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EXPI > SEC Filings for EXPI > Form 10-K on 21-Mar-2014All Recent SEC Filings




Annual Report

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with our financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking statements based upon current expectations that involve numerous risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Those reasons include, without limitation, those described at the beginning of this report under "Statement regarding forward-looking statements," as well as those that may be set forth elsewhere in this report. Except as otherwise required by law, we do not intend to update any information contained in these forward-looking statements. The following discussion also addresses matters we consider important for an understanding of our financial condition and results of operations as of December 31, 2013, and 2012, as well as our future results.


We were incorporated as a Delaware company on July 30, 2008 and recently completed a merger transaction and now have five subsidiaries; eXp Acquisition Corp., eXp Realty, LLC, eXp Realty of Connecticut, LLC, eXp Realty Washington, Inc., and eXp Realty of Canada, Inc.

We are a cloud-based real estate brokerage organization operating in 29 states. As a cloud-based real estate brokerage for the residential real estate market has embraced and adopted a number of cloud-based technologies in order to grow into an international brokerage without the burden of physical bricks and mortar or redundant staffing costs. Following the closing of the merger agreement with eXp Realty International, Inc., the business of eXp Realty, LLC became our principal operating business.


The Company has continued its geographic expansion into new US States (and into sub-markets within those states). The Company added approximately 70 new agents during the year ended 2013. The Company has also entered the international market for the first time with the launch of operations in the Canadian Province of Ontario.

eXp's Cloud Office is the Company office for brokers, agents, management and staff. This Cloud Office is where the Company's community meets to transact business, collaborate, train, exchange, and socialize. Additionally, The Cloud Office is where professional relationships and friendships are initiated and strengthened. To that end, the Company has upgraded its Cloud Office to an enhanced platform in October 2013. Our Cloud Office now has improved audio, visual and presentation capabilities, and an increased capacity that will accommodate our existing and continual growing agent base.

In 2014, the Company expects to introduce and execute on a number of initiatives aimed at accelerating expansion and looks fully to integrate a number of systems that will support our scalable growth.

In pursuit of the vision of becoming a brokerage that, uniquely within the industry, is owned to a substantial degree by its agents and brokers, the Company plans to adopt a formal stock compensation plan the components of which will include equity issuances to agents based on productivity and contributions to Company growth and equity grants which can be leveraged to attract iconic agents within particular marketplaces. In addition, the Company proposes to adopt an Employee Stock Ownership Plan which will permit the voluntary allocation by agents of a percentage of gross commission income on transactions and/or revenue share dollars earned to the purchase of Company stock.

In September, 2013, the Company incentivized the addition of a 19 agent team in Atlanta, Georgia using its common shares of stock and the value propositions of its core business model. This migration, in addition to growing the Company, allowed the Company to test and measure the effectiveness of its processes and systems for the integration of large teams of agents or groups of agents that comprise an entire brokerage. As of March, 2014 the size of our agent and broker population in the Greater Atlanta Metro Region has nearly doubled and the Company has retained 100% of the agents and brokers who joined us last fall. Based on the success of this migration and on the technological, human and financial resources at our disposal, the Company anticipates being able to attract increasing numbers of sizeable agent and brokerage teams into the Company across its markets in 2014 and successfully integrate them into the Company's culture and infrastructure.

The Company has a competitive advantage through its sizeable geographic footprint which grants us access to, at present, some 45 different property data and listing services ("Multiple Listing Services") across our markets. In 2014, the Company expects to commence to undertake the streamlining, in part through service agreements with third-party vendors, of its market-based consumer-facing web sites into one single site in the United States and one in Canada. This process will permit us more efficiently to maintain and optimize our corporate-owned sites; and, will permit us to harness and aggregate Multiple Listing Service data in a more centralized yet farther-reaching manner, effectively syndicating data across increased numbers of channels.

With the efficiencies created within our technology and web-development team, the Company in 2014 can begin to look at ways in which it can leverage its technological capabilities and expertise to build upon the value that it offers to buyers and sellers of real estate. The Company may also begin to explore and identify potential strategic partners that have developed technologies, applications or other proprietary assets of value within the real estate space and that would benefit from access to the resources we possess internally as well as those made possible by our geographic reach, mobility and interconnectivity.

Over the past year, the Company has received numerous expressions of interest from parties whose principal business is in the brokerage of commercial real property. In 2014 the Company will seek to determine the feasibility of various ways in which to accommodate this interest and potentially pursue the engagement of this segment of the real estate industry.

In March, 2014 the Company began the process of launching a new customized transaction management platform designed further to streamline our transaction management and administrative functions enabling scalable growth without the immediate necessity of significant increases in staffing. The new platform will also offer our agents and brokers enhanced reporting features and report generating capabilities and will, in the next phase of its development to be completed later in this year, provide agents and brokers with access to critical information relative to the composition and production of agent and broker teams that they've assembled and grown as well as the revenue share dollars derived from those efforts.


eXp estimates over 50% of real estate brokerages today are not profitable due to the impact of high or fixed overhead and a costly struggle to drive higher productivity among their agents. These brokerages (many small to medium size) want to keep their long-term branding and reputation for excellence but want out from under their high costs to operate. Their current cost structure isn't responsive to cyclical turns and the overhead costs continue to climb. The way in which buyers and sellers of real estate conduct research, initiate appointments, and even make offers has ever increasingly shifted from the traditional retail office to various online technologies. Even the most successful, established, and credible owners in the industry are struggling to remain competitive in the eyes of the agents they need to attract, retain and compensate in order to remain profitable.

Our Cloud Office has enabled brokerage owners to shed enormous overhead expenses and staffing costs while still retaining a percentage of commissions generated by their agents. Brokers through the use of our technology can now add additional agents and leverage their professional reputation and credibility both within and outside of their local or regional markets at little to no expense. The Cloud Office provides a scalable solution and a return to profitability for these existing small to medium sized brokerage owners.

The United States housing market was adversely impacted beginning in 2006 by the combination of a number of factors, including but not limited to more stringent lending guidelines, increased unemployment, and an overall macroeconomic decline. Overall U.S. sales volume declined as did the market value of homes which in turn created a swell in foreclosures and mortgage defaults. Data relative to the amount of time a property takes to sell, units available for resale, and pricing suggests that throughout much of the United States, markets have recovered even as borrowing costs for mortgages increased from historic lows, as tightened lending standards remain in place and as new qualified mortgage rules, introduced in January 2014, take effect. Market conditions prospectively are susceptible to impact from, among other factors, employment growth or decline, population trends, the re-entry into the market of former homeowners who suffered delinquencies, foreclosures, short-sales, or bankruptcies during the downturn, and changes in Federal Reserve monetary policy and federal fiscal policy.

Based on these among other factors we expect to see continued growth in sales within the real estate industry in the upcoming fiscal year.


Twelve months ended December 31, 2013


During the year ended December 31, 2013 net revenues increased $3.99 million to $10.70 million as compared to the year ended December 31, 2012 when we generated $6.71 million. The increase as compared to the prior period is a direct result of the increased sales agent base and higher sales volume realized.

Operating Expenses

                                  Twelve Months Ended December 31,
                                   2013                    2012               Change

Operating expenses:
Cost of revenues             $       8,905,114       $       5,657,067     $  3,248,047
General and administrative           2,430,216                 827,349        1,602,867
Professional fees                      424,361                 190,912          233,449
Sales and marketing                     60,197                 102,267          (42,070 )
Total operating expenses     $      11,819,888       $       6,777,595     $ 5,042,2293

Cost of revenues includes costs related to sales agent commissions and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase of $3.25 million in the current year ended December 31, 2013 as compared to the year ended December 31, 2012 was driven by the substantially higher amount of net revenues.

General and administrative includes costs related to wages, stock compensation, dues, operating leases, utilities, travel, and other general overhead expenses. The merger transaction entailed an exchange of option awards thus triggering a modification to the outstanding awards and an additional $512 thousand of cost recognized in the year ended December 31, 2013. Also, an additional $891 thousand of vested options cost was recognized in the same period. No stock compensation cost was recognized in the year ended December 31, 2012. The remaining additional increase in 2013 as compared to 2012 was primarily associated with increased salaries and wages as a result of increased executive compensation associated with the addition of our president and our chief operating officer.

Professional fees include costs related to legal, accounting, and other consultants. Costs were up $233 thousand in the year ended December 31, 2013 as compared to the year ended December 31, 2012 due to legal and audit fees associated with the merger transaction recently completed in September of 2013.

Sales and marketing include costs related to lead capture, digital and print media, trade shows, in addition to other promotional materials. The Company spent approximately $42 thousand less primarily due to less trade shows attended and less promotional material created in the year ended December 31, 2013 as compared to the year ended December 31, 2012.


                       December 31,       December 31,
                           2013               2012           Change

Current assets        $      288,232     $      207,989     $  80,243
Current liabilities         (252,382 )         (357,176 )     104,794
Net working capital   $       35,850     $     (149,187 )   $ 185,037

The Company's net working capital increased $185 thousand during the current year ending December 31, 2013 as compared to December 31, 2012. The increase is primarily attributable to the increase in cash as well as the decrease in due to related parties.

The following table presents our cash flows for the years ended December 31, 2013 and 2012:

                                                        Years Ended
                                                        December 31,
                                                    2013           2012          Change

Cash provided by (used in) operating activities   $  16,026     $    (538)     $   16,564
Cash (used in) investing activities                 (39,513 )        (387)       (39,126)
Cash provided by (used in) financing activities      65,235       (13,976)         79,211
Net change in cash                                $  41,748     $ (14,901)     $   56,649

Net cash provided by operating activities for the year ended December 31, 2013 was approximately $16 thousand as compared to a use of $1 thousand for the year ended December 31, 2012. Our cash provided in the year ended December 31, 2013 was primarily from an increase in sales and collections. Cash used by operating activities for the year ended 2012 was less than $1 thousand and was virtually break even.

Net cash used in investing activities for the acquisition of fixed assets was $40 thousand and $387 for the year ended December 31, 2013 and December 31, 2012 respectively. In 2013 we started building a new transactional processing software system we expect to be operational by the end of March 2014.

Net cash provided by financing activities for year ended December 31, 2013 comprised of $90 thousand of net proceeds from the issuance of 419,955 shares of common stock at prices ranging from $0.15 to $0.30 per share, which was partially offset from principal payments of $15 thousand on an outstanding notes payable obligation and repurchase of $10,000 of ownership interest in eXp Realty, LLC. Net cash used by financing activities for the year ended December 31, 2012 comprised of $15 thousand of payments on outstanding notes payable obligations.

As our operating cash flows have been only slightly positive, if not at a break-even point, we may need to raise additional cash in order to fund capital expenditures, operations, and our current obligations in 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. Our capital requirements may be affected by factors which we cannot control such as the residential real estate market, interest rates, and other monetary and fiscal policy changes in which we currently operate. We may have a greater need to fund our business by using our cash and cash equivalents, which could not continue indefinitely without raising additional capital.

We currently have no bank debt or line of credit facilities. In the event that additional financing is required, 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 will likely suffer.


We currently have one long-term debt obligation with a principal balance of $62,000 accruing interest at 3% and is payable in full during April 2015. We also have non-cancelable operating lease agreements with various expiration dates through August 2014.


We have no 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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