%.and closed transactions compared to the same period in 2019. Additionally, the average home sale price for closed transactions increased 12% to $290 during the three months ended March 31, 2020 from $259 for the same period in 2019.
Commission and Other Agent Related Costs
Commission and other agent-related costs were $142.5$243.4 million for the three months ended March 31, 20192020 compared to $55.7$142.5 million for the same period in 2018,2019, an increase of $86.8$100.9 million, or 155.9%71%. Commission and other agent related costs increased primarily as a result of anhigher volume of settled real estate transactions related to the increase of $91.3 million in commissions paid, offset by an increase of $4.5 million inour agent related costs.base.
General and Administrative Expense
General and administrative expenses were $19.7$26.9 million for the three months ended March 31, 20192020 compared to $16.3$19.7 million for the same period in 2018,2019, an increase of $3.4$7.2 million or 21.0%36%. 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 $4.4$5.9 million in compensation expense asrelated expenses including salaries, employee benefits, and payroll taxes and processing. These increases are a direct result of the Company’s increasedincrease in employee and agent count. The increase was offset by a decrease of $4.6Additionally, $1.3 million of stock compensation expensethe increase in general and stock options expense. Awards granted, issuedadministrative expenses is related to professional fees including accounting, legal, and forfeitedother consulting. These increases are more fully disclosed in Note 6, Stockholders’ Equity, of the Notesdirectly related to the Condensed Consolidated Financial Statements.Company’s continued revenue growth, international expansion, and new business ventures.
Sales and Marketing
Sales and marketing expenses were relatively consistent at $0.9 million for the three months ended March 31, 20192020 compared to $0.6 million for the same period in 2018, an increase of $0.2 million, or 37.6%. Sales and marketing expenses increased primarily as a result of an increase in lead capture costs of $0.1 million. 2019
Other Income (Expense)
We record the fair value adjustment to our share liability in other expenses. There were no significant changes in other income (expense) for the three months ended March 31, 20192020 compared to the same period in 2018.
Interest Income
We earn interest income on our money market funds. There were no significant changes in interest income for the three months ended March 31, 2019 compared to the same period in 2018.2019.
Income Tax ExpenseBenefit (Expense)
There were no significant changes in income tax expenses for the three months ended March 31, 20192020 compared to the same period in 2018.2019. On March 27, 2020, Congress passed The Coronavirus Aid, Relief, and Economic Security Act (“The CARES Act”) in response to the COVID-19 pandemic. The CARES Act provides assistance to businesses in the form on loans and tax relief. At this time, the CARES Act has not materially impacted the Company’s results of operations.
28
NON-GAAPNON-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-GAAPnon-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.U.S.GAAP.
We define the non-GAAPnon-U.S. GAAP financial measure of Adjusted EBITDA to mean net income (loss), excluding interestother income (expense), income tax benefit (expense), depreciation and amortization; 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
21
supplemental measure in evaluating the performance of our operations and provides better transparency into our results of operations.
We are presenting the non-GAAPnon-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 not related to the agent equity program (and related payroll tax expense) 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 and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future. |
The following tables present a reconciliation of Adjusted EBITDA to net loss,income (loss), the most comparable U.S. GAAP financial measure, for each of the periods presented:
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|
|
|
|
|
| For the Three Months Ended | ||||
|
| March 31, 2019 |
| March 31, 2018 | ||
Net income / (loss) |
| $ | (6,295,823) |
|
| (10,696,345) |
Interest |
|
| 34,731 |
|
| — |
Taxes |
|
| 162,697 |
|
| 30,450 |
Depreciation & Amortization |
|
| 440,279 |
|
| 183,321 |
Stock compensation expense |
|
| 3,669,320 |
|
| 8,279,109 |
Stock option expense |
|
| 1,215,448 |
|
| 1,301,702 |
Adjusted EBITDA |
| $ | (773,348) |
|
| (901,763) |
|
|
|
|
|
|
|
| Three Months Ended March 31, |
| ||
|
| 2020 |
| 2019 |
|
Net income (loss) |
| $ 141 |
| $ (6,296) |
|
Other expense (income), net |
| 59 |
| 35 |
|
Income tax expense |
| 11 |
| 163 |
|
Depreciation & amortization expense |
| 924 |
| 503 | (1) |
Stock compensation expense |
| 3,519 |
| 3,669 |
|
Stock option expense |
| 1,073 |
| 1,215 |
|
Adjusted EBITDA |
| $ 5,727 |
| $ (711) |
|
|
|
|
|
|
|
29
(1) | Includes prior year reclass of $62 of amortization for long term stock payable. |
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash and cash equivalents and cash flows from operations.
At March 31, 2019, our cash and cash equivalents totaled $20.8 million. Cash equivalents are comprised of financial instruments with an original maturity of 90 dayson hand and cash flows generated from our business operations. Our ability to generate sufficient cash flow from operations or less fromto access certain capital markets is necessary to fund our operations and capital expenditures and meet obligations as they become due.
For the date of purchase, primarily money market funds. We hold no marketable securities.
Net Working Capital
The following table presents our net working capital for the three-monthsperiod ended March 31, 2019:
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|
|
| March 31, 2019 |
| December 31, 2018 |
| Change | |||
Current assets |
| $ | 56,452,170 |
| $ | 42,326,727 |
| $ | 14,125,443 |
Current liabilities |
|
| (37,313,013) |
|
| (24,212,062) |
|
| (13,100,951) |
Net working capital |
| $ | 19,139,157 |
| $ | 18,114,665 |
| $ | 1,024,492 |
For2020, the three-months ended March 31, 2019, net working capital increased $1.0 million, to $19.1 million, primarily due to an increase in cash of $0.2 million,coronavirus (“COVID-19”) has not had a material impact on our operations, and a net increase in commissions receivable of $0.56 million resulting from pending real estate transactions, which is offset by several accrued expenses in relation to pending real estate transactions, including commissions payable, and salaries payable.
Cash Flows
The following table presents our cash flows for the three-months ended March 31, 2019 and 2018:
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|
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| Three Months Ended |
|
|
| ||||
|
| March 31, |
|
|
| ||||
|
| 2019 |
| 2018 |
| $ Change | |||
Cash provided by operating activities |
| $ | 6,657,355 |
| $ | 4,788,422 |
|
| 1,868,933 |
Cash used in investment activities |
|
| (1,327,919) |
|
| (513,521) |
|
| (814,398) |
Cash provided by (used in) financing activities |
|
| (3,431,350) |
|
| 264,355 |
|
| (3,695,705) |
Operating Activities
For the three-months ended March 31, 2019, cash provided by operating activities increased $1.9 million compared to the same period in 2018. The change resulted primarily from the increased volume in our sales transactions and participation by our agents and brokers in our Agent Equity Program. See Note 6 – Stockholders’ Equity, of the Notes to the Condensed Consolidated Financial Statements, for further details related to this Program.
Investing Activities
For the three-months ended March 31, 2019, our investing activities consisted of additional expenditures related to the on-going development of our internal use software. As we continue to develop and refine our cloud-based platforms and continue to accelerate our business in innovative ways, we expect to continue to use our existing cash resources on similar expenditures for the next twelve months.
Financing Activities
For the three-months ended March 31, 2019, we utilized approximately $3.4 million in cash flows from financing activities primarily related to the repurchase of common stock in the amount of $3.6 million offset by $0.2 million in proceeds from the exercise of options. See Note 6 Stockholders’ Equity, of the Notes to the Condensed Consolidated Financial Statements, for further details related to our Share Repurchase Program.
30
We believeanticipate 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 and, our rate of growth into new markets and capital used to repurchase shares of the Company’s common stock.markets. Our capital requirements may also be affected by factors which we cannot control such as the residential real estate market, interest rates, and other monetary and fiscal policy changes to the manner in which we currently operate. Additionally, as the impact of the COVID-19 on the economy and operations evolves, we will continuously assess our liquidity needs. In order to support and achieve our future growth plans, however,the event of a sustained market deterioration, we may need or seek advantageously to obtain additional funding through equity or debt financing.
We have a line of credit which provides the Company may borrow up to $1,000,000.
We currently have no borrowings against the line of credit facility ordo not hold any other term loan bank debt. In the event additional financing is required in the future, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, and results of operations, and financial condition would likely suffer. As of March 31, 2020, our cash and cash equivalents totaled $44.3 million. Cash equivalents are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily money market funds. We hold no marketable securities.
22
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 March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
| March 31, 2020 |
| December 31, 2019 |
| Change |
Current assets |
| $ 92,685 |
| $ 78,819 |
| $ 13,866 |
Current liabilities |
| (52,411) |
| (41,965) |
| (10,446) |
Net working capital |
| $ 40,274 |
| $ 36,854 |
| $ 3,420 |
|
|
|
|
|
|
|
For the three months ended March 31, 2020, net working capital increased $3.4 million, or 9%, compared to December 31, 2019 primarily due to an increase in cash and cash equivalents of $4.2 million resulting from the increase in closed transactions during the first quarter of 2020.
Cash Flows
The following table presents our cash flows for the three months ended March 31, 2020 and 2019:
|
|
|
|
|
|
|
|
| Three Months Ended March 31, |
|
| ||
|
| 2020 |
| 2019 |
| Change |
Cash provided by operating activities |
| $ 17,489 |
| $ 6,657 |
| $ 10,832 |
Cash used in investment activities |
| (1,355) |
| (1,328) |
| (27) |
Cash used in financing activities |
| (8,390) |
| (3,431) |
| (4,959) |
Effect of changes in exchange rates on cash, cash equivalents and restricted cash |
| (710) |
| 27 |
| (737) |
Net change in cash, cash equivalents and restricted cash |
| $ 7,034 |
| $ 1,925 |
| $ 5,109 |
|
|
|
|
|
|
|
For the three months ended March 31, 2020, cash provided by operating activities increased $10.8 million compared to the same period in 2019. The change resulted primarily from the increased volume of our sales transactions, decrease in net losses, increase in customer deposits and participation by our agents and brokers in our Agent Equity Program and Agent Growth Incentive Program.
For the three months ended March 31, 2020, cash used in our investing activities were relatively flat compared to the prior year period.
For the three months ended March 31, 2020, the increase in cash flows used in financing activities primarily were related to the repurchase of our common stock, partially offset by proceeds received from the exercise of stock options.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with U.S. GAAP requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in the preparation of the statements.
Accounting estimates are considered critical if the estimate requires us to use judgments and/or make assumptions about matters that were uncertain at the time the accounting estimate was made and if different accounting estimates could have been used in the reporting period or changes in the accounting estimates are likely to occur that would have a material impact on our financial condition, results of operations or cash flows.
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, 2018,2019, which provides a description of our critical accounting policies. There were no changes to critical accounting policies or estimates as reflected in our 2019 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 2019 Annual Report.
OFF-BALANCE SHEET ARRANGEMENTS
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.
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Item 3. QUANTITATIVE3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
AsWe are subject to market risk in the ordinary course of business. Our exposure to market risk results from fluctuations in interest rates and foreign currency exchange rates. Our primary operations are within the United States and most of the Canadian provinces. In the fourth quarter of 2019, the Company began operations in the U.K. and Australia. We do not enter into investments for trading purpose.
Interest Rate Risk
The Company holds funds in a “smaller reporting company”,money market account. We do not have material exposure to changes in fair value of these assets as a result of interest rates due to the short-term nature of our cash and cash equivalents.
Foreign Currency Risk
We have de minimis foreign currency risk related to our operations denominated in currencies other than the U.S. dollar. To date, foreign currency transactions gains and losses have not been material to our financial statements and we aredo not requiredhave a formal hedging program with respect to provide the information required by this Itemforeign currency.
Item 4. CONTROLS4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officerChief Executive Officer and chief financial officer,Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 20192020 pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’sCompany’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
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Based on the evaluation of our disclosure controls and procedures as of March 31, 2019,2020, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of material weaknesses in our internal control over financial reporting and discussed below, our disclosure controls and procedures were not effective as of March 31, 2019.2020.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2019.2020. In making its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)(“COSO”) in Internal Control — Integrated Framework (2013). Our assessment of, and conclusion on, the effectiveness of internal control over financial reporting did not include the internal controls and procedures of our subsidiary, eXp World Technologies, LLC, which was newly formed on November 29, 2018 when we acquired substantially all of the assets of VirBELA, LLC. This acquisition did not result in any material change to our internal control over financial reporting.
Based on this evaluation of the effectiveness of internal controls, management concluded there has not been any change in the Company’s internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
The Company’s internal control over financial reporting was not effective as of March 31, 20192020 due to the material weaknessweaknesses identified in connection with the preparation and audit of our consolidated financial statements for the year ended December 31, 2018,2019, described below.
Under standards established by the Public Company Accounting Oversight Board of the United States, a material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
Material Weaknesses:
General Information Technology Controls (“GITCs”) - We identified a material weakness related to GITCs in certain areas related to user access and program change-management over information technology (“IT”) systems utilized by the Company. Some of our business process controls (automated and manual) are dependent on the affected GITCs they too were deemed ineffective because they could have been adversely impacted. We believe that these control deficiencies were a result of: IT control processes lacking sufficient documentation; insufficient testing of changes; lack of training for our personnel on the importance of GITCs; and a lack of access control considerations in the design of the systems that could impact internal control over financial reporting.
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Information and Communication, Control EnvironmentActivities and Monitoring – The Company also identified that it did not fully implement key components of the COSO framework, including control and monitoring activities relating to: (i) providing oversight over the system of internal control, (ii) overseeing the nature and scope of monitoring activities and management's evaluation and remediation of deficiencies, (iii) using appropriate processes and technology to assign responsibility and segregate duties as necessary, (iv) maintaining quality through processing, and (v) attracting, developing, and retaining sufficient and competent personnel to support the achievement of internal control objectives.
The Company did not properly design or maintain effectiveCompany’s independent registered public accounting firm, Deloitte and Touche LLP has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019 and expressed an adverse opinion, which is disclosed in Item 9A. of the Company’s Annual Report on Form 10-K.
Planned Remediation Actions:
Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls overare designed, implemented, and operating effectively in addition to implementing new monitoring controls to help mitigate the risks associated with the ineffective GITCs. The remediation actions include: (i) establishing an internal audit team to support the Company’s entire control environment and monitoring components which contributedits ongoing internal controls development and monitoring; (ii) creating and filling an IT compliance oversight function; (iii) educating control owners concerning the principles and requirements of each control, with a focus on those related to material weaknesses atuser access and change-management over IT systems impacting financial reporting; (iv) developing and maintaining documentation underlying GITCs to promote knowledge transfer upon personnel and function changes; (v) developing enhanced controls and reviews related to changes in IT systems; (vi) performing an in-depth analysis of who should have access to perform key functions within the control activity level. As it relates to the control environment, the Company did not have sufficient oversight and competencies to address the Company’s overallsystem that impact financial reporting and redesigning aspects of the system to better allow the access rights to be implemented; and (vii) adding additional manual controls to monitor information technology requirements. As it relatesand data produced by the system to monitoring,help mitigate the Company didrisks associated with ineffective GITCs.
We believe that these actions will remediate the material weaknesses. The weaknesses will not perform timelybe considered remediated, however, until the applicable controls operate for a sufficient period of time and ongoing evaluationsmanagement has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Other than the efforts noted above to ascertain whetherremediate the components ofpreviously reported material weaknesses, there have been no changes in our internal control are present and functioning. The failures within these COSO components contributed to the following material weaknesses at the control activity level:
Control Activities
The Company did not have effective business processes and controls as well as resources with adequate training and support to conduct an effective review of manual reconciliations including the complex data feeds into the reconciliations of high-volume transactions. This resulted in several errors mainly to revenue, accounts receivable, and commission expenseover financial reporting during the period covered by this interim report and could have resulted in errors in otheron Form 10-Q that has materially affected or, are reasonably likely to materially affect, our internal control over financial statement line items.
Remediation Actions on Material Weakness:
To address the above material weaknesses described above, our management is currently in the process of undertaking a re-design of the control workflows within our software and systems for processing high-volume transactions. This will include further validations between the systems to ensure accuracy and completeness of the transactions. Additionally, we will provide additional training of the appropriate personnel involved with these business processes and the related control activities.
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reporting.
Inherent Limitations on Effectiveness of Internal Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in Internal Control Over Financial Reporting
Other than the efforts noted above to remediate the previously reported material weaknesses, there have been no changes in our internal control over financial reporting during the period covered by this annual report on Form 10-Q that has materially affected or, are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. LEGAL1.LEGAL PROCEEDINGS
From time to time, we are subjectinvolved in ordinary routine litigation incidental to potential liability under laws and government regulations and various claims and legal actionsthe conduct of our business, including matters that may be asserted against us that could have a material adverse effect on our business, reputation, results of operationscertified as class or financial condition.collective actions.
There are no matterslegal proceedings pending or, to our knowledge, threatened that we expect tobelieve could have a material adverse impact on our business, reputation, results of operations or financial condition.
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Item 1A.RISK FACTORS
An investment in our common stock involves a number of very significant risks. Investors should carefully considerThere were no material changes to the risk factors includedreported in the “RiskPart I, “Item 1A. Risk Factors” section of our Annual Report on Form 10-K for our fiscalthe year ended December 31, 2018,2019, other than the risk factor described below.
The coronavirus (“COVID-19”) pandemic may have a material adverse effect on our businesses, financial condition, and results of operations.
The COVID-19 pandemic is having a profound effect on the global economy and financial markets. In the United States, federal, state, and local governments continue to react to this evolving public health crisis by, among other actions, recommending or requiring the avoidance of gatherings of people or significantly or entirely curtailing activities categorized as filed with SEC on March 18, 2019,non-essential. This unprecedented situation has created considerable risks and uncertainties for the U.S. real estate services industry in addition to other information contained in the Annual Reportgeneral and in this Quarterly Report on Form 10-Q, in evaluatingfor the Company in particular, including those arising from the potential adverse effects on the economy as well as risks related to employees, independent agents, and consumers. The extent of the impact of the pandemic on our business before purchasing shares of our common stock. The Company’s business, operating results and financial conditionresults will depend largely on future developments, including the extent and duration of the spread of the outbreak, the extent of governmental regulation (including, but not limited to, local, state and/or federally mandated “shelter in place” or other regulations that, for example, preclude or strictly limit open houses or in-person showings of properties), the impact on capital and financial markets and the related impact on consumer confidence and spending, and the magnitude of the financial and operational consequences to our agents and brokers, all of which are highly uncertain and cannot be predicted. However, we believe the COVID-19 pandemic could be adversely affected due to anyhave a material adverse impact on our business, results of those risks.operations and financial condition.
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Item 2. UNREGISTERED2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information about repurchases of our common stock duringthrough the quarter ended March 31, 2019:
2020:
|
|
|
|
|
|
|
|
|
|
| (a) |
|
| (b) |
| (c) |
|
| (d) |
Period | Total number of shares purchased |
|
| Average price paid per share |
| Total number of shares purchased as part of publicly announced plans or programs (1) |
|
| Approximate dollar value of shares that may yet be purchased under the plans or programs |
1/2/19 - 1/31/19 | 137,240 |
| $ | 9.18 |
| 137,240 |
| $ | 6,236,524 |
2/1/19 - 2/28/19 | 100,412 |
|
| 11.10 |
| 100,412 |
|
| 5,120,260 |
3/1/19 - 3/31/19 | 120,100 |
|
| 10.63 |
| 120,100 |
|
| 3,842,191 |
Total | 357,752 |
| $ | 10.19 |
| 357,752 |
|
|
|
|
|
|
|
|
|
|
|
|
Period |
| Total number of shares purchased |
| Average price paid per share |
| Total number of shares purchased as part of publicly announced plans or programs (1) |
| Approximate dollar value of shares that may yet be purchased under the plans or programs |
1/1/20 - 1/31/20 |
| 363,549 |
| $ 10.92 |
| 363,549 |
| $ 43,899,456 |
2/1/20 - 2/29/20 |
| 322,946 |
| 11.20 |
| 322,946 |
| 40,282,911 |
3/1/20 - 3/31/20 |
| 304,746 |
| 9.01 |
| 304,746 |
| 37,538,353 |
Total |
| 991,241 |
| $ 10.37 |
| 991,241 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Item 3. DEFAULTS3.DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. MINE4.MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER5.OTHER INFORMATION
Not applicable.
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|
Exhibit |
| Exhibit |
Number |
| Description |
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|
|
3.1 |
| |
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|
3.2 |
| |
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|
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3.3 |
| |
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|
31.1 |
| |
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31.2 |
| |
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|
32.1 |
| |
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|
|
32.2 |
| |
|
|
|
101.INS |
| XBRL Instance Document |
|
|
|
101.SCH |
| XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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SIGNATURES
Pursuant to the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
May 5, 2020 |
|
|
|
| eXp World Holdings, Inc. |
|
| (Registrant) |
|
|
|
Date: May |
| /s/ Jeff Whiteside |
|
| Jeff Whiteside |
|
| Chief Financial Officer (Principal Financial Officer) |
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