Item 1.
Business
Corporate Overview
eXp World Holdings, Inc.(“Company”; ”we”)
is a cloud-based residential real estate brokerage. Our operations are focused on the use of cloud-based technologies in order
to grow an international brokerage without the burden of physical bricks and mortar or redundant staffing costs. Our technology
focus includes the development of a proprietary cloud based real estate transactional platform.
Description of Business
Operations
We launched our operation in October 2009 with a small
number of agents in Washington and Arizona, and have grown to a team of over 3,000 real estate professionals, and operate in most
U.S. states and one Canadian province.
We operate over the internet through our website, http://exprealty.com
and rely on a cloud-based platform to provide our residential real estate brokerage services. Through our website, buyers can search
real-time property listings, and sellers list their properties and gain exposure across the various markets we operate within.
We also provide buyers and sellers access to a network of professional, consumer-centric agents and brokers. Additionally, –
we deliver marketing, training and other support services to our brokers and agents through a combination of proprietary technology
enabled services and technology and support services contracted to third parties. Our brokers and agents leverage our technology,
services, data, lead generation and marketing tools to represent residential real estate buyers and sellers to list, find and consummate
the purchase or sale of a home.
Internally, we use our technology to provide agents, teams of
agents, and brokerage owners with opportunities for increased profitability, reduced risk, and greater levels of professional development
while fostering an organizational culture that values collaboration, strength of community, and commitment to serving the consumer’s
best interests. We provide agents, teams of agents, and brokerage-owners with the systems, support, professional development and
infrastructure to survive and then thrive in unpredictable and, at times, challenging economic conditions. This includes delivering
24/7 access to collaborative tools and training for real estate brokers and agents.
We have adopted a number of cloud-based technologies. Among
the technologies we use to operate our business, is our 3D, fully-immersive, cloud office complex which has conference rooms, training
centers, individual offices, and in which our management, staff, agents and brokers all work on a daily basis learning from, sharing
with, transacting business with, and socializing with their colleagues from different geographic regions by utilizing avatars and
USB headsets. In these virtual spaces agents and brokers meet for state-based sales meetings, attend live interactive training
and classes, go over commission disbursement authorization forms, build websites and online branding materials, and work on purchase
and sales agreements. Moreover, in these virtual spaces new managing brokers are evaluated and approved, our management meets to
discuss strategy and vision, and personnel interviews occur. In addition, we have face-to-face meetings, conferences, presentations,
retreats and other physical interaction from time to time where circumstance warrant. We also provide physical space to brokers
and agents when they need it through a relationship with Regus, which provides access to offices, work space and meeting rooms
at Regus locations worldwide.. Furthermore, our cloud office has a fully-staffed transaction and administration office, and a fully-staffed
web development, search engine optimization and technical support office. Thus, our cloud office provides agents, teams of agents
and brokers with training, education, coaching, mentoring, transaction support, broker support, and technical support. Consequently,
our cloud office is our company office for brokers, agents, management and staff, and the cloud office has also eliminated redundant
staffing costs. The utilization of this cloud office platform permits us to serve our entire geographic reach.
We also serve real estate agents, which are independent contractors
affiliated with our company, teams of agents, and real estate brokers by providing a full suite of back office functions ranging
from paperless file sharing and transaction management, web design, social media, digital campaigns, customer relationship management
platforms, business coaching, tech support, and live training that places a premium on engagement, discussion and collaboration.
Furthermore, we allow our brokers, some of whom are former real
estate brokerage owners, to leverage our infrastructure to reduce their fixed costs and be empowered to build scalable teams of
agents in any of the markets that we serve while preserving and enhancing the broker’s personal brand. In this way our brokers
can attract agents and build a co-brand in any of markets currently served by the Company without any additional capital requirements.
Fee Structure
Our fee structure resulting directly from the cloud office and
its impact on profitability has enabled us to offer our agents and brokers a higher split of the gross commission generated from
transactions than most traditional real-estate brokerages. This higher fee split along with our unique delivery of support services
and the flexibility it provides for brokers and agents has facilitated our growth over the past several years.
We also differentiate ourselves by not charging our agents and
brokers royalties or franchise fees. Because we do not house agents in physical brick and mortar offices our agents and brokers
also do not pay desk or office fees that are commonplace among competitors. Our agents pay a small monthly technology fee, a modest
tuition fee for eXp University (curriculum of professional development classes and real estate vision and training), a transaction
processing fee and a liability insurance fee.
Revenue Sharing Plan
Our cloud office has enabled us to introduce and maintain a
gross revenue sharing plan whereby each of our agents and brokers can participate in and from which they can realize significant
monthly and annual residual overrides on the gross commission income resulting from transactions consummated by agents and brokers
who they have attracted to our company, effectively contributing to our growth.
Our gross revenue sharing plan unties one of the
industry’s longstanding compensation challenges by providing a vehicle through which agents and brokers can
potentially retire with a vested monthly revenue share plan distribution.
Consistent with our commitment to enabling and empowering agents
and brokers in pursuit of building a scalable business and organization, our revenue sharing plan allows brokers and agents a financial
mechanism to build teams across borders without incurring any expense, oversight responsibility, or liability.
Our Markets
Our primary market is the United States where we
currently operate in most U.S. states and one Canadian Province.
Competition
We
compete with local, regional, national and international residential real estate brokerages to attract agents, teams of agents,
brokers and consumers. We compete primarily on the basis of our culture, collaboration, utilization of cloud based systems and
technologies that reduce costs, provide relevant and substantial professional development opportunities, and provide our agents
and brokers with an opportunity to generate more business and participate in the growth of our company. We believe that we are
the only national real estate brokerage in the United States presently using a 3D immersive office environment
in
place of physical brick and mortar locations and as such, we believe that we are well-positioned in our competitive landscape.
Intellectual Property
“eXp
Realty” is one of our registered trademarks in the United States. We have also placed the marks “3D MLS”, “3D
Listing Service” and “RE Tech Campus” on the United States Patent and Trademark Office’s Supplemental Register.
We also own the rights to the domain name http://exprealty.com
.
We license software and other proprietary technology upon which
we depend to provide our 3D immersive cloud office environment from a third party vendor and the Company holds exclusivity to this
technology within the real estate industry. While we currently depend on our relationship with this vendor to provide our cloud
office environment in the short term, we believe other alternatives are available in the longer term, should they be needed, to
license or develop technology for our cloud office environment.
While we haven’t yet had to, we intend to aggressively
assert our rights under trade secret, unfair competition, trademark and copyright laws to protect our intellectual property, including
product design, product research and concepts and recognized trademarks. These rights are protected through the acquisition of
patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate,
litigation against those who are, in our opinion, infringing these rights.
While there can be no assurance that registered trademarks
will protect our proprietary information, we intend to assert our intellectual property rights against any infringer. Although
any assertion of our rights could result in a substantial cost to, and diversion of effort by, management believes that the protection
and defense against infringement of our intellectual property rights are essential to our business.
Seasonality of Business
Seasons and weather, while seemingly predictable, traditionally
impact the real estate industry. Continuous poor weather or natural disasters negatively impact listings and sales. Spring and
summer seasons historically reflect greater sales periods in comparison to fall and winter seasons. Seasonal or weather related
lower revenue also reduces our operating income, net income, operating margins and cash flow.
Real estate listings precede sales and a period of poor list
activity will negatively impact revenue. Past performance be it weather, seasons, prior month or prior quarter is no assurance
of the following month’s or quarter’s revenue and macroeconomic shifts in the markets served could conceal the impact
of poor weather and/or seasonality.
Home sales in successive quarters can fluctuate widely due to
holidays, national or international emergencies, the school year calendar’s impact on relocation and/or interest rate changes
or speculation of pending interest rate changes. Our revenue and operating margins each quarter will remain subject to seasonal
fluctuations, poor weather and natural disasters, that combined with macroeconomic market changes may make it difficult to compare
or analyze our financial performance effectively across successive quarters.
Furthermore, the residential real estate market and the real
estate industry in general has a cyclical nature often defined by a protracted periods of depressed revenues, values, demand,
inflated rates of foreclosure, and then economic relief. Consequently, our business is affected by such cycles.
Internal Use Software Development
Beginning
in late 2015, we increased our investment in the development of our own cloud-based transaction processing platforms. In this regard,
we hired several employees and engaged third party vendors focused on providing our agents and brokers with mobile applications
designed to facilitate transactions in an efficient and consumer friendly way.
Government Regulation
We serve the residential real estate industry which is regulated
by federal, state and local authorities as well as private associations or state sponsored associations or organizations. We are
required to comply with each state, province, county or country’s laws and as well as private governing bodies’ regulations,
which combined results in a highly-regulated industry.
We are also subject to federal and state regulations relating
to employment, contractor, and compensation practices. All of our company’s agents and brokers are classified as independent
contractors, which are subject to Internal Revenue Service and state law guidelines as they apply to this classification. The only
exception is our managing brokers (one per each state where we are registered to conduct business) that are classified as part-time
employees to fulfill state or local real estate business requirements.
Real Estate Regulation - Federal
The Real Estate Settlement Procedures Act of 1974 (
“
RESPA
”
)
became effective on June 20, 1975. The RESPA requires lenders, mortgage brokers, or servicers of home loans to provide borrowers
with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process. The RESPA also protects
borrowers against certain abusive practices, such as kickbacks, and places limitations upon the use of escrow accounts.
The Department of Housing and Urban Development promulgated
by Regulation X, which implements RESPA.
The National Affordable Housing Act of 1990 amended RESPA to
require detailed disclosures concerning the transfer, sale, or assignment of mortgage servicing. It also requires disclosures for
mortgage escrow accounts at closing and annually thereafter, itemizing the charges to be paid by the borrower and what is paid
out of the account by the servicer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
bestowed the administration of RESPA from the Department of Housing and Urban Development to the new Consumer Financial Protection
Bureau (“CFPB”). In addition, the Dodd-Frank Act increased regulation of the mortgage industry, including: generally
prohibiting lenders from making residential mortgage loans unless a good faith determination is made of a borrower's creditworthiness
based on verified and documented information; requiring the CFPB to enact regulations, which have been finalized, to help assure
that consumers are provided with timely and understandable information about residential mortgage loans that protect them against
unfair, deceptive and abusive practices; and requiring federal regulators to establish minimum national underwriting guidelines
for residential mortgages that lenders will be allowed to securitize without retaining any of the loans’ default risk. In
addition, federal fair housing laws generally make it illegal to discriminate against protected classes of individuals in housing
or brokerage services. Other federal regulations protect the privacy rights of consumers, which affects our opportunities to solicit
new clients.
Real Estate Regulation - State and Local Level
States licensing laws and/or requirements vary from state to
state. In general, all individuals and entities lawfully conducting businesses as real estate brokers, agents or sales associates
must be licensed in the state in which they carry on business and at all times be in compliance.
States will require a real estate broker to be employed by the
brokerage firm or permit an independent contractor classification, and the broker may work for another broker conducting business
on behalf of the sponsoring broker.
States may require a person licensed as a real estate agent,
sales associate or salesperson, be affiliated with a broker in order to engage in licensed real estate brokerage activities or
allow the agent, sales associate or salesperson to work for another agent, sales associate or salesperson conducting business on
behalf of the sponsoring agent, sales associate or salesperson. Agents, sales associates or salespersons are generally classified
as independent contractors; however, real estate firms can offer employment.
Engaging in the real estate brokerage business requires obtaining
a real estate broker license (although in some states the licenses are personal to individual brokers). In order to obtain this
license, most jurisdictions require that a member or manager of the limited liability company be licensed individually as a real
estate broker in that jurisdiction. If applicable, this member or manager is responsible for supervising the licensees and the
entity’s real estate brokerage activities within the state.
Real estate licensees, whether they are brokers, salespersons,
individuals, agents or entities, must follow the state’s real estate licensing laws and regulations. These laws and regulations
generally specify minimum duties and obligations of these licensees to their clients and the public, as well as standards for the
conduct of business, including contract and disclosure requirements, record keeping requirements, requirements for local offices,
escrow trust fund management, agency representation, advertising regulations and fair housing requirements.
In each of the states where we have operations, we assign appropriate
personnel to manage and comply with laws and regulations be it equal to, or greater than federal law.
Most states have local regulations (city or county government)
that govern the conduct of the real estate brokerage business. Local regulations generally require additional disclosures by the
parties to a real estate transaction or their agents or brokers, or the receipt of reports or certifications, often from the local
governmental authority, prior to the closing or settlement of a real estate transaction as well as prescribed review and approval
periods for documentation and broker conditions for review and approval.
Third-Party Rules
Beyond federal, state and local governmental regulations, the
real estate industry is subject to rules established by private real estate groups and/or trade organizations, including, among
others, state Associations of REALTORS® (AOR), and local Associations of REALTORS® (AOR), the National Association of Realtors®
(NAR), and local Multiple Listing Services (MLSs). “REALTOR” and “REALTORS” are registered trademarks of
the National Association of REALTORS®.
Each third-party organization generally has prescribed policies,
bylaws, codes of ethics or conduct, and fees and rules governing the actions of members in dealings with other members, clients
and the public, as well as how the third-party organization’s brand and services may or may not be deployed or displayed.
We assign appropriate personnel to manage and comply with third
party organization policies and bylaws.
Employees
We presently have approximately 50 full-time employees and approximately
44 real estate brokers which are classified as part-time employees.
All of our agents and non-state managing brokers are classified
as independent contractors. Currently, we have over 3,000 agents and brokers.
Our operations are overseen directly by management that engages
our employees to carry on our business. Our management oversees all responsibilities in the areas of corporate administration,
business development, and research. We intend to expand our current management to retain skilled directors, officers, and employees
with experience relevant to our business focus. Our management’s relationships with agents, brokers, technology providers,
and customers will provide the foundation through which we expect to grow our business in the future. We believe that the skill-set
of our management team will be a primary asset in the development of our brands and trademarks.
Item 1A.
Risk Factors
In addition to the other information set forth in this report,
you should carefully consider the following factors, which could materially affect our business, financial condition or results
of operations in future periods. The risks described below are not the only risks facing our company. Additional risks not currently
known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or
results of operations in future periods.
Risks Related to Our Business and Industry
We have experienced net losses in recent years, and because
we have a limited operating history, our ability to fully and successfully develop our business is unknown.
We have a history of operating at losses since our inception
in October 2009, although a significant portion of our net losses for fiscal years 2016 and 2015 resulted from increases in intrinsic
value of historical stock options, as further described throughout this annual report. Our ability to realize consistent, meaningful
revenues and profit over a sustained period has not been established and cannot be assured.
While we believe that we have made significant progress in revenue
growth, and managing our overhead by implementing our cloud-based technology strategy, our services must achieve broad market acceptance
by consumers and we must continue to grow our geographical reach, attract more agents and brokers, and increase the volume of our
residential real-estate transactions. If we are unsuccessful in continuing to gain market acceptance, we will not be able to generate
sufficient revenue to continue our business operations and could sustain on-going operating and net losses.
Despite our ongoing efforts to build revenue growth, both organically
and through acquisitions, and to control the anticipated expenses associated with the continued development, marketing and provision
of our services, we may not be able to generate significant net income from operations in the future.
Our profitability is tied to the strength of the residential
real estate market, which is subject to a number of macroeconomic conditions beyond our control.
Our profitability is closely related to the strength of the
residential real estate market which traditionally follows economic cycles and which can be impacted by national, state and local
production, distribution, and consumption of goods and services from the economy. Macroeconomic conditions that could adversely
impact our business include, but are not limited to, economic slowdown or recession, increased unemployment, increased energy costs,
reductions in the availability of credit, increased costs of obtaining mortgages, an increase in foreclosure activity, rising interest
rates, inflation, disruptions in capital markets, declines in the stock market, adverse tax policies or changes in other regulations,
lower consumer confidence, lower wage and salary levels, war or terrorist attacks, natural disasters, or actions taken by the Federal
Reserve Board to regulate the supply of money, or the public perception that any of these events may occur. In addition, federal
and state governments, agencies and government-sponsored entities such as Fannie Mae and Freddie Mac could take actions that result
in unforeseen consequences or that otherwise could negatively impact our business.
We may be
unable to effectively manage rapid growth in our business.
We may not be able to
scale our business quickly enough to meet the growing needs of our affiliated real estate professionals and if we are not able
to grow efficiently, our operating results could be harmed. As the Company adds new real estate professionals, we will need to
devote additional financial and human resources to improving our internal systems, integrating with third-party systems, and maintaining
infrastructure performance. In addition, we will need to appropriately scale our internal business systems and our services organization,
including support of our affiliated real estate professionals as our demographics expand over time. Any failure of or delay in
these efforts could cause impaired system performance and reduced real estate professional satisfaction. These issues could reduce
the attractiveness of our Company to existing real estate professionals who might leave the Company as well as resulting in decreased
attraction of new real estate professionals. Even if we are able to upgrade our systems and expand our staff, any such expansion
will be expensive and complex, requiring management time and attention. We could also face inefficiencies or operational failures
as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving
and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and
systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins
and adversely impact our financial results.
We cannot guarantee that we will be able to grow in the
various local markets that we serve.
To capture and retain market share in the various local markets
that we serve, we must compete successfully against other brokerages for agents and brokers and for the consumer relationships
that they bring. Our competitors could lower the fees that they charge to agents and brokers or could raise the compensation structure
for those agents. Our competitors may have access to greater financial resources than us, allowing them to undertake expensive
local advertising or marketing efforts. In addition, our competitors may be able to leverage local relationships, referral sources,
strong local brand and name recognition that we have not established. Our competitors could, as a result, have greater leverage
in attracting new and established agents in the market and in generating business among local consumers. Our ability to grow in
the local markets that we serve will depend on our ability to compete with these local brokerages.
The utilization of a 3D cloud based immersive office as
a suitable substitute for a physical brick and mortar location is a new and unproven strategy and we cannot guarantee that we will
be able to operate and grow within its confines.
Currently, our cloud office adequately supports the needs of
our agent population located across the United States and Canada. We cannot guarantee that our cloud office platform will continue
to support our agent population and meet our business needs as we grow. The effectiveness of our cloud office platform is tied
to a number of variables at any given time including server capacity and concurrent users. In addition, we do not own certain technology
upon which we depend to provide our 3D immersive cloud office platform. Our need to license this technology exposes us to the risk
that we are unable to maintain agreements with our vendor on favorable terms in the future. It is possible that disruptions to
certain of our services could result from an unexpected switch in vendors, which could adversely affect our business, financial
condition and results of operations. Furthermore, the use of the cloud office platform, and the use generally of 3D immersive office
environments as an acceptable substitute among agents and brokers for physical office locations is unproven. We cannot guarantee
that industry rank and file will adopt or accept cloud-based 3D office environments as a substitute for a physical office environment
in a sustainable, long-term manner.
We face significant risk to our brand and revenue if we
fail to maintain compliance with the law and regulations of federal, state, foreign, county governmental authorities, or private
associations and governing boards
We operate in a heavily regulated industry with regulated labor
classifications which present significant risk in general for each potential instance where we fail to maintain compliance.
Our brokers and can be classified as an employee or independent
contractor and we could potentially misclassify or fail to consistently achieve compliance. Classifications and compliance are
subject to the Internal Revenue Service regulations and applicable state law guidelines and penalties.
Classifications, regulations and guidelines for brokers and
agents are subject to judicial and agency interpretation as well as periodic changes. Changes, or any indication of changes, may
adversely impact our workforce classifications, expenses, compensation, commission structure, roles and responsibilities and broker
organization.
Beyond workforce regulations and classifications, there exist
complex, heavily regulated federal, state, foreign, local authority laws and regulations and national, state, foreign and local
third party organization’s regulations, policies and bylaws governing our real estate business.
In general, the laws, rules and regulations that apply to our
business practices include, without limitation, the federal Real Estate Settlement Procedures Act, the federal Fair Housing Act,
the Dodd-Frank Act, and federal advertising and other laws, as well as comparable state statutes; rules of trade organization such
as NAR, local MLSs, and state and local AORs; licensing requirements and related obligations that could arise from our business
practices relating to the provision of services other than real estate brokerage services; privacy regulations relating to our
use of personal information collected from the registered users of our websites; laws relating to the use and publication of information
through the Internet; and state real estate brokerage licensing requirements, as well as statutory due diligence, disclosure, record
keeping and standard-of-care obligations relating to these licenses.
Additionally, the Dodd-Frank Wall Street Reform and Consumer
Protection Act contains the Mortgage Reform and Anti-Predatory Lending Act (“Mortgage Act”), which imposes a number
of additional requirements on lenders and servicers of residential mortgage loans, by amending certain existing provisions and
adding new sections to RESPA and other federal laws. It also broadly prohibits unfair, deceptive or abusive acts or practices,
and knowingly or recklessly providing substantial assistance to a covered person in violation of that prohibition. The penalties
for noncompliance with these laws are also significantly increased by the Mortgage Act, which could lead to an increase in lawsuits
against mortgage lenders and servicers.
Maintaining legal compliance is challenging and increases our
costs due to resources required to continually monitor business practices for compliance with applicable laws, rules and regulations,
and to monitor changes in the applicable laws themselves.
We may not become aware of all the laws, rules and regulations
that govern our business, or be able to comply with all of them, given the rate of regulatory changes, ambiguities in regulations,
contradictions in regulations between jurisdictions, and the difficulties in achieving both company-wide and region-specific knowledge
and compliance.
If we fail, or we have alleged to have failed, to comply with
any existing or future applicable laws, rules and regulations, we could be subject to lawsuits and administrative complaints and
proceedings, as well as criminal proceedings. Our noncompliance could result in significant defense costs, settlement costs, damages
and penalties.
Our business licenses could be suspended or revoked, our business
practices enjoined, or we could be required to modify our business practices, which could materially impair, or even prevent, our
ability to conduct all or any portion of our business. Any such events could also damage our reputation and impair our ability
to attract and service home buyers, home sellers and agents, as well our ability to attract brokerages, brokers, teams of agents
and agents to our company, without increasing our costs.
We do carry general liability insurance; however, insurance
may not cover all claims or claims of these types or may be inadequate to protect us from all liability.
Further, if we lose our ability to obtain and maintain all of
the regulatory approvals and licenses necessary to conduct business as we currently operate, our ability to conduct business may
be harmed. Lastly, any lobbying or related activities we undertake in response to mitigate liability of current or new regulations
could substantially increase our operating expenses.
If we do not remain an innovative leader in the real estate
industry, we may not be able to grow our business and leverage our costs to achieve profitability.
Innovation has been critical to our ability to compete against
other brokerages for clients and agents. For example, we have pioneered the utilization of a 3D immersive online office environment
in the residential real estate market which reduces our need for office space and facilitates the transaction of business away
from an office. If competitors follow our practices or develop innovative practices, our ability to achieve profitability may diminish
or erode. For example, certain other brokerages could develop or license cloud-based office platforms that are equal to or superior
to ours. If we do not remain on the forefront of innovation, we may not be able to achieve or sustain profitability.
The market for Internet products and services including, without
limitation, 3D immersive experiences, virtual reality and augmented reality is characterized by rapid technological developments,
evolving industry standards and customer demands, and frequent new product introductions and enhancements. The Company’s
future success will depend in significant part on its ability to continually improve the performance, features and reliability
of its Internet-based virtual environment, its tools and other properties in response to both evolving demands of the marketplace
and competitive product offerings, and there can be no assurance that the Company will be successful in doing so. In addition,
the widespread adoption of new virtual reality and augmented reality applications through new technology developments could require
fundamental changes in the Company’s services.
Our value proposition for agents and brokers includes
allowing them to participate in the gross revenues of our company and is not typical in the real estate industry. If agents and
brokers do not understand our value proposition or value its attributes, we may not be able to attract, retain and incentivize
agents.
Participation in our gross revenue sharing plan represents a
key component of our agent and broker value proposition. Agents and brokers may not understand or appreciate its value. In addition,
agents may not appreciate other components of our value proposition including the cloud office platform, the mobility it affords,
the systems and tools that we provide to agents and brokers, and the professional development opportunities we create and deliver.
If agents and brokers do not understand the elements of our agent value proposition, or do not perceive it to be more valuable
than the models used by most competitors, we may not be able to attract, retain and incentivize new and existing agents and brokers
to grow our revenues.
We may be unable to attract and retain additional qualified
personnel.
To execute our business strategy, we must attract and
retain highly qualified personnel. In particular, we compete with many other real estate brokerages for qualified brokers who
manage our operations in each state. We must also compete with technology companies for developers with high levels of
experience in designing, developing and managing cloud-based software, as well as for skilled service and operations
professionals, and we may not be successful in attracting and retaining the professionals we need. We have from time to time
in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in
retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for
experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the
software industry, job candidates often consider the value of the stock options or other equity incentives they are to
receive in connection with their employment. If the price of our stock declines, or continues to experience
significant volatility, our ability to attract or retain key employees will be adversely affected. If we fail to attract new
personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.
As we pursue new lines of business and opportunities to
increase revenues, our profit margins may decline sharply.
We
may implement changes to the business model and operations to improve revenues that cause a disproportionate increase in our expenses
and cost of goods sold, or reduce profit margins. For example, we may allocate resources to acquiring lower margin brokerage models,
the development of a mortgage servicing division, a commercial real estate division, a title and escrow company or a continuing
education division. These decisions could involve significant start-up costs that may only be recovered after lengthy periods of
time. Any of these attempts to improve our revenues could result in a disproportionate increase in our expenses and in reduced
profit margins.
In addition, any of these additional
activities could expose us to additional compliance obligations and regulatory risks.
Our operating results are subject to seasonality and vary
significantly among quarters during each calendar year, making meaningful comparisons of successive quarters difficult.
Seasons and weather, while seemingly predictable, traditionally
impact the real estate industry. Continuous poor weather or natural disasters negatively impact listings and sales. Spring and
summer seasons historically reflect greater sales periods in comparison to fall and winter seasons. Seasonal or weather related
lower revenue also reduces our operating income, net income, operating margins and cash flow.
Real estate listings precede sales and a period of poor listings
activity will negatively impact revenue. Past performance be it weather, seasons, prior month or prior quarter is no assurance
or predictor of the following month’s or quarter’s revenue and macroeconomic shifts in the markets served could conceal
the impact of poor weather or seasonality.
Home sales in successive quarters can fluctuate widely due to
holidays, national or international emergencies, the school year calendar’s impact on relocation and/or interest rate changes
or speculation of pending interest rate changes. Our revenue and operating margins each quarter will remain subject to seasonal
fluctuations, poor weather and natural disasters, combined with macroeconomic market changes may make it difficult to compare or
analyze our financial performance effectively across successive quarters.
If we fail to protect the privacy of employees, independent
contractors, or consumers or personal information that they share with us, our reputation and business could be significantly harmed.
Tens of thousands of consumers, independent contractors, and
employees have shared personal information with us during the normal course of our business processing residential real estate
transactions. This includes, but is not limited to, social security numbers, annual income amounts and sources, consumer names,
addresses, telephone and cell phone numbers, and email addresses.
Our application, disclosure and safeguard of the information
is regulated by federal and state privacy laws. To comply with privacy laws, we invested resources and adopted a privacy policy
outlining the use and care as well as how and with whom we may share personal information. This policy includes informing consumers,
independent contractors and employees that we will not share their personal information with third parties without their consent
unless required by law.
Privacy policies and compliance with federal and state privacy
laws presents risk and could incur legal liability for failing to maintain compliance. We may not become aware of all privacy laws,
changes to privacy laws, or third party privacy regulations governing the real estate business, or be unable to comply with all
of these regulations, given the rate of regulatory changes, ambiguities in regulations, contradictions in regulations between jurisdictions,
and the difficulties in achieving both company-wide and region-specific knowledge and compliance.
Our policy and safeguards could be deemed insufficient if third
parties with whom we have shared personal information fail to protect the privacy of that information. Our legal liability could
include significant defense costs, settlement costs, damages and penalties, plus, damage our reputation with consumers, which could
significantly damage our ability to attract and maintain customers. Any or all of these consequences would result in meaningful
unfavorable impact on our brand, business model, revenue, expenses, income and margins.
Our business could be adversely affected if we are unable
to expand, maintain and improve the systems and technologies upon which we rely on to operate.
As the number of agents and brokers in our company grows, our
success will depend on our ability to expand, maintain and improve the technology that supports our business operations, including,
but not limited to, our cloud office platform. Loss of key personnel or the lack of adequate staffing with the requisite expertise
and training could impede our efforts in this regard. If our systems and technologies lack capacity or quality sufficient to service
agents and their clients, then the number of agents who wish to use our products could decrease, the level of client service and
transaction volume afforded by our systems could suffer, and our costs could increase. In addition, if our systems, procedures
or controls are not adequate to provide reliable, accurate and timely financial and other reporting, we may not be able to satisfy
regulatory scrutiny or contractual obligations with third parties and may suffer a loss of reputation. Any of these events could
negatively affect our financial position.
Our business, financial condition and reputation may be
substantially harmed by security breaches, interruptions, delays and failures in our systems and operations.
The performance and reliability of our systems and operations
are critical to our reputation and ability to attract agents, teams of agents and brokers into our company as well as our ability
to service home buyers and sellers. Our systems and operations are vulnerable to security breaches, interruption or malfunction
due to certain events beyond our control, including natural disasters, such as earthquakes, fire and flood, power loss, telecommunication
failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. In addition, we rely on third
party vendors to provide the cloud office platform and to provide additional systems and related support. If we cannot continue
to retain these services on acceptable terms, our access to these systems and services could be interrupted. Any security breach,
interruption, delay or failure in our systems and operations could substantially reduce the transaction volume that can be processed
with our systems, impair quality of service, increase costs, prompt litigation and other consumer claims, and damage our reputation,
any of which could substantially harm our financial condition.
Loss of our current executive officers or other key management
could significantly harm our business.
We depend on the industry experience and talent of our current
executives, including our Chairman and Chief Executive Officer, Glenn Sanford; and President and General Counsel, Russell Cofano,
Chief Financial Officer Alan Goldman and Chief Executive Officer of eXp Realty, Jason Gesing. We believe that our future results
will depend in part upon our ability to retain and attract highly skilled and qualified management. The loss of our executive officers
could have a material adverse effect on our operations because other officers may not have the experience and expertise to readily
replace these individuals. This is especially relevant because we have not entered into an employment agreement with either our
chairman and chief executive officer or our president. To the extent that one or more of our top executives or other key management
personnel depart from the Company, our operations and business prospects may be adversely affected. In addition, changes in executives
and key personnel could be disruptive to our business. The Company does not have any key person insurance.
Failure to protect intellectual property rights could
adversely affect our business.
Our intellectual property rights, including existing and future
trademarks, trade secrets, patents and copyrights, are important assets of the business. We have taken measures to protect our
intellectual property, but these measures may not be sufficient or effective. We may bring lawsuits to protect against the potential
infringement of our intellectual property rights; other companies, including our competitors, could make claims against us alleging
our infringement of their intellectual property rights. Any significant impairment of our intellectual property rights could harm
our business.
We may evaluate potential vendors, suppliers and other
business partners for acquisition in order to accelerate growth, but may not succeed in identifying suitable candidates or may
acquire businesses that negatively impact us.
As part of our growth strategy, we may evaluate the potential
acquisition of businesses offering products or services that complement our services offerings. If we identify a business that
we deem to be suitable for acquisition and complete an acquisition, our evaluation may prove faulty and the acquisition may prove
unsuccessful. In addition, an acquisition may prove unsuccessful to us because of our inability to effectively execute post-acquisition
strategy. We may be unable to successfully integrate the systems and personnel of the acquired businesses. An acquisition could
negatively impact our culture or undermine its core values. Acquisitions could disrupt our existing operations or cause management
to neglect to focus adequately on our core business. An acquisition could cause potentially dilutive issuances of equity securities,
incurrence of debt, contingent liabilities or could cause us to assume or incur unknown or unforeseen liabilities. We intend to
evaluate other brokerages for acquisition in order to accelerate growth and may not succeed in identifying suitable candidates
or may acquire brokerages that negatively impact us.
Unfavorable general economic conditions in the United
States and other markets that we enter and operate within could negatively impact our financial performance.
Unfavorable general economic conditions, such as a recession
or economic slowdown, in the United States and other markets we enter and operate within could negatively affect the affordability
of, and consumer demand for, our services in the United States. Under difficult economic conditions, consumers may seek to reduce
spending by forgoing real estate purchases. Lower consumer demand for our services in the United States and other markets could
reduce our profitability.
We are subject to certain risks related to litigation
filed by or against us, and adverse results may harm our business and financial condition.
We cannot predict with certainty the cost of defense, the cost
of prosecution, insurance coverage or the ultimate outcome of litigation and other proceedings filed by or against us, including
remedies or damage awards, and adverse results in such litigation and other proceedings, including treble damages, may harm our
business and financial condition. Such litigation and other proceedings may include, but are not limited to, actions relating to
intellectual property, commercial arrangements, negligence and fiduciary duty claims arising from our company owned brokerage operations,
actions against our title company alleging it knew or should have known others were committing mortgage fraud, standard brokerage
disputes like the failure to disclose hidden defects in the property such as mold, vicarious liability based upon conduct of individuals
or entities outside of our control, including our agents, brokers, third-party service or product provides, antitrust claims, general
fraud claims and employment law claims, including claims challenging the classification of our employees as independent contractors
and compliance with wage and hour regulations, and claims alleging violations of RESPA or state consumer fraud statutes. In addition,
class action lawsuits can often be particularly vexatious litigation given the breadth of claims, the large potential damages claimed
and the significant costs of defense. The risks of litigation become magnified, and the costs of settlement increase, in class
actions in which the courts grant partial or full certification of a large class. In the case of intellectual property litigation
and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property
rights used in our business and injunctions prohibiting our use of business processes or technology that is subject to third party
patents or other third party intellectual property rights. In addition, we may be required to enter into licensing agreements (if
available on acceptable terms) and be required to pay royalties.
From time to time, we may become involved in various lawsuits
and legal proceedings which arise in the ordinary course of business. We know of no material, active or pending legal proceedings
against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings
in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has
a material interest adverse to our interest.
We may suffer significant financial harm and loss of reputation
if we do not comply, cannot comply, or are alleged to have not complied with applicable laws, rules and regulations concerning
our classification and compensation practices for the agents in our owned-and-operated brokerage.
Except for our employed state brokers, all real estate professionals
in our brokerage operations have been retained as independent contractors, either directly or indirectly through third-party entities
formed by these independent contractors for their business purposes. With respect to these independent contractors, like most brokerage
firms, we are subject to the Internal Revenue Service regulations and applicable state law guidelines regarding independent contractor
classification. These regulations and guidelines are subject to judicial and agency interpretation, and it might be determined
that the independent contractor classification is inapplicable to any of our affiliated real estate professionals. Further, if
legal standards for classification of real estate professionals as independent contractors change or appear to be changing, it
may be necessary to modify our compensation and benefits structure for our affiliated real estate professionals in some or all
of our markets, including by paying additional compensation or reimbursing expenses.
In the future we could incur substantial costs, penalties and
damages, including back pay, unpaid benefits, taxes, expense reimbursement and attorneys’ fees, in defending future challenges
by our affiliated real estate professionals to our employment classification or compensation practices.
Risk Related to Our Stock
Glenn Sanford, our Principal Executive Officer and Chairman,
owns a significant percentage of our stock, and as a result, the trading price for our shares may be depressed and he can take
actions that may be adverse to the interests of our stockholders.
Glenn Sanford beneficially owns approximately 41% of our
outstanding common stock as of March 15, 2017. This significant concentration of share ownership may adversely affect the
trading price for our common stock because investors may perceive disadvantages in owning stock in companies with a
controlling stockholder. Mr. Sanford may have the ability to significantly influence all matters requiring approval by our
stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or
substantially all of our assets. In addition, due to his significant ownership stake and his service as our Principal
Executive Officer and Chairman of the Board and Director, Mr. Sanford controls the management of our business and affairs.
This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a
merger or consolidation, takeover or other business combination that could be favorable to our other stockholders.
Because we can issue additional shares of common stock,
our stockholders may experience dilution in the future.
We are authorized to issue up to 220,000,000 shares of common
stock, of which approximately 52.4 million shares were issued and outstanding as of March 31, 2017. Our board of directors has
the authority to cause us to issue additional shares of common stock without consent of any of our stockholders. Consequently,
the stockholders may experience more dilution in their ownership of our stock in the future.
Our board of directors has the authority to cause us to issue
additional shares of common stock without consent of any of our stockholders and we have several equity based compensation plans
in place for employees and non-employees. Consequently, all stockholders may experience more dilution in their ownership of our
stock in the future.
Our common stock is illiquid and the price of our common
stock may be negatively impacted by factors which are unrelated to our operations.
Although our common stock is currently listed for quotation
on the OTCQB (Symbol “EXPI”) operated by the OTC Markets Group, trading through the OTCQB is frequently thin and highly
volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders
to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including
market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume
in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our
competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had
a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance
and could have the same effect on our common stock.
Because we do not intend to pay any cash dividends on
our shares of common stock in the near future, our stockholders will not be able to receive a return on their shares unless they
sell them.
We intend to retain any future earnings to finance the development
and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the near future. The declaration,
payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among
other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors
as the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid,
there is no assurance with respect to the amount of any such dividend. Unless we pay dividends, our stockholders will not be able
to receive a return on their shares unless they sell them.
Trading of our stock is restricted by the Securities Exchange
Commission’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our common stock.
The Securities and Exchange Commission has adopted regulations
which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00
per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny
stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers
and “accredited investors”. The term “accredited investor” refers generally to institutions with assets
in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000
jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise
exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission,
which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also
must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and
its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s
account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer
orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s
confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from
these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently,
these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules
discourage investor interest in, and limit the marketability of, our common stock.
FINRA sales practice requirements may also limit a stockholder’s
ability to buy and sell our stock.
In addition to the “penny stock” rules described
above, the Financial Industry Regulatory Authority (known as
“
FINRA
”
) has adopted rules that require
that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment
is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives
and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low
priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers
to recommend that their customers buy our common stock, which may limit an investor’s ability to buy and sell our stock and
have an adverse effect on the market for our shares.
Our results of operations are subject to fluctuation
that is outside of our control based on the required method of valuing certain historical stock options in a manner tied to
the Company’s stock price.
Prior to becoming a public company in 2013, we issued approximately
7.1 million options convertible into restricted and unregistered shares of common stock. Subsequent to becoming a public company,
and in accordance with US GAAP, we are required to remeasure the intrinsic value of these awards at each reporting date through
the date of exercise or other settlement. The changes are recorded as a component of earnings and included in general and administrative
expenses. Based on our current analysis, a 10% change in the intrinsic value of the options, in consideration of quoted market
prices as of December 31, 2016, would potentially result in the recognition of approximately $2,617,000 of compensation expense
(benefit). Additionally, the recognition of any significant fluctuation in the intrinsic value of these outstanding awards could
swing operating results from a loss to income, and vice versa, in future periods.