Attached files

file filename
EX-32.2 - CERTIFICATION - EXP World Holdings, Inc.exp_10k-ex3202.htm
EX-32.1 - CERTIFICATION - EXP World Holdings, Inc.exp_10k-ex3201.htm
EX-31.2 - CERTIFICATION - EXP World Holdings, Inc.exp_10k-ex3102.htm
EX-31.1 - CERTIFICATION - EXP World Holdings, Inc.exp_10k-ex3101.htm
EX-21 - SUBSIDIARIES OF EXP WORLD HOLDINGS, INC. CORPORATION - EXP World Holdings, Inc.exp_10k-ex21.htm

 

Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2017

 

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: 000-53300

 

 

EXP WORLD HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

 

Delaware 98-0681092
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)

 

2219 Rimland Drive, Suite 301
Bellingham, WA 98226
(Address of principal executive offices and Zip Code)

 

Registrant’s telephone number, including area code: (360) 685-4206

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of each class Name of each exchanged on which registered
None N/A

 

Securities registered pursuant to section 12(g) of the Act:

Common Stock, par value $0.00001 per share (Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes [_]    No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes [_]    No [X]

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.

Yes [_]    No [X]

 

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 (Check one).

 

Large accelerated filer o Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x
Emerging growth company o    

 

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 mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [_]    No [X]

 

The aggregate market value of the voting and nonvoting common equity held by non-affiliates of eXp World Holdings, Inc. was approximately $41,069,787 based on 14,667,781 shares of common stock held by non-affiliates as of June 30, 2017, being $2.80 per share.

 

The number of shares of the registrant's $0.00001 par value common stock outstanding as of March 15, 2018 was 56,100,047.

 

 

 

   

 

 

TABLE OF CONTENTS

 

  Page 
   
  Overview of Restatement 1
  Forward Looking Statements 4
PART 1   5
Item 1. Business 5
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 19
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Mine Safety Disclosures 19
     
PART II   20
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

20

Item 6. Selected Financial Data 22
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 32
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

63

Item 9A. Controls and Procedures 63
Item 9B. Other Information 65
     
PART III   66
Item 10. Directors, Executives, Officers and Corporate Governance 66
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

74

Item 13. Certain Relationships and Related Transactions, and Director Independence 75
Item 14. Principal Accounting Fees and Services 76
     
PART IV   77
Item 15. Exhibits, Financial Statement Schedules 77
Item 16. Form 10-K Summary 77
Signatures   78

 

 

 

 

 i 

 

 

EXPLANATORY NOTE

 

Overview of Restatement

 

In this Annual Report on Form 10-K, eXp World Holdings, Inc. (together with its subsidiaries the “Company”; “we”, or “eXp”):

 

a.restates its Consolidated Balance Sheet as of December 31, 2016 and the related Consolidated Statements of Operations, Consolidated Statements of Stockholders’ Equity and Consolidated Cash Flows for the fiscal years ended December 31, 2016 and December 31, 2015;
b.restates its additional paid-in capital and accumulated deficit balance as of December 31, 2014 as part of the Consolidated Statements of Stockholders’ Equity;
c.amends its Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) as related to the fiscal years ended December 31, 2016 and December 31, 2015; and
d.restates its Unaudited Quarterly Financial Data for each of the first three fiscal quarters in the fiscal years ended December 31, 2017, 2016 and 2015.

 

Background on the Restatement

 

On April 3, 2018, the Company filed a Form 8-K disclosing that, after discussion with management and with BDO USA, LLP, the Company’s independent registered public accounting firm, the Company’s Board of Directors, based on a recommendation of the Audit Committee, had concluded that the Company’s previously issued financial statements for the fiscal year ended December 31, 2016 (“Fiscal 2016”) and the first three fiscal quarters of the fiscal year ended December 31, 2017 (“Fiscal 2017”), should no longer be relied upon, and determined that the financial statements will be restated due to the identification of accounting errors. The Company also disclosed that it would restate certain quarterly data for Fiscal 2016 and would reassess its internal controls as a result of the identification of the errors.

 

On April 12, 2018, after discussion with management and with BDO USA, LLP, the Company’s independent registered public accounting firm, the Company’s Board of Directors, based on a recommendation of the Audit Committee, concluded that the Company’s previously issued financial statements for the fiscal year ended December 31, 2015 (“Fiscal 2015”) , should no longer be relied upon, and determined that such financial statements will be restated due to the identification of accounting errors. The Company also will restate certain quarterly data for Fiscal 2015.

 

The restatement disclosed on April 3, 2018, resulted from accounting errors in the treatment of equity instruments granted to non-employees in 2012 and 2013 and materially impacted our financial statements for the fiscal year ended December 31, 2016. The restatement disclosed on April 12, 2018 results from accounting errors in the treatment of equity instruments granted to employees in 2012 and 2013 which materially impacted our financial statements Fiscal 2015, Fiscal 2016, and the first three quarters in Fiscal 2017.

 

The accounting errors had no effect on cash and no impact on the Company’s assets, liabilities, or net cash flows from operating, investing, and financing activities on the statement of cash flows during Fiscal 2015, Fiscal 2016 or the quarterly periods in Fiscal 2017. The combined non-cash effect of the accounting errors lead to a net reduction in previously recognized stock-based compensation expense of approximately $2.6 million and $18.6 million for Fiscal 2015 and Fiscal 2016, respectively and an increase in previously recognized stock-based compensation expense of approximately of $5.7 million for the first three fiscal quarters of Fiscal 2017.

 

In addition, the Company will make correction of certain immaterial errors in revenue and cost of revenue, which decreases previously reported net revenues and cost of revenues by approximately $0.4 million for Fiscal 2015, by approximately $0.6 million for Fiscal 2016 and by approximately $1.8 million for the first three fiscal quarters of Fiscal 2017. These errors had no impact on the previously reported net loss.

 

 

 

 1 

 

 

These errors were discovered by management during the course of its preparation of the Annual Report on Form 10-K for Fiscal 2017, and the audit of the financial results for Fiscal 2017. None of the errors involve misconduct with respect to the Company or its management or employees.

 

The Company is restating its financial statements for Fiscal 2015, Fiscal 2016, certain quarterly data for Fiscal 2015, certain quarterly data for Fiscal 2016, and the first three fiscal quarters of Fiscal 2017, in this Annual Report on Form 10-K for Fiscal 2017.

 

The restated financial statements correct the following errors:

 

Equity-Based Payments – Stock Options

·A $4,514,158 overstatement of stock option expense which was the result of applying incorrect accounting guidance for equity-based payments to non-employees for the year ended December 31, 2016;
·A $15,329,588 overstatement of stock option expense which was the result of applying incorrect accounting guidance for equity-based payments for employees for the full year ended December 31, 2016;
·A $264,795 overstatement of stock option expense which was a result from applying the incorrect accounting guidance for equity-based payments for non-employees for the full year ended December 31, 2015;
·A $2,499,457 overstatement of stock option expense which was a result from applying the incorrect accounting guidance for equity-based payments for employees for the full year ended December 31, 2015;

 

Equity-Based Payments – Stock Compensation

·A $1,215,188 understatement of stock compensation expense in connection with our Agent Growth Incentive Program for the full year ended December 31, 2016. The error was the result of an incorrect application of the equity-based payments for non-employees which requires remeasurement of each award at each reporting date throughout the vesting period;

·

A $121,704 understatement of stock compensation expense in connection with our Agent Growth Incentive Program for the full year ended December 31, 2015. The error was the result of an incorrect application of the equity-based payment for non-employees which requires remeasurement of each award at each reporting date throughout the vesting period;

 

Other Adjustments

·The Company also made corrections related to certain errors in revenue and cost of sales which decreased previously reported net revenues and cost of revenues by approximately $0.6 million and approximately $0.4 million for the years ended December 31, 2016 and 2015, respectively.

 

Cumulatively through December 31, 2016 and December 31, 2015 the restatement had the following effects on net loss:

  

  Stock Option Expense Adjustment Stock Compensation Expense Adjustment Other Adjustments Total Decrease to Net Loss
2016 $ (19,843,746) $ 1,215,188 $ – $ (18,628,558)
2015 $   (2,764,252) $ 121,704 $ – $   (2,642,548)

 

 

 

 2 

 

 

Effects of Restatement

 

The following table sets forth the effects of the restatement on affected items within our previously reported Consolidated Statements of Operations. The adjustments to correct the errors have no effect on reported Consolidated Cash Flows from Operations nor a material impact on the Consolidated Balance Sheet in relation to assets or liabilities.

  

         2016 
Net Loss   As Originally Reported   $(26,043,274)
    Adjustment    18,628,558 
    As Restated   $(7,414,716)
Net Loss attributable to common shareholders:          
Basic and Diluted from continuing operations   As Originally Reported   $(0.51)
    Adjustment    0.37 
    As Restated   $(0.14)
         2015 
Net Loss   As Originally Reported   $(4,602,975)
    Adjustment    2,642,548 
    As Restated   $(1,960,427)
Net Loss attributable to common shareholders:          
Basic and Diluted from continuing operations   As Originally Reported   $(0.09)
    Adjustment    0.05 
    As Restated   $(0.04)

 

The adjustments made as a result of the restatement are more fully disclosed in Note 3, Restatement of Previously Issued Financial Statements, of the Notes to the Consolidated Financial Statements included in this Annual Report. To further review the effects of the accounting errors identified and the restatement adjustments, see Part II – Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Annual Report. For a description of the control deficiencies identified by management during the course of its preparation of this Annual Report and the audit, and management’s plans to remediate those deficiencies, see Part II – Item 9A – Controls and Procedures.

 

Previously filed Annual Reports on Form 10-K and quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. Accordingly, investors should no longer rely upon the Company’s previously released financial statements for these periods and any earnings releases or other communications relating to these periods. See Note 13, Unaudited Quarterly Financial Data, of the Notes to the Consolidated Financial Statements in this Annual Report for the impact of these adjustments on each of the quarterly periods in fiscal 2016 and fiscal 2015, and for the first three quarters of fiscal 2017. All amounts in this Annual Report on Form 10-K affected by the restatement adjusted reflect such amounts as restated.

 

 

 

 3 
 

 

Statement Regarding Forward-Looking Statements

 

This Annual Report and our other public filings contains 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, 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 described in Part I, Item IA Risk Factors. 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 for 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 list of uncertainties could be complete, some factors that could cause actual results to differ materially from those 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, 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 agent, 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.

 

All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirely 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.

 

 

 

 

 

 

 

 

 

 4 
 

 

PART I

 

Item 1. BUSINESS

 

Overview

 

eXp World Holdings, Inc. (the “Company”; “we”, or “eXp”) was incorporated in the State of Delaware on July 30, 2008. The Company owns and operates its main operating division which is a cloud-based international residential real estate brokerage (“eXp Realty”). We focus our operations on the use of cloud-based technologies in order to grow an international brokerage without the burden of physical brick and mortar offices or redundant staffing costs. Our technology focus includes the development of a proprietary cloud-based real estate transactional platform.

 

Operations

 

We launched our operation in October 2009 with a small number of real estate agents in two states and ended the fiscal year 2017 with a team of over 6,500 real estate professionals, operating across the United States, and in the provinces of Alberta and Ontario, Canada. Except for our employed state brokers, all real estate professionals in our brokerage operations are independent contractors and are not our employees.

 

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 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, as well as 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 agents and brokers.

 

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 virtual conference rooms, training centers, and individual offices 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. 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 interactions where circumstances 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. 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 serves as our primary 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.

 

 

 

 5 
 

 

We also serve real estate agents, 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 markets currently served by the Company without any additional capital requirements.

 

eXp Realty has held firm in its belief that each individual agent delivers value to individual home buyers and sellers in different ways depending upon the knowledge, skills or niche of the agent and the needs and wants of the consumer. Consumers work with agents because of their skills and service individually and generally place greater weight on those individual skill sets, service levels and style than they do on the brokerage brand with which the agent is affiliated.

 

Numerous real estate coaches provide training and classes in facilitation of selling coaching services, whether to brokerages on a vendor basis or to individual agent outside of their brokerage relationship. eXp Realty is working to develop a model and infrastructure for an internal coaching program which approaches the relationship between coach and agent with a similar philosophy. The needs of individual agents vary as do the methods of instruction that are most effective for their learning. This approach aims to offer coaching that draws upon, highlights, promotes and supports some of the best coaches in the industry based upon their individual talents and the corresponding fit to the particular needs to our individual, entrepreneurial professionals.

 

Fee Structure

 

The lower overall cost of operating our cloud office has enabled us to offer our agents and brokers a higher split of the gross commissions generated from real estate 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 monthly technology fee, a tuition fee for a curriculum of professional development classes and real estate vision and training (which we call eXp University), a transaction processing fee and a risk management 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 receive 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.

 

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 gross revenue sharing plan attains 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.

 

 

 

 

 6 
 

 

Our Markets

 

Our primary market is the United States where we currently operate in most United States and the District of Columbia, and in the provinces of Alberta and Ontario, Canada.

 

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 offices 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.

 

If necessary, we will 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 registered 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 infringement. Although any assertion of our rights could result in a substantial cost and diversion of management effort, we believe the protection and defense against infringement of our intellectual property rights are essential to our business.

 

Seasonality of Business

 

Seasons and weather 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. We have historically experienced lower revenues during the fall and winter seasons, as well as during periods of unseasonable weather, which reduces our operating income, net income, operating margins and cash flow.

 

Real estate listings precede sales and a period of poor listing activity will negatively impact revenue. Past performance in similar seasons or during similar weather events can provide no assurance of future or current performance, and macroeconomic shifts in the markets we serve can conceal the impact of poor weather and/or seasonality.

 

 

 

 

 7 
 

 

Home sales in successive quarters can fluctuate widely due to a wide variety of factors, including holidays, national or international emergencies, the school year calendar’s impact on timing of family relocations, interest rate changes, speculation of pending interest rate changes and the overall macroeconomic market. Our revenue and operating margins each quarter will remain subject to seasonal fluctuations, poor weather and natural disasters and macroeconomic market changes that 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 is often cyclical, characterized by protracted periods of depressed home values, lower buyer demand, inflated rates of foreclosure and often changing regulatory or underwriting standards applicable to mortgages. Such depressed real estate cycles are often followed by extended periods of higher buyer demand, lower available real estate supply and increasing home values. Our business is affected by these cycles in the residential real estate market, which can make it difficult to compare or analyze our financial performance effectively across successive periods.

 

Internal Use Software Development

 

Our Company continues to increase our investment in the development of our own cloud-based transaction processing platforms. During 2017, we hired several employees and engaged third party vendors focused on creating process efficiencies and 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 federal, state, provincial, and local laws, 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. 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.

 

Real Estate Regulation - Federal

 

The Real Estate Settlement Procedures Act of 1974, as amended, (RESPA) became effective on June 20, 1975. 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. RESPA also protects borrowers against certain abusive practices, such as kickbacks, and places limitations upon the use of escrow accounts. RESPA also requires detailed disclosures concerning the transfer, sale, or assignment of mortgage servicing, as well as disclosures for mortgage escrow accounts.

 

 

 

 8 
 

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) moved authority to administer RESPA from the Department of Housing and Urban Development to the new Consumer Financial Protection Bureau (“CFPB”). At present, leadership at the CFPB is in transition, with a new acting director. The CFPB released a five-year strategic plan in February 2018 indicating that it intends to continue to focus on protecting consumer rights while engaging in rulemaking to address unwarranted regulatory burdens. As a result, the regulatory framework of RESPA applicable to our business may be subject to change. The Dodd-Frank Act also increased regulation of the mortgage industry, including: (i) 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;(ii) requiring the CFPB to enact regulations, 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 (iii) 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 laws and regulations applicable to our business include (i) the Federal Truth in Lending Act of 1969; (ii) the Federal Equal Credit Opportunity; (iii) the Federal Fair Credit Reporting Act; (iv) the Fair Housing Act; (v) the Home Mortgage Disclosure Act; (vi) the Gramm-Leach-Bliley Act; (vii) the Consumer Financial Protection Act; (viii) the Fair and Accurate Credit Transactions Act; and (ix) the Do Not Call/Do Not Fax Act and other state and federal laws pertaining to the privacy rights of consumers, which affects our opportunities to solicit new clients.

 

Real Estate Regulation - State and Local Level

 

Real estate and brokerage licensing laws and 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 must 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, to 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 also 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 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 applicable laws and regulations.

 

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®.

 

 

 

 9 
 

 

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 ended fiscal year 2017 with 184 full-time employees and 6511 agents and brokers whom we classify as independent contractors.

 

Our operations are overseen directly by management. 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 employees with experience relevant to our business. 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 the skill-set of our management team will be a primary asset in the development of our brands and trademarks.

 

Available Information

 

Our Company files annual, quarterly, and current reports, proxy statements and other documents with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The public may read and copy any materials that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public can obtain any documents that we file with the SEC at www.sec.gov.

 

Our Company maintains a website at www.expworldholdings.com. Our filings with the SEC, including without limitation, our Annual Reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, are available through a link maintained on our website under the heading “Investor Relations—SEC Filings.” Information contained on our website is not incorporated by reference into this report. Previously filed Annual Reports on Form 10-K and quarterly reports on Form 10-Q for the periods affected by the restatement have not been amended. Accordingly, investors should no longer rely upon the Company’s previously released financial statements for these periods and any earnings releases or other communications relating to these periods.

 

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. Our ability to realize consistent, meaningful revenues and profit over a sustained period has not been established and cannot be assured.

 

 

 

 

 10 
 

 

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 general business and macroeconomic conditions beyond our control.

 

Our profitability is closely related to the strength of the residential real estate market which is cyclical in nature and typically is affected by changes in national, state and local economic conditions which are beyond our control. Macroeconomic conditions that could adversely impact the growth of the real estate market and have a material adverse effect on our business include, but are not limited to, economic slowdown or recession, increased unemployment, increased energy costs, reductions in the availability of credit or higher interest rates, increased costs of obtaining mortgages, an increase in foreclosure activity, 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 adverse weather events, or the public perception that any of these events may occur. Unfavorable general economic conditions, such as a recession or economic slowdown, in the United States, Canada or other markets we enter and operate within could negatively affect the affordability of, and consumer demand for, our services which could have a material adverse effect on our business and profitability. 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 to the real estate market or that otherwise could negatively impact our business.

 

The real estate market is substantially reliant on the monetary policies of the federal government and its agencies and is particularly affected by the policies of the Federal Reserve Board, which regulates the supply of money and credit in the U.S., which in turn impacts interest rates. Our business could be negatively impacted by any rising interest rate environment. As mortgage rates rise, the number of home sale transactions may decrease as potential home sellers choose to stay with their lower mortgage rate rather than sell their home and pay a higher mortgage rate with the purchase of another home. Similarly, in higher interest rate environments, potential home buyers may choose to rent rather than pay higher mortgage rates. Changes in the interest rate environment and mortgage market are beyond our control, are difficult to predict and could have a material adverse effect on our business and profitability.

 

The 2017 Tax Act could have a negative impact on homeownership and reduce market demand which could adversely affect our profitability.

 

With the passage of the 2017 Tax Act, the law includes provisions that, among other things:

 

·reduce individual federal tax rates at most income levels;
·increase the standard deduction from $12,700 to $24,000 for married taxpayers filing a joint tax return;
·caps the amount of property, sales and state and local income tax deductions at $10,000;
·reduce the limit on deductible mortgage debt to $750,000, from $1 million on mortgage loans entered into after December 15, 2017, while entirely suspending interest deductibility of home equity loans; and
·suspend the deductibility of certain home moving expenses.

 

 

 

 

 11 
 

 

The provisions of the 2017 Tax Act may cause changes in the residential real estate market, the prices taxpayers are willing to pay for new homes and the terms of their financing. The effects of the 2017 Tax Act on average home sale prices may be more impactful in states with particularly high state income tax and property values. A reduction in the number of home sale transactions or average home sale prices or reductions could have a material adverse effect on our revenues and profitability.

 

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, such expansion may be expensive, complex, and place increasing demands on our management. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure and we may not be successful in maintaining adequate financial and operating systems and controls as we expand. 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.

 

If we fail to grow in the various local markets that we serve or are unsuccessful in identifying and pursuing new business opportunities our long-term prospects and profitability will be harmed.

 

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, and 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.

 

We may implement changes to our business model and operations to improve revenues that cause a disproportionate increase in our expenses 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 up-front costs that may only be recovered after lengthy periods of time. Any of these attempts to pursue new business opportunities 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.

 

If we fail to continue to grow in the local markets we serve or if we fail to successfully identify and pursue new business opportunities, our long-term prospects, financial condition and results of operations may be harmed, and our stock price may decline.

 

 

 

 

 12 
 

 

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, county and foreign governmental authorities, or private associations and governing boards.

 

We operate in a heavily regulated industry subject to complex, federal, state, provincial and local laws and regulations and third-party organizations’ regulations, policies and bylaws governing the real estate business.

 

In general, the laws, rules and regulations that apply to our business practices include, without limitation, RESPA. the federal Fair Housing Act, the Dodd-Frank Act, and federal advertising and other laws, as well as comparable state statutes; rules of trade organizations 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 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.

 

 

 

 13 
 

 

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.

 

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.

 

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 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.

 

 

 

 

 14 
 

 

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. From time to time in the past we have 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 may 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.

 

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 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. We have historically experienced lower revenues during the fall and winter seasons, as well as during periods of unseasonable weather, which 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 in similar seasons or during similar weather events can provide no assurance of future or current performance, and macroeconomic shifts in the markets we serve can conceal the impact of poor weather or seasonality.

 

Home sales in successive quarters can fluctuate widely due to a wide variety of factors, including holidays, national or international emergencies, the school year calendar’s impact on timing of family relocations, interest rate changes, speculation of pending interest rate changes and the overall macroeconomic market. Our revenue and operating margins each quarter will remain subject to seasonal fluctuations, poor weather and natural disasters and macroeconomic market changes that 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.

 

The Application, disclosure and safeguarding of this information is regulated by federal and state privacy laws. To comply with privacy laws, we invested resources and adopted a privacy policy outlining policies and procedures for the use of safeguarding 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 we 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.

 

 

 

 

 15 
 

 

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; 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. 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 and other companies, including our competitors, could make claims against us alleging our infringement of their intellectual property rights. There can be no assurance that we would prevail in such lawsuits. Any significant impairment of our intellectual property rights could harm our business.

 

 

 

 

 16 
 

 

Cybersecurity incidents could disrupt our business operations, result in the loss of critical and confidential information, adversely impact our reputation and harm our business.

 

Cybersecurity threats and incidents directed at us could range from uncoordinated individual attempts to gain unauthorized access to information technology systems to sophisticated and targeted measures aimed at disrupting business or gathering personal data of customers. In the ordinary course of our business, we and our agents and brokers collect and store sensitive data, including proprietary business information and personal information about our customers. Our business, and particularly our cloud-based platform, is reliant on the uninterrupted functioning of our information technology systems. The secure processing, maintenance, and transmission of information are critical to our operations, especially the processing and closing of real estate transactions. Although we employ measures designed to prevent, detect, address, and mitigate these threats (including access controls, data encryption, vulnerability assessments, and maintenance of backup and protective systems), cybersecurity incidents, depending on their nature and scope, could potentially result in the misappropriation, destruction, corruption, or unavailability of critical data and confidential or proprietary information (our own or that of third parties, including potentially sensitive personally information of our customers) and the disruption of business operations. Any such compromises to our security could cause harm to our reputation, which could cause customers to lose trust and confidence in us, or could cause agents and brokers to stop working for us. In addition, we may incur significant costs for remediation that may include liability for stolen assets or information, repair of system damage, and compensation to customers and business partners. We may also be subject to legal claims, government investigation, and additional state and federal statutory requirements.

 

The potential consequences of a material cybersecurity incident include regulatory violations of applicable U.S. and international privacy and other laws, reputational damage, loss of market value, litigation with third parties (which could result in our exposure to material civil or criminal liability), diminution in the value of the services we provide to our customers, and increased cybersecurity protection and remediation costs (that may include liability for stolen assets or information), which in turn could have a material adverse effect on our competitiveness and results of operations.

 

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 if we fail to effectively execute a post-acquisition integration 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 divert its focus from 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. From time to time, we intend to evaluate other brokerages for acquisition in order to accelerate growth and may not succeed in identifying suitable candidates or we may acquire brokerages that negatively impact us.

 

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. Adverse results in such litigation and other proceedings 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 a 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, employment law claims, including claims challenging the classification of our agents and brokers 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 burdensome given the breadth of claims, large potential damages and significant costs of defense. 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.

 

Risk Related to Our Stock

 

Glenn Sanford, our Chairman and Chief Executive Officer, together with Penny Sanford, a significant shareholder, own a significant percentage of our stock, and as a result, the trading price for our shares may be depressed and they can take actions that may be adverse to the interests of our stockholders.

 

 

 

 

 

 17 
 

 

Glenn Sanford beneficially owns approximately 37% of our outstanding common stock as of December 31, 2017. Penny Sanford beneficially owns approximately 27% of our outstanding common stock as of December 31, 2017. In December 2017 Mr. Sanford and Ms. Sanford filed a Schedule 13D with the Securities and Exchange Commission (“SEC”) indicating that they had entered into an agreement to vote their shares as a group with respect to the election of directors and any other matter on which our shares of common stock are entitled to vote. 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 group. The group can 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 56.1 million shares were issued and outstanding as of March 15, 2018. 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 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, as a result, the trading price of our stock is highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for stockholders to sell their stock. The market price of our common stock fluctuates 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.

 

Our common stock has been subject to the Securities and 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) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Based on its trading prices, our securities have been covered by the penny stock regulations in the past. The penny stock regulations impose additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, which may have the effect of reducing the level of trading activity in the secondary market for such stock. If our securities become subject to the penny stock regulations, it may affect the ability of broker-dealers to trade our securities, which we believe would 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.

 

 

 

 18 
 

 

Item 1B. UNRESOLVED STAFF COMMENTS

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

Item 2. PROPERTIES

 

Our principal corporate office is located at 2219 Rimland Drive, Suite 301 in Bellingham, Washington where we lease an office space that expires on May 31, 2019. We also lease small office spaces in a number of States in which we operate, in order to comply with state regulatory and licensing requirements and, in certain instances, to provide office space to our managing state brokers and drop-in space for our agents. In some of these instances, the state managing brokers are financially responsible for a significant portion of the rental expense associated with a leased office space. We generally do not provide office space for the agents other than for drop-in service. We do not own any real property. We believe that leased facilities are adequate to meet current needs and that additional facilities will be available for lease to meet future needs.

 

Item 3. LEGAL PROCEEDINGS

 

From time to time, we are subject to potential liability under laws and government regulations and various claims and legal actions that may be asserted against us that could have a material adverse effect on our business, reputation, results of operations or financial condition.

 

There are no matters pending or, to our knowledge, threatened that we expect to have a material adverse impact on our business, reputation, results of operations or financial condition.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 

 

 19 
 

 

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our common stock is quoted on the OTCQB operated by the OTC Markets Group under the trading symbol “EXPI”. As of March 15, 2018, there are 56,100,047 issued and outstanding shares of our common stock held by a total of approximately 4,900 stockholders of record. The following table shows the low and high bid price per share for our common stock quarterly during the last two fiscal years. These prices represent inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions.

 

   2017   2016 
   Low   High   Low   High 
First Quarter  $3.30   $3.98   $0.61   $1.15 
Second Quarter  $2.72   $3.70   $1.12   $1.89 
Third Quarter  $2.60   $3.65   $1.60   $5.80 
Fourth Quarter  $3.37   $7.99   $3.50   $5.84 

 

Trading in our common stock quoted on the OTCQB is often thin and is characterized by wide fluctuations in trading prices due to many factors, some of which may have little to do with our company’s operations or business prospects. We cannot assure you that there will be a market for our common stock in the future.

 

Transfer Agent

 

Our transfer agent is Island Stock Transfer with an office at 15500 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760.

 

Dividends

 

We have not declared any dividends since incorporation and do not anticipate that we will do so in the foreseeable future. Although there are no restrictions that limit the ability to pay dividends on our common stock, our intention is to retain future earnings, if any, for use in our operations and the expansion of our business.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table summarizes certain information regarding our equity compensation plan as at December 31, 2017:

 

Plan category  Number of securities to be issued upon exercise
of outstanding options, warrants and rights
(a)
   Weighted-average exercise price of
outstanding options, warrants and rights
(b)
   Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
 
Equity compensation plans approved by security holders   13,932,357   $2.53    12,053,800 
Equity compensation plans not approved by security holders   -0-    N/A    N/A 
Total   13,932,357   $2.53    12,053,800 

 

 

 

 20 
 

 

2013 Stock Option Plan

 

On September 27, 2013, we adopted a stock option plan. The purpose of the stock option plan is to retain the services of valued key employees, directors, officers and consultants and to encourage such persons with an increased initiative to make contributions to our company. Under the stock option plan, eligible employees, consultants and certain other persons who are not eligible employees, may receive awards of “non–qualified stock options”. Individuals, who, at the time of the option grant, are employees of our company or any related company (as defined in the stock option plan) who are subject to tax in the United States may receive “incentive stock options,” and non–U.S. residents may receive awards of “non-qualified stock options”. The number of shares of our common stock issuable under the plan is 10,000,000. As of March 15, 2018, there were stock options to purchase an aggregate of 5,078,045 shares of our common stock outstanding. We do not expect to grant future option awards under the 2013 stock option plan.

 

2015 Equity Incentive Plan

 

On March 12, 2015, we adopted an equity incentive plan which was subsequently amended on October 29 2017. The purpose of the equity incentive plan is to retain the services of valued key employees, directors, officers and consultants and to encourage commitment and motivate excellent performance. Our employees, consultants and directors are eligible to participate in the 2015 Equity Incentive Plan as determined by the Board. The following equity awards may be granted under the equity incentive plan: “incentive stock options”, “non-qualified stock options,” shares of restricted stock, restricted stock units and other stock-based awards; provided, that “incentive stock options” may be granted only to employees. The number of shares of our common stock issuable under the plan is 21,000,000. As of March 15, 2018, there were stock options to purchase an aggregate of 4,860,651 shares of our common stock outstanding with 8,195,616 available for future issuances.

 

On November 14, 2017, we filed a registration statement on Form S-8 to register the sale of 23,273,890 shares issuable under the 2013 Stock Option Plan and 2015 Equity Incentive Plan.

 

Recent Sales of Securities

 

During the year ended December 31, 2017, the Company issued:

 

·181,572 shares of common stock to employees and independent contractors upon the exercise of stock options, for aggregate cash consideration of $46,596;
·1,464,997 shares of common stock as part of our Agent Equity Program for services valued at $5,857,554;
·1,000,594 shares of common stock for services valued at $10,961,630; and
·49,231 shares of common stock to accredited investors in private placement transactions for aggregate cash proceeds of $160,000, or $142,158 net of issuance costs.

 

During the year ended December 31, 2016, the Company issued:

 

·159,678 shares of common stock to employees and independent contractors upon the exercise of stock options, for aggregate cash consideration of $4,900;
·785,504 shares of common stock as part of our Agent Equity Program for services valued at $1,778,437;
·1,018,687 shares of common stock for services valued at $4,996,649; and
·184,615 shares of common stock to accredited investors in private placement transactions for aggregate cash proceeds of $600,000. In conjunction with the issuance, we incurred expenses of $67,794 (of which $49,980 were paid as of December 31, 2016).

 

 

 21 
 

 

During the year ended December 31, 2015, the Company issued:

 

·420,866 shares of common stock as part of our Agent Equity Program for services valued at $355,746;
·1,192,950 shares of common stock for services valued at $1,059,035.

 

The foregoing sales to employees and independent contractors were exempt from registration in reliance upon Section 4(a)(2) of the Securities Act.

 

The sales to accredited investors were exempt from registration in reliance upon Rule 506 and Regulation D under the Securities Act.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

None.

 

Item 6. SELECTED FINANCIAL DATA

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND REULTS OF OPERATIONS

 

Overview of Restatement

 

In this Annual Report on Form 10-K, eXp World Holdings, Inc. (together with its subsidiaries the “Company”; “we”, or “eXp”):

 

a.restates its Consolidated Balance Sheet as of December 31, 2016, and the related Consolidated Statements of Operations, Consolidated Statements of Stockholders’ Equity and Consolidated Cash Flows for the fiscal years ended December 31, 2016 and December 31, 2015;
b.restates its additional paid-in-capital and accumulated deficit balance as of December 31, 2015 as part of the Consolidated Statements of Stockholders Equity; and
c.restates its Unaudited Quarterly Financial Data for each of the first three fiscal quarter in the fiscal years ended December 31, 2017, 2016 and 2015

 

The adjustments made as a result of the restatement are more fully discussed in Note 3, Restatement of Previously Issued Financial Statements, of the Notes to Consolidated Financial Statements included in this Annual Report. For a description of the control deficiencies identified by management as a result of the investigation and our internal reviews, and management’s plan to remediate those deficiencies, see Part II—Item 9A—Controls and Procedures.

 

Previously filed Annual Reports on Form 10-K and quarterly reports on Form 10-Q for the affected periods have not been amended. Accordingly, investors should no longer rely upon the Company’s previously released financial statements for these periods and any earnings releases or other communications relating to these periods. See Note 13, Unaudited Quarterly Financial Data, of the Notes to the Consolidated Financial Statements in this Annual Report for the impact of these adjustments on each of the quarterly periods in fiscal 2016 and for the first three quarters of fiscal 2017.

 

Background on the Restatement

 

On April 3, 2018, the Company filed a Form 8-K disclosing that, after discussion with management and with BDO USA, LLP, the Company’s independent registered public accounting firm, the Company’s Board of Directors, based on a recommendation of the Audit Committee, had concluded that the Company’s previously issued financial statements for the fiscal year ended December 31, 2016 (“Fiscal 2016”) and the first three fiscal quarters of the fiscal year ended December 31, 2017 (“Fiscal 2017”), should no longer be relied upon, and determined that the financial statements will be restated due to the identification of accounting errors. The Company also disclosed that it would restate certain quarterly data for Fiscal 2016 and would reassess its internal controls as a result of the identification of the errors.

 

On April 12, 2018, after discussion with management and with BDO USA, LLP, the Company’s independent registered public accounting firm, the Company’s Board of Directors, based on a recommendation of the Audit Committee, concluded that the Company’s previously issued financial statements for the fiscal year ended December 31, 2015 (“Fiscal 2015”) , should no longer be relied upon, and determined that such financial statements will be restated due to the identification of accounting errors. The Company also will restate certain quarterly data for Fiscal 2015.

 

 

 

 22 

 

 

The restatement disclosed on April 3, 2018, resulted from accounting errors in the treatment of equity instruments granted to non-employees in 2012 and 2013 and materially impacted our financial statements for the fiscal year ended December 31, 2016. The restatement disclosed on April 12, 2018 results from accounting errors in the treatment of equity instruments granted to employees in 2012 and 2013 which materially impacted our financial statements for Fiscal 2015, Fiscal 2016, and the first three quarters in Fiscal 2017.

 

The accounting errors had no effect on cash and no impact on the Company’s assets, liabilities, or net cash flows from operating, investing, and financing activities on the statement of cash flows during Fiscal 2015, Fiscal 2016 or the quarterly periods in Fiscal 2017. The non-cash effect of the accounting errors leads to a net reduction in previously recognized stock-based compensation expense of approximately $2.6 million and $18.6 million for Fiscal 2015 and Fiscal 2016, respectively and an increase in previously recognized stock-based compensation expense of approximately of $5.7 million for the first three fiscal quarters of Fiscal 2017.

 

In addition, the Company will make correction of certain immaterial errors in revenue and cost of revenue, which decreases previously reported net revenues and cost of revenues by approximately $0.4 million for Fiscal 2015, by approximately $0.6 million for Fiscal 2016 and by approximately $1.8 million for the first three fiscal quarters of Fiscal 2017. These errors had no impact on the previously reported net loss.

 

These errors were discovered by management during the course of its preparation of the Annual Report on Form 10-K for Fiscal 2017, and the audit of the financial results for Fiscal 2017. None of the errors implicate misconduct with respect to the Company or its management or employees.

 

The Company is restating its financial statements for Fiscal 2015, Fiscal 2016, certain quarterly data for Fiscal 2015, certain quarterly data for Fiscal 2016, and the first three fiscal quarters of Fiscal 2017, in this Annual Report on Form 10-K for Fiscal 2017.

 

The restated financial statements correct the following errors:

 

Equity-Based Payments- Stock Options

 

·A $4,514,158 overstatement of stock option expense which was a result from applying the incorrect accounting guidance for equity-based payments for employees as compared to the proper guidance for non-employees for the full year ended December 31, 2016;
·A $15,329,588 overstatement of stock option expense which was a result from applying the incorrect accounting guidance for equity-based payments for non-employees for the full year ended December 31, 2016;
·A $264,795 overstatement of stock option expense which was a result from applying the incorrect accounting guidance for equity-based payments for non-employees for the full year ended December 31, 2015;
·A $2,499,457 overstatement of stock option expense which was a result from applying the incorrect accounting guidance for equity-based payments for non-employees for the full year ended December 31, 2015;

 

Equity-Based Payments – Stock Compensation

 

·A $1,215,188 understatement of stock compensation expense in connection with our Agent Growth Incentive Program for the full year ended December 31, 2016. The error was the result of an incorrect application of the equity-based payments for non-employees which requires remeasurement of each award at each reporting date throughout the vesting period;
·A $121,704 understatement of stock compensation expense in connection with our Agent Growth Incentive Program for the full year ended December 31, 2015. The error was the result of an incorrect application of the equity-based payment for non-employees which requires remeasurement of each award at each reporting date throughout the vesting period;

 

 

 23 

 

 

Other Adjustments

·The Company also made corrections related to certain errors in revenue and cost of sales which decreased previously reported net revenues and cost of revenues by approximately $0.6 million and approximately $0.4 million for the years ended December 31, 2016 and 2015, respectively.

 

The following discussion should be read together with our consolidated financial statements and related notes included elsewhere within this report. The Management’s Discussion and Analysis of Financial Condition 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 “Item 1 A. – Risk Factors” for a discussion of certain risks, uncertainties and assumptions associated with these statements.

 

OVERVIEW

 

eXp World Holdings, Inc., (the “Company”, “eXp”, “we”, “us”, “our”), is a holding company with our main operating division being a cloud-based international residential real estate brokerage (“eXp Realty”) operating across the United States and in the provinces of Alberta and Ontario, Canada. Our operations are focused on the use of cloud-based technologies in order to grow an international brokerage without the burden of physical brick and mortar offices or redundant staffing costs. Our technology focus includes the development of a proprietary cloud based real estate transactional platform.

 

Continued Accelerated Growth

 

Beginning in 2016 and throughout 2017, we increased our net real estate brokerage agent and broker base by 171.2%, from 2,401 at December 31, 2016 to 6,511 at December 31, 2017. These increases occurred in both new and existing geographical markets and contributed to our net revenue increase of 191.5% for the year ended December 31, 2017 as compared to the prior year-ended December 31, 2016.

 

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 this 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. In 2017, approximately 2,700 eXp Realty agents and brokers took advantage of this program resulting in 1,464,997 shares of common stock being issued. This agent equity program continues to be another element in creating a culture of agent-ownership. 

 

RECENT BUSINESS DEVELOPMENTS

 

Initiatives

 

Advancements during the year ended December 31, 2017 centered on the addition of scaling the corporate operations of the Company to match current and ongoing growth of the business. During this period the Company hired a new chief operating officer for our eXp Realty division who most recently held leadership positions at both Realty Executives and HomeSmart International. This new role will focus on cross collaboration efforts across the entire organization in addition to working with our agent advisory council. We also hired a new chief product and technology officer with extensive industry experience to lead our continued development efforts of product and services for our agents and employees. We also hired a new vice president of employee experience. As the organization continues to grow and in an effort to support our rapidly growing agent base, we believe it is important to continue building our culture in alignment with long term goals of the Company.

 

 

 

 24 

 

 

The Company continues to build out its eXp Enterprise (“Enterprise”) operating platform. Enterprise is a proprietary platform that manages all of the Company’s critical processes and information, including agent details, transactions, commissions and revenue share. It allows for a flow of real time information to eXp agents, while also providing a singular platform for eXp staff to perform a variety of back office functions in a scalable and efficient manner. The platform has already led to improvements in the areas of agent onboarding, transaction processing and financial oversight. This platform will lend itself to constantly enhance and build out capabilities that meet the needs of company stakeholders into the future.

 

During the year ended December 31, 2017, the Company also created a variety of new marketing and communications collateral, allowing stakeholders to have more transparency into the organization while providing more ways to provide feedback. Collateral provided to agents included tools to assist with social media, public relations, and a variety of internal communication pieces to help agents be more productive and in-the-know.

 

The Company continues to focus its efforts on the quality of our services and recruiting and retaining top performing talent with the overall goal of growing and improving overall profitability.

 

Tax Cuts and Jobs Act of 2017

 

The Tax Cuts and Jobs Act of 2017 became law on December 22, 2017.

 

The law includes provisions that, among other things:

 

·reduce individual federal tax brackets at most income levels;
·increase the standard deduction from $12,700 to $24,000 for married taxpayers filing a joint tax return;
·caps the amount of property, sales and state and local income tax deductions at $10,000;
·reduce the limit on deductible mortgage debt to $750,000, from $1 million on mortgage loans entered into after December 15, 2017, while entirely suspending interest deductibility of home equity loans; and
·suspend the deductibility of certain home moving expenses.

 

The provisions of the 2017 Tax Act may cause changes in the residential real estate market, the prices taxpayers are willing to pay for new homes and the terms of their financing. The effects of the 2017 Tax Act on average home sale prices may be more impactful in states with particularly high state income tax and property values. The impact of the income tax changes on individuals and potential impact on home sale transactions is difficult to predict.

 

MARKET CONDITIONS AND INDUSTRY TRENDS

 

According to the NAR, home sale transactions of single family homes volume increased 8.4% in 2017 as compared to the same period in 2016 as a result of both an increase in the number of home sale transactions, combined with average home sale price growth. Also, according to NAR, the housing affordability index has continued 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 composite housing affordability index was 157.5 for 2017 and 167.1 for 2016.

 

The favorable housing affordability index is due in part to favorable mortgage rate conditions. Mortgage rates increased approximately 40 basis points from December 31, 2016 to December 31, 2017 but continue to be at historically low levels. While any increase to mortgage rates can adversely impact housing affordability, we believe that rising wages, improving consumer confidence and continued low inventory levels will result in favorable demand conditions and existing home sale volume growth.

 

According to the Federal Housing Finance Agency, mortgage rates on commitments for 30-year, conventional, fixed-rate first mortgages averaged 3.88% for 2016 and the rate rose to 4.17% in December 2017. 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.

 

 

 

 25 

 

 

Partially offsetting the positive impact of low mortgage rates are low housing inventory levels. According to NAR, the inventory of existing homes for sale in the U.S. decreased to 1.3 million (preliminary), from 1.7 million at year ended December 31, 2016. The inventory represents a national average supply of 3.1 months at the current home sales pace which is down from 4.4 months for 2016.

 

Additional factors offsetting the positive impact of low mortgage rates include the ongoing rise in home prices, less than favorable mortgage underwriting standards and some would-be home sellers having limited or negative equity in homes. Mortgage credit conditions tightened significantly during the housing downturn, with banks limiting credit availability to more creditworthy borrowers and requiring larger down payments, stricter appraisal standards, and more extensive mortgage documentation. Although mortgage credit conditions appear to be easing, mortgages remain less available to some borrowers and it frequently takes longer to close a residential transaction due to current mortgage and underwriting requirements.

 

Existing Home Sales

 

According to NAR, existing home sale transactions increased 1.1% to 5.5 million for year ended December 31, 2017 compared to the same period in 2016. eXp Realty home sale transactions increased 217% to 25,055 for the year ended December 31, 2017, from 7,905 compared to the same period in 2016. Our increase in homes sale transactions was attained by the growth of our agent base which grew approximately 171% to over 6,500 for the year ended December 31, 2017 from approximately 2,400 at year ended 2016.

 

As of their most recent releases, NAR is forecasting existing home sales to decrease .2% in 2018 and increase 3.1% in 2019.

 

Existing Home Sales Price

 

We believe primary drivers to the long-term demand for housing and the growth of our company to support that demand are housing affordability, the general economic health of the U.S. economy, demographic trends such as population growth, the increase in household formation, mortgage rate levels and mortgage availability, job growth, the inherent benefits of owning a home versus renting and the influence of local housing dynamics of supply versus demand.

 

Significant changes to one or more of these drivers could cause the demand for housing to slow, negatively affecting all real estate brokerage firms, including eXp Realty. Regardless of whether the housing market continues to grow or slows, eXp Realty expects to adhere to its low-cost, high-engagement model, affording a growing number of agents and brokers increased income and ownership opportunities while offering a scalable solution to brokerage owners looking to survive and thrive in a wide range of economic conditions.

 

 

 

 26 
 

 

Results of Operations

 

Year ended December 31, 2017 vs. Year ended December 31, 2016

 

Revenues

 

Net revenues were $156.1 million for the year ended December 31, 2017 compared to $53.6 million for the year ended December 31, 2016, an increase of $102.5 million, or 191.5%. This increase as compared to the prior year ended December 31, 2016 is a direct result of the increase in our sales agent base by approximately 171% to over 6500 agents.

 

Operating Expenses

 

       Years Ended December 31,    
       2017  

2016

(As Restated)

   Change
             
Operating expenses:               
Cost of revenues       $139,603,970   $46,438,944   $93,165,026
General and administrative        35,685,512    13,272,746   22,412,766
Professional fees        1,274,675    645,024   629,651
Sales and marketing        1,572,041    570,844   1,001,197
Total operating expenses       $178,136,198   $60,927,558   $117,208,640

 

Cost of revenues was $139.6 million for the year ended December 31, 2017 compared to $46.4 million for the year ended December 31, 2016, an increase of $93.2 million, or 200.6%. 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 in cost of revenue was primarily attributable to a higher amount of net revenues and increase in agent commissions paid.

 

General and administrative expenses were $35.7 million for the year ended December 31, 2017 compared to $13.3 million for the year ended December 31, 2016, an increase of $22.4 million, or 169.0%. General and administrative expenses include costs related to wages, including stock compensation, dues, operating leases, utilities, travel and other general overhead expenses. The increase in general and administrative costs was driven primarily by the increase in compensation expenses of $5.3 million, increase in stock options expense of $4.8 million, from $2.1 million (as restated) for the year ended December 31, 2016 to $6.9 million for the year ended December 31, 2017, and an increase in stock compensation expense of $6.0 million, from $5.0 million (as restated) for the year ended December 31, 2016 to $11.0 million for the year ended December 31, 2017. The increase in stock options and stock compensation expense is affected by awards granted, awards exercised and/or awards forfeited throughout the year. Awards granted, issued and forfeited are more fully disclosed in Note 8, Stockholders’ Equity, of the Consolidated Financial Statements. Also impacting the increase in stock compensation expense was the increase in our stock price and the increase in shares granted for our equity incentive program whereby agents and brokers of eXp Realty become eligible for awards of the Company’s common stock through the achievement of production and agent attraction benchmarks.

 

Professional fees were $1.3 million for the year ended December 31, 2017 compared to $0.6 million for the year ended December 31, 2016, an increase of $0.6 million, or 97.6%. Professional fees include costs related to legal, accounting and other consultants. The increase in professional fees were primarily driven by an increase in audit costs of $0.3 million and an increase in legal fees of $0.2 million including fees for non-recurring transactions. Non-recurring legal fees related to performing diligence and contract review and preparation to support the growth of new agent and broker bases as well as entry into new geographical markets.

 

Sales and marking expenses were $1.6 million for the year ended December 31, 2017 compared to $0.6 million for the year ended December 31, 2016, an increase of $1.0 million, or 175.4%. Sales and marketing includes costs related to lead capture, digital and print media, and trade shows, in addition to other promotional materials. The increase in sales and marketing expenses was primarily due to increased cost in lead capture of $0.7 million and other internet marketing of $0.1 million related to our growth in agent and broker headcount.

 

 

 

 27 
 

 

Year ended December 31, 2016 vs. Year ended December 31, 2015

 

Net revenues were $53.6 million for the year ended December 31, 2016 compared to $22.5 million for the year ended December 31, 2015, an increase of $31.1 million, or 138.4%. This increase as compared to the prior year ended December 31,2015 is a direct result of the increase in our sales agent base by approximately 182% to over 2400 agents.

 

Operating Expenses

 

   Years Ended
December 31,
     
   2016
(As Restated)
  

2015

(As Restated)

   Change 
             
Operating expenses:               
Cost of revenues  $46,438,944   $19,125,565   $27,313,379 
General and administrative   13,272,746    4,543,776    8,728,970 
Professional fees   645,024    439,763    205,261 
Sales and marketing   570,844    211,456    359,388 
Total operating expenses  $60,927,558   $24,320,560   $36,606,998 

 

Cost of revenues was $46.4 million for the year ended December 31, 2016 compared to $19.1 million for the year ended December 31, 2015, an increase of $27.3 million, or 142.8%. 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 in cost of revenue was primarily attributable to a higher amount of net revenues and increase in agent commissions paid.

 

General and administrative expenses were $13.3 million for the year ended December 31, 2016 compared to $4.5 million for the year ended December 31, 2015, an increase of $8.7 million, or 192.1%. General and administrative expenses include costs related to wages, including stock compensation, dues, operating leases, utilities, travel and other general overhead expenses. The increase in general and administrative costs was driven primarily by the increase in compensation expenses of $1.6 million, increase in stock options expense of $1.4 million, from $0.7 million (as restated) for the year ended December 31, 2015 to $2.1 million (as restated) for the year ended December 31, 2016, and an increase in stock compensation expense of $4.0 million, from $1.1 million (as restated) for the year ended December 31, 2015 to $5.0 million (as restated) for the year ended December 31, 2016. The increase is primarily related to the 85% increase in full-time employees inclusive of officer level individuals with higher salaries and stock- based awards and additional facilities costs to support our approximate 182% increase in agent and brokers. Awards granted, issued and forfeited are more fully disclosed in Note 8, Stockholders’ Equity, of the Consolidated Financial Statements. Also impacting the increase in stock compensation expense was the increase in the Company’s stock price and the increase in shares granted for our equity incentive program whereby agents and brokers of eXp Realty become eligible for awards of the Company’s common stock through the achievement of production and agent attraction benchmarks.

 

Professional fees were $0.6 million (as restated) for the year ended December 31, 2016 compared to $0.4 million (as restated) for the year ended December 31, 2015, an increase of $0.2 million, or 46.7%. Professional fees include costs related to legal, accounting and other consultants. The increase in professional fees was primarily attributable to non-recurring fees associated with the engagement of professional service providers to support the execution of our agent and broker growth initiatives. During 2016, we engaged additional third parties to expand our market awareness programs.

 

Sales and marking expenses were $0.6 million (as restated) for the year ended December 31, 2016 compared to $0.2 million (as restated) for the year ended December 31, 2015, an increase of $0.4 million, or 170.0%. Sales and marketing includes costs related to lead capture, digital and print media, and trade shows, in addition to other promotional materials. The increase in sales and marketing expenses was primarily due to increased growth in agent and broker headcount and expanding our brand awareness in existing and prospective geographical regions.

 

 

 

 28 
 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Year ended December 31, 2017 vs. Year ended December 31, 2016 

 

  

Years Ended

December 31,

     
   2017   2016   Change 
             
Current assets  $13,098,918   $5,565,642   $7,533,276 
Current liabilities   (10,376,460)   (3,577,021)   (6,799,439)
Net working capital  $2,722,458   $1,988,621   $733,837 

 

Net working capital increased $0.7 million, or 36.9% to $2.7 million for the year ended December 31, 2017 from $2.0 million for the year ended December 31, 2016. The increase in net working capital was driven primarily by an increase in cash of $3.0 million and commissions receivable of $3.7 million resulting from pending real estate transactions. In correlation to the number of pending real estate transactions, accrued expenses, which include commissions payable, and salaries payable, increased $6.1 million as of December 31, 2017.

 

The following table presents our cash flows for the years ended December 31, 2017 and 2016:

 

   Years Ended     
   December 31,     
   2017   2016   Change 
             
Cash provided by operating activities  $4,114,930   $1,024,277   $3,090,653 
Cash (used in) investing activities   (1,281,147)   (416,672)   (864,475)
Cash provided by (used in) financing activities   149,394    493,698    (344,304)

 

For the year ended December 31, 2017, cash provided by operating activities increased $3.1 million from the same period in 2016. The change resulted primarily from the increased volume in our sales transactions and higher commissions receivable. In correlation with our increased volume in sales transactions, we incurred higher expenses, specifically commissions payable.

 

Cash used in investing activities for the year ended December 31, 2017 increased $0.9 million compared to the year ended December 31, 2016. The change resulted primarily from our fixed asset expenditures related to the on-going development of our internal use software. We expect to continue to use our existing cash resources on similar expenditures for the next twelve months as we continue to develop and refine our cloud-based platforms.

 

Cash provided by financing activities for the year ended December 31, 2017 decreased $0.3 million compared to the year ended December 31, 2016. The change resulted primarily from the exercise of 181,572 options to purchase 181,572 shares of common stock and cash proceeds of $0.6 million received for a private placement completed in the year ended December 31, 2016.

 

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 changes in demographics, interest rates, the economy and government policies and could impact the manner in which we operate. We believe that our current available cash and cash flow from ongoing operations will provide the necessary resources to continue operating our business over the next 12 months. In order to support and achieve our future growth plans, however, we may need or seek to obtain additional funding through equity or debt financing.

 

During the year ended 2017, we secured a $500,000 line of credit. We currently have no borrowings against the line of credit or any other term loan bank debt. In the event that 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 or needed, our business and results of operations will likely suffer.

 

 

 

 

 29 
 

 

Year ended December 31, 2016 vs. Year ended December 31, 2015

 

  

Years Ended

December 31,

     
   2016   2015   Change 
             
Current assets  $5,565,642   $1,146,521   $4,419,121 
Current liabilities   (3,577,021)   (664,210)   (2,912,811)
Net working capital  $1,988,621   $482,311   $1,506,310 

 

Net working capital increased $1.5 million, or 312.3% to $2.0 million for the year ended December 31, 2016 from $0.5 million for the year ended December 31, 2015. The net working capital increase is primarily the result of the completion of a private placement of our restricted and unregistered shares sold in December 2016 for net cash proceeds of $532,206. At December 31, 2016, we had a significant number of transactions pending, resulting in receivables of $3,015,767, a 783% increase from December 31, 2015. Further, related to the large number of pending transactions as of December 31, 2016, our current liabilities increased by approximately 438% from December 31, 2015 primarily related to outstanding commissions payable of $2,417,621.

 

The following table presents our cash flows for the years ended December 31, 2016 and 2015:

 

   Years Ended
December 31,
     
   2016   2015   Change 
             
Cash provided by operating activities  $1,024,277   $346,186   $678,091 
Cash (used in) investing activities   (416,672)   (57,116)   (359,556)
Cash provided by (used in) financing activities   493,698    (63,059)   (556,757)

 

For the year ended December 31, 2016, cash provided by operating activities increased $0.7 million from the same period in 2015. The change resulted primarily from the increased volume in our Agent Equity Program providing for the settlement of commissions earned in the form of restricted and unregistered shares of common stock. Also impacting the increase is our significant increase in sales volume.

 

Cash used in investing activities for the year ended December 31, 2016 increased $0.4 million compared to the year ended December 31, 2015. Our investing activities solely consisted of the acquisition of fixed assets. In addition to leasing and furnishing new office space in Reno, we continued aggressive improvement to our core cloud office platform and transactional management systems.

 

Cash provided by financing activities for the year ended December 31, 2016 decreased $0.6 million compared to the year ended December 31, 2015. In 2016, we generated gross cash proceeds from the sale of shares of our restricted and unregistered common stock totaling approximately $600,000. In addition, we financed certain insurance policies totaling approximately $53,000. Off-setting the cash received from the above financing activities, we purchased the non-controlling interest in First Cloud Mortgage for a total of $97,000. We did not enter into any significant financing transaction during 2015. As we continue to pursue or aggressive growth plans, we may pursue additional private placements of our common stock or other financing options.

 

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 changes in demographics, interest rates, the economy and government policies and could impact the manner in which we operate. We believe that our current available cash and cash flow from ongoing operations will provide the necessary resources to continue operating our business over the next 12 months. In order to support and achieve our future growth plans, however, we may need or seek to obtain additional funding through equity or debt financing.

 

For the year ended December 31, 2016, we 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.

 

 

 30 
 

 

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. Our significant accounting policies are described in Note 2 of the Consolidated Financial 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.

 

Revenue Recognition

 

In general, we recognize revenue when (i) persuasive evidence of an arrangement exists, (ii) services have been rendered to the customer, (iii)the fee is fixed or determinable and (iv) collectability is reasonably assured.

 

We consider the closing of residential real estate transactions and signed agreements reflecting the terms and conditions under which services will be provided to be persuasive evidence of an arrangement.

 

Income Taxes

 

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. A valuation allowance against deferred tax assets would be established if, based on the weight of available evidence, it is more likely than not (a likelihood of more than 50%) that some or all of the deferred tax assets are not expected to be realized. Our assumptions, judgments, and estimates relative to the value of our deferred tax assets take into account predictions of the amount and category of future taxable income.

 

Since inception, we have incurred operating losses, and accordingly, we have generally not recorded a provision for income taxes. We generally do not expect any significant changes in the amount of our income tax provision until we are no longer incurring operating losses.

 

Stock Based Compensation

 

The Company issues equity and equity linked instruments to employees and non-employees. Share-based payment transactions with non-employees are measured at the fair value which requires estimates to determine fair value in association with U.S. GAAP.

 

We measure expense associated with stock-based awards (usually stock options) to our employees and directors on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award.

 

We account for stock-based compensation arrangements with non-employees using a fair value approach. The estimated fair value of unvested awards granted to non-employee consultants is remeasured at each reporting date through the date of final vesting. As a result, the non-cash charge to operations for non-employee awards with vesting conditions is affected in each reporting period by changes in the fair value of the Company’s common stock.

 

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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.

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company”, we are not required to provide the information required by this Item.

 

 

 

 31 
 

 

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

   Page 
Reports of Independent Registered Public Accounting Firms   33 
Consolidated Balance Sheets   35 
Consolidated Statements of Operations   36 
Consolidated Statements of Comprehensive Income (Loss)   37 
Consolidated Statements of Stockholders’ Equity   38 
Consolidated Statements of Cash Flows   39 
Notes to Consolidated Financial Statements   40 

 

 

 

 

 32 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

 

Shareholders and Board of Directors

eXp World Holdings, Inc.

Bellingham, Washington

 

Opinion on the Consolidated Financial Statements

 

We have audited the accompanying consolidated balance sheets of eXp World Holdings, Inc. (the “Company”) and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2017 and 2016, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

We also have audited the adjustments described in Note 3 that were applied to restate the 2015 consolidated financial statements to correct errors. In our opinion, such adjustments are appropriate and have been properly applied. We were not engaged to audit, review, or apply any procedures to the 2015 consolidated financial statements of the Company other than with respect to the adjustments and, accordingly, we do not express an opinion or any other form of assurance on the 2015 consolidated financial statements taken as a whole.

 

Restatement to Correct 2016 Misstatements

 

As discussed in Note 3 to the consolidated financial statements, the 2016 financial statements have been restated to correct misstatements.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ BDO USA, LLP

 

We have served as the Company's auditor since 2017.

 

Salt Lake City, Utah

 

April 17, 2018

 

 

 

 

 

 33 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Board of Directors and Stockholders of

eXp World Holdings, Inc.

Bellingham, Washington

 

We have audited, before the effects of the adjustments for the correction of the error described in Note 3 to the consolidated financial statements, the accompanying consolidated statements of operations, comprehensive income (loss), stockholders' equity, and cash flows of eXp World Holdings, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2015 (the 2015 consolidated financial statements before the effects of the adjustments for the correction of the error described in Note 3 to the consolidated financial statements). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above before the effects of the adjustments for the correction of the error described in Note 3 to the consolidated financial statements, present fairly, in all material respects, the results of operations and cash flows of eXp World Holdings, Inc. and subsidiaries for the year ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.

 

We were not engaged to audit, review, or apply any procedures to the adjustments for the correction of the error described in Note 3 to the consolidated financial statements and, accordingly, we do not express an opinion or any other form of assurance about whether such retrospective adjustments are appropriate and have been properly applied. Those retrospective adjustments were audited by other auditors.

 

/s/ WSRP, LLC

 

WSRP, LLC

Salt Lake City, Utah

 

March 15, 2016

 

 

 

 

 

 

 34 
 

 

EXP WORLD HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

   

 

   December 31, 2017   December 31, 2016
(as restated)
 
         
ASSETS        
CURRENT ASSETS          
Cash and cash equivalents  $4,672,034   $1,684,608 
Restricted cash   923,193    481,704 
Accounts receivable, net of allowance $179,759 and $133,845, respectively   6,912,657    3,015,767 
Prepaids and other assets   591,034    383,563 
           
TOTAL CURRENT ASSETS   13,098,918    5,565,642 
           
OTHER ASSETS          
Fixed assets, net   1,538,213    538,405 
           
TOTAL OTHER ASSETS   1,538,213    538,405 
           
TOTAL ASSETS  $14,637,131   $6,104,047 
           
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Accounts payable  $635,087   $317,420 
Customer deposits   923,193    481,704 
Accrued expenses   8,818,180    2,742,119 
Notes payable       35,778 
           
TOTAL CURRENT LIABILITIES   10,376,460    3,577,021 
           
Commitments and contingencies        
           
STOCKHOLDERS' EQUITY          
Common Stock, $0.00001 par value 220,000,000 shares authorized; 54,962,535 and 52,316,679 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively     550        523   
Additional paid-in capital   36,848,041    12,987,707 
Accumulated deficit   (32,596,374)   (10,465,409)
Accumulated other comprehensive income (loss)   8,454    4,205 
Total eXp World Holdings, Inc. stockholders' equity   4,260,671    2,527,026 
Non-controlling interest in subsidiary        
           
TOTAL STOCKHOLDERS' EQUITY   4,260,671    2,527,026 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $14,637,131    6,104,047 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 35 
 

 

EXP WORLD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

               

   Year Ended
December 31,
2017
   Year Ended
December 31,
2016
(as restated)
   Year Ended December 31,
2015 (as restated)
 
             
Net revenues  $156,104,544   $53,555,725   $22,464,306 
                
Operating expenses               
Cost of revenues   139,603,970    46,438,944    19,125,565 
General and administrative   35,685,512    13,272,746    4,543,776 
Professional fees   1,274,675    645,024    439,763 
Sales and marketing   1,572,041    570,844    211,456 
                
Total expenses   178,136,198    60,927,558    24,320,560 
                
Net loss from operations   (22,031,654)   (7,371,833)   (1,856,254)
                
Other income and (expenses)               
Other income       15    23 
Interest expense   (2,077)   (370)   (1,127)
                
Total other income and (expenses)   (2,077)   (355)   (1,104)
                
Loss from before income tax expense   (22,033,731)   (7,372,188)   (1,857,358)
                
Income tax expense   (97,234)   (42,528)   (103,069)
                
Net loss   (22,130,965)   (7,414,716)   (1,960,427)
                
Net loss attributable to non-controlling interest in subsidiary       29,801    21,526 
                
Net loss attributable to common shareholders  $(22,130,965)  $(7,384,915)  $(1,938,901)
                
Net loss per share attributable to common shareholders               
Basic from continuing operations  $(0.42)  $(0.14)  $(0.04)
Diluted from continuing operations  $(0.42)  $(0.14)  $(0.04)
                
Weighted average shares outstanding               
Basic   53,194,928    51,081,949    49,409,266 
Diluted   53,194,928    51,081,949    49,409,266 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 36 
 

 

EXP WORLD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 

 

   Year Ended
December 31, 2017
   Year Ended
December 31, 2016
(as restated)
   Year Ended
December 31, 2015
(as restated)
 
             
Net loss  $(22,130,965)  $(7,414,716)  $(1,960,427)
Other comprehensive loss:               
Foreign currency translation adjustments, net of tax   4,249    13,318    (7,571)
Comprehensive loss   (22,126,716)   (7,401,398)   (1,967,998)
Comprehensive loss attributable to non-controlling interest in subsidiary       29,801    21,526 
Comprehensive loss attributable to common shareholders  $(22,126,716)  $(7,371,597)  $(1,946,472)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

 

 37 
 

 

EXP WORLD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                             

 

   Common Stock   Additional Paid-In   Accumulated   Accumulated Other Comprehensive   Non-controlling   Total 
   Shares   Amount   Capital   Deficit   Income (Loss)   Interest   Equity 
Balance, December 31, 2014, as restated   48,566,909   $486   $1,556,315   $(1,141,593)  $(1,542)  $   $413,666 
                                    
Stock compensation expense, as restated   1,192,950    12    1,059,023                1,059,035 
Stock option expense, as restated           733,239                733,239 
Agent equity program, as restated   420,866    4    355,742                355,746 
Issuance of subsidiary common stock                       1,950    1,950 
Repurchase and retirement of shares   (12,530)       (3,132)               (3,132)
Foreign currency translation (loss)                   (7,571)       (7,571)
Net loss, as restated               (1,938,901)       (21,526)   (1,960,427)
                                    
Balance, December 31, 2015, as restated   50,168,195    502    3,701,187    (3,080,494)   (9,113)   (19,576)   592,506 
                                    
Stock issued for cash at $3.25 per share, net of issuance costs   184,615    2    532,204                532,206 
Exercise of options   159,678    2    4,898                4,900 
Stock compensation expense, as restated   1,018,687    9    4,996,640                4,996,649 
Stock option expense, as restated           2,120,726                2,120,726 
Agent equity program, as restated   785,504    8    1,778,429                1,778,437 
Acquisition of non-controlling interest           (146,377)           49,377    (97,000)
Foreign currency translation gain                     13,318        13,318 
Net loss, as restated               (7,384,915)       (29,801)   (7,414,716)
                                    
Balance, December 31, 2016, as restated   52,316,679    $523    12,987,707    (10,465,409)   4,205        2,527,026 
                                     
Stock issued for cash at $3.25 per share, net of issuance costs           142,158                142,158 
Exercise of options   181,572    2    46,594                46,596 
Repurchase and retirement of common stock   (1,307)       (3,607)               (3,607)
Stock compensation expense   1,000,594    10    10,961,621                10,961,631 
Stock option expense           6,856,029                6,856,029 
Agent equity program   1,464,997    15    5,857,539                5,857,554 
Foreign currency translation gain                   4,249        4,249 
Net loss               (22,130,965)           (22,130,965)
                                    
Balance, December 31, 2017   54,962,535   $550   $36,848,041   $(32,596,374)  $8,454   $   $4,260,671 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 38 
 

 

EXP WORLD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

               

 

   Year Ended
December 31, 2017
   Year Ended
December 31, 2016
(as restated)
   Year Ended
December 31, 2015
(as restated)
 
OPERATING ACTIVITIES               
Net loss  $(22,130,965)  $(7,414,716)  $(1,960,427)
Adjustments to reconcile net loss to cash provided by operating activities:                            
Depreciation   353,229    58,374    26,304 
Stock compensation expense   10,961,631    4,996,640    1,059,035 
Stock option expense   6,856,029    2,120,726    733,239 
Agent equity program   5,857,554    1,778,429    355,746 
Deferred tax asset           75,196 
                
Changes in operating assets and liabilities:               
Accounts receivable   (3,884,982)   (2,692,198)   (158,617)
Accounts receivable, related party           6,000 
Prepaids and other assets   (279,361)   (359,112)   (9,778)
Restricted cash   (441,489)   (333,091)   (7,105)
Customer deposits   441,489    333,091    7,105 
Accounts payable   317,667    227,436    10,595 
Accrued expenses   6,076,062    2,308,698    218,290 
Accrued interest           (9,397)
                
CASH PROVIDED BY OPERATING ACTIVITIES   4,126,864    1,024,277    346,186 
                
INVESTING ACTIVITIES               
Acquisition of property and equipment   (1,281,147)   (416,672)   (57,116)
                
CASH USED IN INVESTING ACTIVITIES   (1,281,147)   (416,672)   (57,116)
                
FINANCING ACTIVITIES               
Proceeds from issuance of common stock   142,158    600,000     
Common stock issuance transaction costs       (49,980)    
Proceeds from issuance of subsidiary common stock           1,950 
Repurchase and retirement of common stock   (3,607)       (3,132)
Repurchase and retirement of subsidiary common stock       (97,000)    
Proceeds from exercise of options   46,596    4,900     
Proceeds from issuance of notes payable        53,498     
Principal payments of notes payable   (35,778)   (17,720)   (61,877)
                
CASH PROVIDED BY FINANCING ACTIVITIES   149,369    493,698    (63,059)
                
Effect of changes in exchange rates on cash and cash equivalents   (7,660)   11,491    (7,571)
                
Net change in cash and cash equivalents   2,987,426    1,112,794    218,440 
                
Cash and cash equivalents, beginning of period   1,684,608    571,814    353,374 
                
CASH AND CASH EQUIVALENTS, END OF PERIOD  $4,672,034   $1,684,608   $571,814 
              
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:               
Cash paid for interest  $2,077   $369   $10,524 
Cash paid for income taxes  $97,234   $42,013   $24,313 
                
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:               
Fixed asset purchases in accounts payable  $71,890   $69,912   $ 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 39 
 

 

eXp World Holdings, Inc.

Notes to the Consolidated Financial Statements

December 31, 2017

(Expressed in U.S. dollars)

 

1.        BASIS OF PRESENTATION

 

eXp World Holdings, Inc. (the “Company” or “we” or “eXp”) was incorporated in the State of Delaware on July 30, 2008. Through various operating subsidiaries, the Company operates a cloud-based real estate brokerage operating in most U.S. States, the District of Columbia and the provinces of Alberta and Ontario, Canada. 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.

 

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and are expressed in U.S. dollars. The Company’s fiscal year end is December 31. We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.

 

The Company has evaluated events and transactions subsequent to the balance sheet date and has disclosed all events or transactions that occurred subsequent to the balance sheet date but prior to filing this Annual Report on Form 10-K that would require recognition or disclosure in the Consolidated Financial Statements.

 

2.       SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

Principles of consolidation

 

The accompanying audited condensed consolidated financial statements include the accounts of eXp World Holdings, Inc., and its subsidiaries. All inter-company accounts and transactions have been eliminated upon consolidation.

 

Non-controlling interests

 

Non-controlling interests in the Company’s subsidiary are reported as a component of equity, separate from the parent company’s equity. Results of operations attributable to the non-controlling interest are included in the Company’s consolidated statements of operations and consolidated statements of comprehensive income (loss). In the year ended December 31, 2016, the Company acquired the previously outstanding non-controlling interest in First Cloud Mortgage, Inc. Upon obtaining 100% interest, the Company inactivated First Cloud. For the years ended December 31, 2017 and 2016, the activities of First Cloud did not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 provisions for doubtful accounts, legal contingencies, income taxes, revenue recognition, stock-based compensation, expense accruals, 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.

 

 

 

 

 40 
 

 

Cash and cash equivalents

 

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance 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 these excess deposits.

 

Restricted cash

 

Restricted cash consists of cash held in escrow by the Company’s brokers and agents on behalf of real estate buyers. The Company recognized a corresponding customer deposit liability until the funds are released. Restricted cash totaled $923,193, and $481,704 at December 31, 2017, and 2016 respectively.

 

Fair value measurements

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The methodology establishes consistency and comparability by providing a fair value hierarchy that prioritizes the inputs to valuation techniques into three broad levels, which are described below:

 

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).

 

The fair value of cash and cash equivalents, accounts receivable, prepaids and other assets, accounts payable, accrued expenses, and notes payable approximates their carrying value due to their short-term maturities.

 

Allowance for doubtful accounts

 

A portion of the Company’s accounts receivable are derived from non-commission based technology fees. These accounts receivable are typically unsecured. The allowance for doubtful accounts is our estimate based on historical experience. We periodically preform detailed reviews to assess the adequacy of the allowance. We exercise significant judgment in estimating the timing, frequency and severity of losses.

 

The Company typically does not experience material uncollectible accounts.

 

Foreign currency translation

 

The Company’s functional and reporting currency is the United States dollar and the functional currency of the Company’s foreign subsidiaries is the local currency of their country of domicile. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate prevailing at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currencies are translated at rates of exchange in effect at the date of the transaction. Average monthly rates are used to translate revenues and expenses. Gains and losses arising on translation or settlement of foreign currency denominated transactions or balances are included in the determination of income. The Company does not employ any derivative or hedging strategy to offset the impact of foreign currency fluctuations.

 

Fixed assets

 

Fixed assets are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives.

 

Computer hardware and software: 3 to 5 years

Furniture, fixtures and equipment: 5 to 7 years

 

 

 

 41 
 

 

Maintenance and repairs are expensed as incurred. Expenditures that substantially increase an asset’s useful life or improve an asset’s functionality are capitalized.

 

The Company capitalizes the costs associated with developing its internal-use cloud-based residential real-estate transaction system. Capitalized costs are primarily related to costs incurred in relation to internally created software during the application development stage including costs for upgrades and enhancements that result in additional functionality.

 

Impairment of long-lived assets

 

The Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. When assets are considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal.

 

Stock based compensation

 

The Company issues equity and equity linked instruments to employees and non-employees in lieu of cash for the receipt of services. Share-based payment transactions with non-employees are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable and expensed in the periods the services are received.

 

We measure expense associated with stock-based awards (usually stock options) to our employees and directors on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award.

 

We account for stock-based compensation arrangements with non-employees using a fair value approach. The estimated fair value of unvested awards granted to non-employee consultants is remeasured at each reporting date through the date of final vesting. As a result, the non-cash charge to operations for non-employee awards with vesting conditions is affected in each reporting period by changes in the fair value of the Company’s common stock.

 

In prior years, the Company granted stock-based performance awards to certain managing real estate brokers as part of a long-term incentive program with the payout based on the achievement of introducing and retaining real estate agents into the Company to contribute to the overall growth of the Company. Performance awards with non-employees are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable and expensed in the periods the services are received.

 

Revenue recognition

 

Revenue is recognized only when the price is fixed, or determinable, persuasive evidence of an arrangement exists, the service has been delivered, and collectability of the resulting receivable is reasonably assured.

 

The majority of our revenue is derived from assisting home buyers and sellers in listing, marketing, selling and purchasing residential real estate.

 

Commissions earned by the Company in residential real estate transactions are recognized upon the closing of a transaction (purchase or sale), commonly referred to as gross commission income, and are presented net of fees and expenses in the accompanying consolidated statement of operations. Real estate agent commissions paid, concurrently recognized with the closing of each transaction, are presented as costs of revenues in the accompanying consolidated statement of operations.

 

 

 

 

 42 
 

 

Advertising costs

 

Advertising costs are generally expensed in the period incurred. Advertising expenses are included in the sales and marketing expense line item on the accompanying consolidated statements of operations. For the years ended December 31, 2017, 2016 and 2015, the Company incurred advertising expenses of $1,258,334, $503,121, and $163,905, respectively.

 

Income taxes

 

Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements as well as from net operating loss and tax credit carry forwards. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period adjusted for the change during the period in deferred tax assets and liabilities. For U.S. income tax returns, the open taxation years subject to examination range from 2011 to 2017.

 

Comprehensive income (loss)

 

The Company’s only component of comprehensive income (loss) is foreign currency translation adjustments.

 

Net income (loss) per share

 

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding plus, if dilutive, potential common shares outstanding during the period.

 

Recently issued accounting pronouncements

 

In May 2017, the FASB issued ASU No. 2017-09 - Compensation (Topic 718): Scope of Modification Accounting. The FASB issued guidance to clarify when to account for a change in the terms or conditions of share-based payments awards as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The general model for modifications of share-based payment awards is to record the incremental value arising from the change as additional compensation costs. Previously, judgments about whether certain changes to an award were substantive may have impacted whether or not modification accounting was applied in these situations. This ASU is effective in annual reporting periods beginning after December 15, 2017 and the interim periods within that year. The Company is still evaluating the potential impacts that the implementation of ASU 2017-09 may have on its financial position, operational results, or cash flows.

 

In November 2016, the FASB issued ASU No. 2016-18 – Statement of Cash Flows (Topic 240). The FASB issued guidance to address the diversity in the classification and presentation of changes in restricted cash on the statement of cash flows under Topic 230, Statement of Cash Flows. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cashflows. This ASU is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The Company is still evaluating the potential impacts that the implementation of ASU 2016-18 may have on its financial position, operational results, or cash flows.

 

In October 2016, the FASB issued ASU No. 2016-16 - Income Taxes (Topic 740). The Update was issued to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under the new guidance an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. This ASU is effective in annual reporting periods beginning after December 15, 2017 and the interim periods within that fiscal year. The Company is still evaluating the potential impacts that the implementation of ASU 2016-16 may have on its financial position, operational results, or cash flows.

 

 

 

 

 43 
 

 

In February 2016, the FASB issued ASU No. 2016-02 - Leases (Topic 842). Under the new guidance, a lessee is required to recognize lease liabilities and corresponding right-of-use assets, initially measured at the present value of lease payments, on the balance sheet for operating leases with terms greater than one year. Lessor accounting remains largely unchanged from existing lease accounting. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and lease liabilities. If the lessee makes the election, the lessee would recognize lease expense on a straight-line basis over the lease term. This ASU is effective in annual reporting periods beginning after December 15, 2019 and the interim periods beginning after December 15, 2020. The Company is still evaluating the potential impacts that the implementation of ASU 2016-02 may have on its financial position, operational results, or cash flows.

 

In May 2014, the FASB issued ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606). The objective of the revenue standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to remove inconsistencies in requirements, provide a robust framework, improve comparability across entities and industries, provide more useful information to users and simplify the preparation of financial statements. The core principle of the revenue standard is that revenue be recognized upon the transfer of goods or services to customers in an amount that reflects the consideration to which we expect to receive in exchange for those goods or services. The new standard permits for two alternative implementation methods, the use of either (1) full retrospective application to each prior reporting presented or (2) modified retrospective application in which the cumulative effect of initially applying the revenue standard is recognized as an adjustment to the opting balance of retained earnings in the period of adoption. This ASU is effective in annual reporting periods beginning after December 15, 2017 and the interim periods within that year. The Company will adopt the new standard effective January 1, 2018 using the modified retrospective method. Since the Company currently recognizes revenue on a gross basis acting as a principal, upon completion of its performance obligations in the form of a completed residential real estate sale, the Company does not expect the adoption of ASU No. 2014-09 to have a material effect on the consolidated financial statements.

 

Recently adopted accounting pronouncements

 

In January 2017, the Company implemented accounting treatment as promulgated by FASB as issued in ASU No. 2016-09 Compensation – Stock Compensation (Topic 718). The new standard simplifies several aspects of the accounting for share-based payments, including accounting for income taxes, forfeitures and statutory tax withholding requirements, and classification within the statement of cash flows. The Company made an election to account for forfeitures of non-vested equity awards in the periods in which they occur. The treatment implemented did not have a material impact on the accompanying consolidated financial statements as presented.

 

3.       RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

 

The Company has restated its consolidated financial statements as of and for the fiscal years ended December 31, 2016 and December 31, 2015. In addition, the Company has restated its quarterly Consolidated Statements of Operations for each of the first three quarterly periods in fiscal 2017, 2016 and 2015, as presented in Note 13, Unaudited Quarterly Financial Data.

 

These errors were discovered by management during the course of its preparation of this Annual Report and the audit of the financial results for fiscal year 2017. The effect of the restatements on the Company’s Balance Sheets is not material and the restatements have no effect on reported cash flow from operations. The nature and impact of these adjustments are described below and detailed in the tables below.

 

Equity-Based Payments

During the first quarter of 2018 in preparation of our annual report and financial statement audit, the Company identified an error as a result of applying incorrect accounting guidance for equity-based payments for non-employees in its previously reported Consolidated Statement of Operations. In prior periods, the Company had erroneously accounted for these option grants to non-employees in the same manner that it had accounted for option grants to employees during that same time frame. The error resulted in an overstatement of stock option expense in the amount of $4,514,158 and $264,795 for the years ended December 31, 2016 and December 31, 2015, respectively. The adjustments made to the income statement are set out in the table below. Based on this error, these same equity instruments to non-employees also understated expense in the fiscal year ended December 31, 2014 by $173,859. Accordingly, we restated the ending balance of additional paid in capital and accumulated deficit as of December 31, 2014 on the Consolidated Statements of Stockholders’ Equity.

 

 

 

 

 44 
 

 

In this same time frame, we identified an error in the accounting treatment for equity grants made to employees as a result of applying incorrect accounting guidance for equity-based payments for employees in its previously reported Consolidated Statement of Operations. In prior periods, the Company had accounted for these option grants to employees using the intrinsic value method. The Company concluded that it should have utilized the calculated value method. The error resulted in an overstatement of stock option expense in the amount of $15,329,588 and $2,499,457 for the years ended December 31, 2016 and December 31, 2015, respectively. The adjustments made to the income statement are set out in the table below. Based on this error, these same equity instruments to employees overstated expense in the fiscal year ended December 31, 2014 by $441,814. Accordingly, we restated the ending balance of additional paid in capital and accumulated deficit as of December 31, 2014 on the Consolidated Statement of Stockholders’ Equity.

 

We also identified an error in the accounting treatment for equity grants made to non-employees in connection with our Agent Growth Incentive Plan. The error was the result of an incorrect application of the equity-based payments for non-employees which requires remeasurement of each award at each reporting date throughout the vesting period. The correction of this error resulted in an understatement of expenses by $1,215,188 and $121,704 for the years ended December 31, 2016 and December 31, 2015, respectively. Based on this error, these same equity grants to non-employees overstated expense in the fiscal year ended December 31, 2014 by $91. Accordingly, we restated the ending balance of additional paid in capital and accumulated deficit as of December 31, 2014 on the Consolidated Statement of Stockholder’s Equity.

 

We previously did not recognize costs associated with a 20% discount to the fair value determined each month when issuing shares under our Agent Equity Program. The restated financial statements now include these additional charges as cost of sales expense in the restated periods.

 

Other Adjustments 

In addition to the errors described above, the restated financial statements also include adjustments to correct certain other immaterial errors. Specifically, we previously recorded certain agent fees as revenue. These fees should be reported on a net basis as a reduction to the cost of sales expense. The restated financial statements now include the revisions in the restated periods.

 

 

 45 
 

 

eXp World Holdings Inc.

Consolidated Statement of Operations

For the fiscal year ended December 31, 2016

 

   As Previously Reported on Form 10-K   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $54,179,511            (623,786)  $53,555,725 
                          
Operating expenses                         
Cost of revenues   46,726,533        

336,197

    (623,786)   46,438,944 
General and administrative   32,237,501    (19,843,746)   878,991        13,272,746 
Professional fees   645,024                645,024 
Sales and marketing   570,844                570,844 
                          
Total expenses   80,179,902     (19,843,746)   1,215,188   (623,786)   60,927,558 
                          
Net income (loss) from operations   (26,000,391)   19,843,746    (1,215,188)       (7,371,833)
                          
Other income   15                15 
Interest expense   (370)               (370)
                          
Total other income and (expenses)   (355)               (355)
                          
Net income (loss) from operations before income tax expense   (26,000,746)   19,843,746    (1,215,188)       (7,372,188)
                          
Income tax expense   (42,528)               (42,528)
                          
Net income (loss)   (26,043,274)   19,843,746    (1,215,188)       (7,414,716)
                          
Net loss attributable to non-controlling interest in subsidiary   29,801                29,801 
                          
Net income (loss) attributable to common shareholders  $(26,013,473)   19,843,746    (1,215,188)       (7,384,915)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.51)  $0.39   $(0.02)  $(0.00)  $(0.14)
Diluted from continuing operations  $(0.51)  $0.39   $(0.02)  $(0.00)  $(0.14)
                          
Weighted average shares outstanding                         
Basic   51,081,949    51,081,949    51,081,949    51,081,949    51,081,949 
Diluted   51,081,949    51,081,949    51,081,949    51,081,949    51,081,949 

 

 

 

 

 46 
 

 

eXp World Holdings Inc.

Consolidated Statement of Operations

For the fiscal year ended December 31, 2015

 

   As Previously Reported on Form 10-K   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $22,866,787            (402,481)  $22,464,306 
                          
Operating expenses                         
Cost of revenues   19,456,409        

71,637

    (402,481)   19,125,564 
General and administrative   7,257,961    (2,764,252)   50,067        4,543,776 
Professional fees   439,763                439,763 
Sales and marketing   211,456                211,456 
                          
Total expenses   27,365,589    (2,764,252)   121,704    (402,481)   24,320,560 
                          
Net income (loss) from operations   (4,498,802)   2,764,252    (121,704)       (1,856,254)
                          
Other income   23                23 
Interest expense   (1,127)               (1,127)
                          
Total other income and (expenses)   (1,104)               (1,104)
                          
Net income (loss) from operations before income tax expense   (4,499,906)   2,764,252    (121,704)       (1,857,358)
                          
Income tax expense   (103,069)               (103,069)
                          
Net income (loss)   (4,602,975)   2,764,252    (121,704)       (1,960,427)
                          
Net loss attributable to non-controlling interest in subsidiary   21,526                21,526 
                          
Net income (loss) attributable to common shareholders  $(4,581,449)   2,764,252    (121,704)       (1,938,901)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.09)  $0.06   $(0.00)  $(0.00)  $(0.04)
Diluted from continuing operations  $(0.09)  $0.06   $(0.00)  $(0.00)  $(0.04)
                          
Weighted average shares outstanding                         
Basic   49,409,266    49,409,266    49,409,266    49,409,266    49,409,266 
Diluted   49,409,266    49,409,266    49,409,266    49,409,266    49,409,266 

 

 

 47 
 

 

4.       PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

Prepaid expenses and other current assets consisted of the following:

 

   Year Ended December 31, 
   2017   2016 
         
Prepaid expenses   $219,074   $199,066 
Prepaid insurance   287,244    145,825 
Rent deposits   68,196    28,047 
Other assets   16,520    10,625 
   $591,034   $383,563 

 

 

5.       FIXED ASSETS, NET

 

Fixed assets, net consisted of the following:

 

   Year Ended December 31, 
   2017   2016 
         
Computer hardware and software  $1,982,749   $219,590 
Furniture, fixture and equipment   5,910    5,910 
Total depreciable property and equipment   1,988,659    225,500 
Less: accumulated depreciation and amortization   (450,446)   (97,216)
Depreciable property, net   1,538,213    128,284 
Assets under development   -0-    410,121 
Fixed assets, net  $1,538,213   $538,405 

 

Depreciation and amortization expense for the years ended December 31, 2017 and 2016 was $353,229, and $58,374 respectively.

 

6.       ACCRUED EXPENSES

 

Accrued expenses consisted of the following:

 

  

Year Ended December 31,

 
   2017   2016 
         
Commissions payable  $7,565,357   $2,417,621 
Payroll payable   749,203    54,402 
Vacation payable   283,077    78,294 
Taxes payable   99,809    58,714 
Other accrued expenses   120,734    133,088 
   $8,818,180   $2,742,119 

 

7.       DEBT

 

We have a $500,000 line of credit with a variable interest rate computed on a 360-day year. The variable interest rate is 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 December 31, 2017, we were in compliance with all of the financial covenants under the line of credit.

 

 

 

 

 48 
 

 

In 2016, the Company entered into a financing arrangement to fund portions of its insurance premiums. As of December 31, 2016, the Company had a remaining outstanding obligation associated with this funding totaling $35,778, exclusive of accrued interest totaling $1,034, included in the current portion of notes payable in the accompanying consolidated balance sheet. The Company did not have any such financing arrangements as of December 31, 2015 and incurred immaterial interest expense for the year ended then.

 

The Company did not have any such financing arrangements as of December 31, 2017.

 

As of December 31, 2017, we had no amount outstanding under the line of credit.

 

8.       STOCKHOLDERS’ EQUITY

 

As of December 31, 2017, the Company had 54,962,535 shares of common stock issued and outstanding.

 

The following provides a detailed description of the stock-based transactions completed during fiscal year 2017 and 2016:

 

During the year ended December 31, 2017, the Company issued the remaining 49,231 shares of common stock to accredited investors following receipt of $160,000 of gross proceeds ($142,158 net of issuance costs) from the Company’s December 2016 private placement. The Company received total gross cash proceeds from the private placement of $760,000.

 

During the year ended December 31, 2017, the Company issued 181,572 shares of common stock upon the exercise of stock options and received cash consideration totaling $46,596 upon payment of the exercise price for the options.

 

During the year ended December 31, 2017, the Company repurchased and retired 1,307 shares of common stock for cash consideration totaling $3,607.

 

During the year ended December 31, 2017, the Company issued 1,464,997 shares of common stock in exchange for services totaling $5,857,554, which includes the expense activity in our 2015 Agent Equity Program.

 

During the year ended December 31, 2017, the Company issued 1,000,594 shares of common stock in exchange for services totaling $10,961,631, which included the expense activity for Real Estate Agent Growth and Other Incentive Programs.

 

During December 2016, the Company issued 184,615 shares of restricted and unregistered shares of common stock to accredited investors in private placement transactions for gross cash proceeds totaling $600,000. In conjunction with the issuance, we incurred expenses of $67,794 (of which $49,980 were paid as of December 31, 2016).

 

During the year ended December 31, 2016, the Company issued 159,678 shares of restricted and unregistered common stock for cash proceeds totaling $4,898 related to the exercise of stock options.

 

During the year ended December 31, 2016, the Company issued a total of 785,504 shares of restricted and unregistered common stock in exchange for services totaling $1,778,429, which included the expense activity in our 2015 Agent Equity Program.

 

During the year ended December 31, 2016, the Company issued 1,018,687 shares of restricted and unregistered common stock in exchange for services totaling $4,996,640, which included the expense for Real Estate Agent Growth and Other Incentive Programs.

 

During the year ended December 31, 2016, the Company paid $97,000 to acquire the 10.6% non-controlling interest in First Cloud Mortgage. As a result of the acquisition, the Company owned 100% of First Cloud Mortgage as of December 31, 2016.

 

 

 

 

 49 
 

 

During the year ended December 31, 2015, the Company issued 420,866 shares of common stock in exchange for services totaling $352,575, which includes the expense activity in our 2015 Agent Equity Program.

 

During the year ended December 31, 2017, the Company issued 1,192,950 shares of common stock in exchange for services totaling $1,059,023, which included the expense activity for Real Estate Agent Growth and Other Incentive Programs.

 

2015 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 at a 20% discount to market on the date of issuance. We recognize this 20% discount as an additional cost of sales charge during the periods presented.

 

All agents and brokers in good standing with the Company are eligible to participate in the Agent Equity Program. To be considered in good standing, agents and brokers must be current in their financial obligations, including all fees, 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.

 

During the years ended December 31, 2017, 2016, and 2015, the Company issued 1,464,997, 785,504 and 420,866 shares, respectively, of common stock to agents and brokers for total consideration of $5,857,539, $1,709,959, and $352,575, respectively for the settlement of commissions payable.

 

Real Estate 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 awarded common stock based on achievement of performance milestones.

 

Under this program, the Company awards common stock to our agents and brokers that become issuable upon the achievement of certain milestones for both the individual and the recruited agents.

 

The following table illustrates the Company’s stock activity for the Real Estate Agent Growth Incentive Program for the following periods:

 

   Shares   Weighted
Average
Fair Value
 
Balance, December 31,2014   354,700   $0.30 
Granted   1,011,956    0.84 
Issued        
Forfeited   (73,600)   0.84 
Balance, December 31, 2015   1,293,056   $0.84 
Granted   2,452,965    4.05 
Issued   (558,567)   4.30 
Forfeited   (129,575)   2.57 
Balance, December 31, 2016   3,057,879   $4.05 
Granted   2,024,498    7.60 
Issued   (1,457,538)   5.27 
Forfeited   (565,774)   4.76 
Balance, December 31, 2017   3,059,065   $7.60 

 

As of December 31, 2017, the Company had 1,953,074 unvested stock awards and 3,059,065 expected to vest, respectively, with unrecognized compensation costs totaling $13,450,031.

 

Stock Option Awards

 

During the year ended December 31, 2017, the Company granted 2,848,231 stock options with an estimated grant date fair value of $8,223,561. The assumptions used to estimate the grant date fair value of the awards issued for the year ended December 31, 2017 include: expected volatility based on historical stock prices ranging from 142% to 155%; an average expected term between 6.25 and 10 years; risk free rates based on U.S. Treasury instruments for the expected term of approximately 2.2%; and no dividend payments. The assumptions used to estimate the grant date fair value of the awards issued for the year ended December 31, 2016 include: expected volatility based on historical stock prices ranging from 166% to 178%; an average expected term of 6.25 years; risk free rates based on U.S. Treasury instruments for the expected term of approximately 1.7%; and no dividend payments. The assumptions used to estimate the grant date fair value of the awards issued for the year ended December 31, 2015 include: expected volatility based on historical stock prices ranging from 196% to 223%; an average expected term between or 6.25 10 years; risk free rates based on U.S. Treasury instruments for the expected term of approximately 2.2%; and no dividend payments.

 

 

 50 
 

 

In January 2017, the Company modified certain terms of previously outstanding option awards to purchase 500,000 shares of common stock, including accelerating portions of the award to vest prior to the original terms and the forfeiture of unvested options to purchase 275,000 shares of common stock. As a result of this modification, the Company recognized approximately $368,000 of additional stock option expense during the year ended December 31, 2017.

  

The following table illustrates the Company’s stock option activity (inclusive of awards accounted for under the intrinsic value and fair value) for the following periods:

 

   Options   Weighted
Average
Exercise
Price
   Intrinsic
Value
   Weighted
Average
Remaining
Contractual
Term (Years)
 
Balance, December 31, 2014   7,211,479   $0.15   $0.17    8.00 
Granted   337,750    0.56        10.00 
Exercised                 
Forfeited   (267,979)           7.10 
Balance, December 31, 2015   7,281,250   $0.17   $0.17    7.00 
Granted   4,130,000    1.53        9.75 
Exercised   (159,678)   0.13    1.42     
Forfeited   (504,014)   1.19    3.36     
Balance, December 31, 2016   10,747,558   $0.67   $3.56    7.75 
Granted   2,848,231    3.76        6.15 
Exercised   (181,572)   0.26    6.86     
Forfeited   (2,540,925)   2.31    3.20     
Balance, December 31, 2017   10,873,292   $1.50   $5.08    6.65 
Exercisable at December 31, 2017   7,692,566    0.57    6.16    5.74 
Vested at December 31, 2017   8,031,986   $0.66   $6.94    5.87 

 

For the years ended December 31, 2017, 2016, and 2015, the Company recognized total stock-based compensation of $10,961,631 and $4,996,649 (as restated), and $1,059,035 (as restated) respectively, associated with all equity and equity-linked awards.

 

As of December 31, 2017, the total unrecognized compensation cost associated with options was approximately $4,858,670.

 

The following table summarizes information about stock options outstanding:

 

Outstanding   Vested 
Options   Weighted Average Exercise Price   Remaining Contractual Life In Years   Aggregate Intrinsic Value   Options   Weighted Average Exercise Price   Remaining Contractual Life In Years   Aggregate Intrinsic Value 
 5,204,061    0.13    4.69    38,874,332    5,204,061    0.13    4.69    38,874,332 
 333,831    0.14    6.50    2,490,376    333,831    0.14    6.50    2,490,376 
 284,000    0.15    5.09    2,115,800    284,000    0.15    5.09    2,115,800 
 33,000    0.20    5.00    244,200    33,000    0.20    5.00    244,200 
 157,750    0.30    7.00    1,151,575    118,313    0.30    7.00    863,681 
 20,000    0.50    7.27    142,000    13,658    0.50    7.27    96,968 
 50,000    0.84    7.67    338,000    31,123    0.84    7.67    210,393 
 500,000    0.80    8.21    3,400,000    224,315    0.80    8.21    1,525,342 
 350,000    1.58    8.34    2,107,000    145,034    1.58    8.34    873,106 
 2,000,000    1.76    8.55    11,680,000    966,210    1.76    8.55    5,642,667 
 100,000    2.81    8.62    479,000    34,452    2.81    8.62    165,025 
 237,420    3.13    9.73    2,311,105    221,661    3.13    9.73    990,824 
 50,000    3.35    9.75    212,500    3,082    3.35    9.75    13,099 
 668,231    3.40    9.61    2,806,570    253,511    3.40    9.61    1,064,745 
 100,000    3.42    9.62    418,000    9,521    3.42    9.62    39,796 
 30,000    3.49    9.43    123,300    4,295    3.49    9.43    17,650 
 430,000    3.55    9.29    1,741,500    75,986    3.55    9.29    307,745 
 10,000    3.82    9.07    37,800    2,322    3.82    9.07    8,777 
 200,000    3.84    9.22    752,000    39,178    3.84    9.22    147,310 
 100,000    3.85    9.07    375,000    23,288    3.85    9.07    87,329 
 15,000    7.60    9.99        15,000    7.60    9.99     

 

 51 
 

 

9.       INCOME TAXES

 

The components of the provision for income tax expense are as follows: 

 

   Year Ended December 31, 
   2017  

2016

(As Restated)

  

2015

(As Restated)

 
Current:               
Federal  $   $   $ 
State   86,787    37,070    14,875 
Foreign   10,447    5,458    6,691 
    97,234    42,528    21,566 
Deferred:               
Federal           77,428 
State           4,075 
            81,503 
Total provision (benefit) for income taxes  $97,234   $42,528   $103,069 

 

The Company is subject to United States federal and state income taxes at an approximate rate of 38.25%. The reconciliation of the provision for income taxes at the United States federal statutory rate compared to the Company’s income tax expense as reported is as follows:

  

   Year Ended December 31, 
   2017   2016
(As Restated)
   2015
(As Restated)
 
Statutory tax rate   38.25%   38.25%   38.25%
State taxes   (0.39)%   %   (0.32)%
Permanent differences   (0.31)%   (0.09)%   (7.01)%
Non-deductible share-based compensation   (19.70)%   (58.90)%   %
Foreign tax rate differential   (0.05)%   %   0.22%
Change in tax rate   (6.33)%   %   %
Prior year true up   %   (0.04)%   (0.34)%
Valuation allowance   (11.90)%   20.23%   (35.98)%
Other net   (0.01)%   %   %
Total   (0.44)%   (0.56)%   

(5.18

)%

   

Deferred tax assets consist of the following at:

  

   Year Ended December 31, 
   2017  

2016

(As Restated)

  

2015

(As Restated)

 
Deferred tax assets:               
Net operating loss carryforward  $2,445,965   $679,797   $174,942 
Temporary differences   241,649    63,172    17,099 
Share-based compensation   430,614        917,977 
Total gross deferred tax assets  $3,118,228   $742,969   $1,110,017 
Deferred tax liabilities               
Property and equipment   (17,835)       (17,813)
Valuation allowance   (3,100,394)   (742,969)   (1,092,204)
Net deferred tax assets  $   $   $ 

 

At December 31, 2017, the Company had federal net operating losses of approximately $4.7 million which will begin to expire in 2031 and could be subject to certain limitations under section 382 of the Internal Revenue Code.

 

The Company has provided a valuation allowance at December 31, 2017, 2016 and 2015 of $3,100,394, $742,969, and $1,110,017, respectively, for its net deferred tax assets as it cannot conclude it is more likely than not all of the estimated net deferred tax assets will be realized. The valuation allowance increased by $2,357,426 and decreased by $349,235 in 2017 and 2016, respectively.

 

As of December 31, 2017, 2016, and 2015, the Company did not have any unrecognized tax benefits. The Company's policy is to recognize interest and penalties related to income tax matters in income tax expense. The Company currently has no federal or state tax examinations in progress nor has it had any federal or state tax examinations since its inception.

 

 

 

 

 52 
 

 

Our ability to utilize the domestic net operating losses (NOLs) and tax credit forwards may be limited due to ownership change limitations that may have occurred or that could occur in the future, as required by the Internal Revenue Code Section 382, as well as similar state provisions. An “ownership change,” as defined by the code, results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percentage points of the outstanding stock of a company by certain stockholders or public groups. Any limitation may result in expiration of all or a portion of the NOL or tax credit carryforwards before utilization.

 

The Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), which became law on December 22, 2017, will reduce the U.S. Federal corporate tax rate from 35% to 21% for tax years beginning in 2018. The Company remeasured its net deferred tax assets and liabilities as a result of the 2017 Tax Act along with the corresponding valuation allowance resulting in no net expense or benefit. The result related to the 2017 Tax Act is a provisional amount that reflects the Company’s reasonable estimate at this time and is subject to adjustment during a measurement period not to exceed one year from enactment in accordance with guidance from the Securities and Exchange Commission.

 

10.       COMMITMENTS AND CONTINGENCIES

 

Operating leases

 

At December 31, 2017, the Company was obligated under non-cancelable operating leases for office space.

 

The following table illustrates the Company’s future obligations related to its non-cancellable operating leases:

 

Year Ending December 31,    
2018  $213,026 
2019   94,881 
2020   4,997 
2021   4,560 
2022 and thereafter   4,560 
   $322,024 

 

Legal proceedings

 

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 the Company, nor are we involved as a plaintiff in any material proceedings 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.

 

11.       SEGMENT INFORMATION

 

The Company primarily operates within residential real estate markets in the United States and Canada. The Company’s management generally does not rely on historical geographical results in making operational decisions. The Company’s management analyzes geographical locations on a forward-looking basis to identify growth opportunities.

 

The Company enters into residential real estate transactions within the United States and Canada. For the year ended December 31, 2017, approximately 1% of the Company’s total net revenue of $156,104,544 was generated in Canada. For the period ended December 31, 2016, the Company generated approximately 2% of its total revenue from Canada. The Company did not possess material assets located outside of the United States as of December 31, 2017, 2016 and 2015.

 

 

 

 53 
 

 

12.       RELATED PARTY TRANSACTIONS

 

In January 2017, and as part of her agreement to join the Company’s Board of Directors, Ms. Laurie Hawkes was granted an option to purchase a total of 350,000 shares of common stock from a significant stockholder at an exercise price of $4.22 per share. The Company estimated the grant date fair value of these options using a Black-Scholes model with the assumptions described in Footnote 8. The aggregate grant date fair value of this award was $1,333,501. During the year ended December 31, 2017, the Company recognized compensation cost totaling $254,522 associated with this award. The transaction was accounted for as a deemed contribution from the significant stockholder. 

 

On August 7, 2017, Ms. Hawkes submitted to the Company her resignation as a member of the Board of Directors effective August 9, 2017. The options to purchase common stock from a significant stockholder were forfeited subsequent to her resignation.

 

13.       UNAUDITED QUARTERLY FINANCIAL DATA

 

The unaudited quarterly information for the fiscal years 2017, 2016 and 2015 have been restated to correct the errors described in Note 3, Restatement of Previously Issued Financial Statements.

 

 

The following table presents the unaudited quarterly information for the three months ended September 30, 2017:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $48,105,769            (734,024)  $47,371,745 
                          
Operating expenses                         
Cost of revenues   43,291,473        

346,175

    734,024    

42,903,624

 
General and administrative   11,987,268    (3,007,819)   

195,811

        9,175,260 
Professional fees   223,811                223,811 
Sales and marketing   380,452                380,452 
                          
Total expenses   55,883,004    3,007,819    (541,986)   734,024    52,683,147 
                          
Net income (loss) from operations   (7,777,235)   3,007,819    (541,986)       (5,311,402)
                          
Other income                    
Interest expense   (58)               (58)
                          
Total other income and (expenses)   (58)               (58)
                          
Net income (loss) from operations before income tax expense   (7,777,293)   3,007,819    (541,986)      (5,311,460)
                          
Income tax expense   (3,277)               (3,277)
                          
Net income (loss)   (7,780,570)   3,007,819    (541,986)       (5,314,737)
                          
Net loss attributable to non-controlling interest in subsidiary                    
                          
Net income (loss) attributable to common shareholders  $(7,780,570)   3,007,819    (541,986)       (5,314,737)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.15)  $0.06   $(0.01)  $(0.00)  $(0.10)
Diluted from continuing operations  $(0.15)  $0.06   $(0.01)  $(0.00)  $(0.10)
                          
Weighted average shares outstanding                         
Basic   53,335,822    53,335,822    53,335,822    53,335,822    53,335,822 
Diluted   53,335,822    53,335,822    53,335,822    53,335,822    53,335,822 

 

 

 

 

 54 
 

 

The following table presents the unaudited quarterly information for the three months ended June 30, 2017:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $39,574,311            (593,370)  $38,980,941 
                          
Operating expenses                         
Cost of revenues   35,048,967        

285,277

    593,370    34,740,874 
General and administrative   600,420    5,427,087    (334,860)       5,692,648 
Professional fees   318,383                318,383 
Sales and marketing   348,823                348,823 
                          
Total expenses   36,316,593    (5,427,087)   49,583    593,370    41,100,727 
                          
Net income (loss) from operations   3,257,718    (5,427,087)   49,583        (2,119,786)
                          
Other income                    
Interest expense   (3,762)               (3,762)
                          
Total other income and (expenses)   (3,762)               (3,762)
                          
Net income (loss) from operations before income tax expense   3,253,956    (5,427,087)   49,583        (2,123,548)
                          
Income tax expense   (23,747)               (23,747)
                          
Net income (loss)   3,230,209    (5,427,087)   49,583        (2,147,296)
                          
Net loss attributable to non-controlling interest in subsidiary                    
                          
Net income (loss) attributable to common shareholders  $3,230,209    (5,427,087)   49,583        (2,147,296)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $0.06   $(0.10)  $0.00   $(0.00)  $(0.04)
Diluted from continuing operations  $0.05   $(0.10)  $(0.00)  $(0.00)  $(0.04)
                          
Weighted average shares outstanding                         
Basic   52,749,086    52,749,086    52,749,086    52,749,086    52,749,086 
Diluted   59,640,200    52,749,086    52,749,086    52,749,086    52,749,086 

 

 

 

 55 
 

 

The following table presents the unaudited quarterly information for the three months ended March 31, 2017:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $22,011,237            (483,054)  $21,528,183 
                          
Operating expenses                         
Cost of revenues   19,279,626        

163,563

    483,054    18.960,135 
General and administrative   2,109,352    2,669,099    (2,570)       4.775,881 
Professional fees   364,460                364,460 
Sales and marketing   301,222                301,222 
                          
Total expenses   22,054,660    (2,669,099)   (160,993)   483,054    24,401,698 
                          
Net income (loss) from operations   (43,423)   (2,669,099)   (160,993 )       (2,873,515)
                          
Other income                    
Interest expense   (1,715)               (1,715)
                          
Total other income and (expenses)   (1,715)               (1,715)
                          
Net income (loss) from operations before income tax expense   (45,138)   (2,669,099)   (160,993)       (2,875,230)
                          
Income tax expense   (24,591)               (24,591)
                          
Net income (loss)   (69,729)   (2,669,099)   (160,993 )       (2,899,821)
                          
Net loss attributable to non-controlling interest in subsidiary                    
                          
Net income (loss) attributable to common shareholders  $(69,729)   (2,669,099)   (160,993 )       (2,899,821)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.00)  $(0.05)  $0.00   $(0.00)  $(0.05)
Diluted from continuing operations  $(0.00)  $(0.05)  $0.00   $(0.00)  $(0.05)
                          
Weighted average shares outstanding                         
Basic   52,416,392    52,416,392    52,416,392    52,416,392    52,416,392 
Diluted   52,416,392    52,416,392    52,416,392    52,416,392    52,416,392 

 

 

 

 56 
 

 

The following table presents the unaudited quarterly information for the three months ended September 30, 2016:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $15,756,956            (78,279)  $15,835,235 
                          
Operating expenses                         
Cost of revenues   13,294,452        

96,733

    (78,279)   13,469,464 
General and administrative   16,810,567    (13,943,548)   720,770        3,587,789 
Professional fees   140,804                140,804 
Sales and marketing   158,968                158,968 
                          
Total expenses   30,404,791    13,943,548    (817,503)   78,279    17,357,025 
                          
Net income (loss) from operations   (14,647,835)   13,943,548    (817,503)       (1,521,790)
                          
Other income   (432)               (432)
Interest expense                    
                          
Total other income and (expenses)   (432)               (432)
                          
Net income (loss) from operations before income tax expense   (14,648,267)   13,943,548    (817,503)       (1,522,222)
                          
Income tax expense   (7,444)               (7,444)
                          
Net income (loss)   (14,655,711)   13,943,548    (817,503)       (1,529,666)
                          
Net loss attributable to non-controlling interest in subsidiary   8,613                8,613 
                          
Net income (loss) attributable to common shareholders  $(14,647,098)   13,943,548    (817,503)       (1,521,053)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.29)  $0.27   $(0.01)  $(0.00)  $(0.03)
Diluted from continuing operations  $(0.29)  $0.27   $(0.01)  $(0.00)  $(0.03)
                          
Weighted average shares outstanding                         
Basic   51,225,817    51,225,817    51,225,817    51,225,817    51,225,817 
Diluted   51,225,817    51,225,817    51,225,817    51,225,817    51,225,817 

 

 

 

 57 
 

 

The following table presents the unaudited quarterly information for the three months ended June 30, 2016:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $13,282,028            (198,201)  $13,083,827 
                          
Operating expenses                         
Cost of revenues   11,463,125        

80,126

    

198,201

    

11,345,050

 
General and administrative   7,565,698    (5,697,433)   

137,414

        

2,005,679

 
Professional fees   130,018                130,018 
Sales and marketing   122,285                122,285 
                          
Total expenses   19,281,126    5,697,433    (217,540)   

198,201

    13,603,032 
                          
Net income (loss) from operations   (5,999,098)   5,697,433    (217,540)       (519,205)
                          
Other income   439                439 
Interest expense                    
                          
Total other income and (expenses)   439                439 
                          
Net income (loss) from operations before income tax expense   (5,998,659)   5,697,433    (217,540)       (518,766)
                          
Income tax expense   (13,968)               (13,968)
                          
Net income (loss)   (6,012,627)   5,697,433    (217,540)       (532,734)
                          
Net loss attributable to non-controlling interest in subsidiary   6,720                6,720 
                          
Net income (loss) attributable to common shareholders  $(6,005,907)   5,697,433    (217,540)       (526,014)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.12)  $0.11   $(0.00)  $(0.00)  $(0.01)
Diluted from continuing operations  $(0.12)  $0.11   $(0.00)  $(0.00)  $(0.01)
                          
Weighted average shares outstanding                         
Basic   50,940,460    50,940,460    50,940,460    50,940,460    50,940,460 
Diluted   50,940,460    50,940,460    50,940,460    50,940,460    50,940,460 

 

 

 

 58 
 

 

The following table presents the unaudited quarterly information for the three months ended March 31, 2016:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $7,142,812            (155,829)  $6,986,983 
                          
Operating expenses                         
Cost of revenues   6,110,987        

34,766

    

155,829

    5,989,924 
General and administrative   1,425,158    (165,752)   

30,606

        1,290,012 
Professional fees   143,375                143,375 
Sales and marketing   77,143                77,143 
                          
Total expenses   7,756,663    165,752    (65,372)   

155,829

    7,500,454 
                          
Net income (loss) from operations   (613,851)   165,752    (65,372)       (513,471)
                          
Other income   7                7 
Interest expense                    
                          
Total other income and (expenses)   7                7 
                          
Net income (loss) from operations before income tax expense   (613,844)   165,752    (65,372)       (513,464)
                          
Income tax expense   (11,603)               (11,603)
                          
Net income (loss)   (625,447)   165,752    (65,372)       (525,067)
                          
Net loss attributable to non-controlling interest in subsidiary   5,580                5,580 
                          
Net income (loss) attributable to common shareholders  $(619,867)   165,752    (65,372)       (519,487)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.01)  $0.00   $(0.00)  $(0.00)  $(0.01)
Diluted from continuing operations  $(0.01)  $0.00   $(0.00)  $(0.00)  $(0.01)
                          
Weighted average shares outstanding                         
Basic   50,617,769    50,617,769    50,617,769    50,617,769    50,617,769 
Diluted   50,617,769    50,617,769    50,617,769    50,617,769    50,617,769 

 

 

 

 59 
 

 

The following table presents the unaudited quarterly information for the three months ended September 30, 2015:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $7,419,103            (109,245)  $7,309,858 
                          
Operating expenses                         
Cost of revenues   6,354,951        

29,697

    109,245    6, 275,403 
General and administrative   (661,707)   1,522,943    (5,796 )       855,440  
Professional fees   138,001                138,001 
Sales and marketing   77,011                77,011 
                          
Total expenses   5,908,256    (1,522,943)   (23,901)   109,245    7,345,855 
                          
Net income (loss) from operations   1,510,847    (1,522,943)   (23,901 )       (35,997)
                          
Other income   319                319 
Interest expense   (202)               (202)
                          
Total other income and (expenses)   117                117 
                          
Net income (loss) from operations before income tax expense   1,510,964    (1,522,943)           (35,880)
                          
Income tax expense   (1,244)               (1,244)
                          
Net income (loss)   1,509,720    (1,522,943)   (23,901)       (37,124)
                          
Net loss attributable to non-controlling interest in subsidiary   7,388                7,388 
                          
Net income (loss) attributable to common shareholders  $1,517,108    (1,522,943)   (23,901)       (29,736)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $0.03   $(0.03)  $0.00   $(0.00)  $(0.00)
Diluted from continuing operations  $0.03   $(0.04)  $0.00   $(0.00)  $(0.01)
                          
Weighted average shares outstanding                         
Basic   49,714,285    49,714,285    49,714,285    49,714,285    49,714,285 
Diluted   51,163,219    51,163,219    51,163,219    51,163,219    51,163,219 

 

 

 60 
 

 

The following table presents the unaudited quarterly information for the three months ended June 30, 2015:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $5,584,963            (93,856)  $5,491,107 
                          
Operating expenses                         
Cost of revenues   4,767,527        

14,604

    93,856    4,688,275 
General and administrative   5,669,105    (3,973,717)   22,368        1,717,756 
Professional fees   98,832                98,832 
Sales and marketing   43,006                43,006 
                          
Total expenses   10,578,470    3,973,717    (36,972)   93,856    6,547,869 
                          
Net income (loss) from operations   (4,993,507)   3,973,717    (36,972)       (1,056,762)
                          
Other income   2,897                2,897 
Interest expense   (464)               (464)
                          
Total other income and (expenses)   2,433                2,433 
                          
Net income (loss) from operations before income tax expense   (4,991,074)   3,973,717    (36,972)       (1,054,329)
                          
Income tax expense   (7,080)               (7,080)
                          
Net income (loss)   (4,998,154)   3,973,717    (36,972)       (1,061,409)
                          
Net loss attributable to non-controlling interest in subsidiary                    
                          
Net income (loss) attributable to common shareholders  $(4,998,154)   3,973,717    (36,972)       (1,061,409)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.10)  $0.08   $(0.00)  $(0.00)  $(0.02)
Diluted from continuing operations  $(0.10)  $0.08   $(0.00)  $(0.00)  $(0.02)
                          
Weighted average shares outstanding                         
Basic   49,182,952    49,182,952    49,182,952    49,182,952    49,182,952 
Diluted   49,182,952    49,182,952    49,182,952    49,182,952    49,182,952 

 

 

 

 61 
 

 

The following table presents the unaudited quarterly information for the three months ended March 31, 2015:

 

   As Previously Reported on Form 10-Q   Stock Option Expense Adjustment   Agent Incentive Stock Compensation Expense Adjustment   Other Adjustments   As Restated 
Net revenues  $3,449,241            (75,771)  $3,373,470 
                          
Operating expenses                         
Cost of revenues   2,877,744            75,771    2,801,973 
General and administrative   449,936    294,992    3,134        748,062 
Professional fees   76,603                645,024
Sales and marketing   46,357                570,844 
                          
Total expenses   3,450,640    (294,922)   (3,134)   75,771    3,672,995 
                          
Net income (loss) from operations   (1,399)   (294,922)   (3,134)       (299,525)
                          
Other income   3,686                3,686 
Interest expense   (461)               (461)
                          
Total other income and (expenses)   3,225                3,225 
                          
Net income (loss) from operations before income tax expense   1,826    (294,922)   (3,134)       (296,300)
                          
Income tax expense   (18,643)               (18,643)
                          
Net income (loss)   (16,817)   (294,922)   (3,134)       (314,943)
                          
Net loss attributable to non-controlling interest in subsidiary                    
                          
Net income (loss) attributable to common shareholders  $(16,817)   (294,922)   (3,134)       (314,943)
                          
Net loss per share attributable to common shareholders                         
Basic from continuing operations  $(0.00)  $(0.01)  $(0.00)  $0.00   $(0.01)
Diluted from continuing operations  $(0.00)  $(0.01)  $(0.00)  $0.00   $(0.01)
                          
Weighted average shares outstanding                         
Basic   48,727,385    48,727,385    48,727,385    48,727,385    48,727,385 
Diluted   48,727,385    48,727,385    48,727,385    48,727,385    48,727,385 

 

 

 

 

 62 
 

 

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None

 

Item 9A. CONTROLS AND PROCEDURES

 

Background

 

As previously reported in the Company’s Current Report on Form 8-K filed on April 2, 2018 and Current Report on Form 8-K filed on April 13, 2018, the board of directors of the Company, based on the recommendation of the audit committee and in consultation with management, concluded that the Company’s previously issued financial statements for the fiscal years ended December 31, 2016 and December 31, 2015 should be restated in order to correct certain identified errors. Accordingly, the Company has restated its previously issued financial statements for those periods. See Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Background on the Restatement and Note 3, Restatement of Previously Issued Financial Statements of the Notes to Consolidated Financial Statements included in Part II—Item 8—Financial Statements and Supplementary Data.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures. Based on this evaluation, due to the material weaknesses in our internal control over financial reporting discussed below, our Chief Executive and Chief Financial Officers each concluded that our disclosure controls and procedures were not effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information was not accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

 

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 December 31, 2017. In making its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013).

 

Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2017.

 

 

 

 

 63 
 

 

Our management determined that our internal control over financial reporting was not effective based on the identification of certain material weaknesses. 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.

 

The determination that our internal control over financial reporting was not effective was based on the identification of the following material weaknesses:

 

·Failure to properly recognize and measure the fair value of equity and equity-linked awards issued to employees and non-employees. Our policies and procedures failed to identify the need to consider certain areas of US GAAP applicable to stock awards issued to employees and non-employees.
·Our internal controls failed to identify the need to consider certain areas of U.S. GAAP applicable to the classification of certain agent fees. Our agent fees are no longer classified as revenue, rather they are offset against costs of revenue.

 

During 2018, Management has been actively engaged in remediation efforts to address the material weaknesses summarized above, including the following:

 

To address the above material weaknesses, management has implemented additional training programs associated with accounting for equity-based payments to employees and non-employees. The Company plans to engage the services of a third-party software servicer to ensure consistency in the identification and classification of share based payments of current as well as future share based payment arrangements. It will also ensure proper and consistent U.S. GAAP reporting for our equity instruments. The Company completed an analysis of the historical option grants to ensure that they have been correctly recorded. The Company has also reviewed its revenue recognition policies and trained staff to ensure compliance with US GAAP. We continue to hire qualified personnel who have a greater understanding of accounting principles. The Company will test the continued effectiveness of the new controls over stock compensation and revenue subsequent to implementation and consider the material weaknesses remediated after the applicable remedial controls operate effectively for a sufficient period of time.

 

The following provides a description of the material weaknesses identified in prior periods that have been remediated in 2017 along with a description of our remediation actions:

 

2016 material weakness: We lack a documented governance framework and corporate governance policies that establish governance roles, responsibilities and independence for defining responsibilities for operational, control and reporting processes.

 

Remediation actions: During the period ended December 31, 2017, the board continued to monitor the corporate governance of the Company through continuous review of our internal structure to ensure there are clear lines of accountability for management. Review of our internal structure includes, but is not limited to, the review of annual budgets and business plans, corporate performance, corporate strategy, key executive and board remuneration and capital expenditures. During the fiscal year ended 2017 each of the formed committees established protocols whereby they are each to maintain proper meeting minutes and records which are communicated to the board at large at each full board meeting. The applicable board meeting minutes applicable with action plans needed by Management are communicated as appropriate. Given the actions taken we no longer believe this to be a material weakness as of December 31, 2017.

 

2016 material weakness: Despite the addition of two new independent directors and an independent Audit Committee during 2016, at December 31, 2016, our level of independent director oversight still posed risk of management override and potential fraud.

  

Remediation actions: Although we are a controlled company, our Company is committed to sound integrity and ethical values, particularly of top management who set the standard of conduct. During the period ended December 31, 2017, we constituted a Compensation Committee which is now comprised of two independent directors. Each of our standing committees, including the Audit Committee, Governance Committee and Compensation Committee, have been specifically charged with certain oversight functions. Our committees of the board have independent directors who have sufficient resources to provide effective oversight. Members of the committees of the board understand the Company’s operations and can identify unusual activity potentially impacting financial reporting. Our committees are positioned and have the ability to take corrective or investigative actions if necessary. Given the actions taken and ownership structure we no longer believe this to be a material weakness as of December 31, 2017.

 

 

 

 64 
 

 

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 material weaknesses and the remediation activities described above there have been no changes in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2017, that have materially affected or, are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. OTHER INFORMATION

 

None.

 

 

 

 

 

 

 65 
 

 

 

PART III

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Directors and Executive Officers

 

The following individuals serve as directors and executive officers of our company. All directors of our company hold office until the next annual meeting of our stockholders or until their successors have been elected and qualified. The executive officers of our company are appointed by our board of directors and hold office until their resignation or removal from office.

 


Name

Position

Age
Date First Elected
or Appointed
Glenn Sanford Chairman, Chief Executive Officer, Treasurer,
Secretary, and Director
51 March 12, 2014
Jason Gesing Real Estate Brokerage Division Chief Executive Officer and Director 44 September 27, 2014
Alan Goldman Chief Financial Officer 39 March 16, 2016
Gene Frederick Director 62 April 7, 2016
Richard Miller Director 59 July 20, 2016
Randall Miles Director 61 July 20, 2016
Darren Jacklin Director 45 May 22, 2014
Susan Truax Director 52 August 9, 2017

 

Business Experience

 

The following is a brief account of the education and business experience during at least the past five years of each director and executive officer, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.

 

Glenn Sanford

 

Since early 2002, Glenn Sanford has been actively involved in the online real estate space. In early 2007, Mr. Sanford launched eXp Realty, LLC which, using a combination of web and traditional brick and mortar locations, grew to three offices and into two states. After the drop off of the real estate market in late 2008, Mr. Sanford and his executive team went back and rewrote the entire business model in recognition of the “perfect storm” of lower revenues, fixed or rising overhead costs, and a consumer with more information and access than ever before. eXp Realty International, Inc. was launched in October 2009 as the first truly cloud-based national real estate brokerage which meant giving up the traditional brick and mortar environment and moving to a fully-immersive 3D virtual office environment where agents, brokers and staff collaborate across borders while learning and transacting business from anywhere in the world. Since that time eXp World Holdings Inc. has quickly grown throughout the United States.

 

From 2005 to 2007, Mr. Sanford ran a large mega-agent team and consulted to Keller Williams International as a member of the Agent Technology Council in the areas of online client acquisition, client conversion and technology. Mr. Sanford was also a significant contributor to Keller Williams Internet Lead Generation Masterminds.

 

Prior to real estate, Mr. Sanford was active at the executive level with a number of technology-related companies. In 1998, Mr. Sanford founded and served as President for eShippers.com, an online e-commerce and logistics company.

 

We believe Mr. Sanford is qualified to serve on our board of directors because of his business and management experience.

 

 

 

 

 66 
 

 

Jason Gesing

 

Mr. Gesing joined the Company in March 2010 and was appointed Chief Business Development Officer in September 2012, a position he held until June 2014. From June 2014 through September 2016, Mr. Gesing served as the Corporation’s President. Mr. Gesing currently serves as Chief Executive Officer of our Real Estate Brokerage Division. With over a decade of experience in real estate in various capacities, Mr. Gesing holds broker's license in Massachusetts.

 

Mr. Gesing has been practicing law at Gesing Law Offices, LLP since 2009, and was an attorney with Murphy, Hesse, Toomey & Lehane, LLP in Boston, MA from 2002 to 2010. In his capacity as a lawyer, he obtained a broad base of experience in corporate, municipal, real estate, compliance, health care, construction, litigation, and administrative law, and advising clients on day to day issues and managing crises. He has acted in a variety of roles and undertaken a variety of matters including: corporate counsel; municipal counsel; hospital counsel; leasing, licensing and contract negotiation; governance and compliance; appearances before administrative hearing officers and state judges; defense of management in unfair labor practice charges; collective bargaining; internal investigations; and, owner representative in construction matters.

 

Mr. Gesing obtained a Bachelor of Arts (Magna Cum Laude) in 1996 from Syracuse University, and a Juris Doctor in 2002 from Boston College Law School. He is licensed to practice law in Massachusetts and New Hampshire.

 

We believe Mr. Gesing is qualified to serve on our board of directors because of his business and legal experience.

 

Alan Goldman

 

Mr. Goldman joined the Company as its Chief Financial Officer on March 16, 2016. Prior to his employment with the Company, Mr. Goldman served as a partner at Ingenium Accounting Associates, a PCAOB registered firm, from February 2013 to March 2016. While at Ingenium, he was responsible for both attest and non-attest engagements primarily with public issuers, many of whom are in the real estate industry. Prior to Ingenium, Mr. Goldman worked as an auditor for Excelsis Accounting (formerly known as Mark Bailey and Company) from May 2011 to February 2013. Prior to joining Excelsis, Mr. Goldman served as the Controller for Pacific West Companies, a vertically integrated multi-family developer.  During his tenure of four years with Pacific West, the group was recognized as a top condominium developer. Mr. Goldman earned a Bachelor of Business Administration, with an emphasis in Finance, from the University of Georgia. He is also licensed as a Certified Public Accountant in the state of Nevada.

 

Gene Frederick

 

Mr. Frederick has served as a director of the Company since April 2016 and joined the Company as an agent in April 2015. For over a decade prior to joining the Company, Mr. Frederick served in various management capacities at Keller Williams Realty. Mr. Frederick spent much of this time recruiting other top-producing real estate agents in the states of Virginia and Texas. Prior to joining the Keller Williams management team in the mid-nineties, Mr. Frederick was one of the top-producing real estate agents in the State of Texas beginning in the late eighties.

 

Earlier in his career, in the mid-eighties, Mr. Frederick served as Controller for Texas Instruments before leaving the corporate world for real estate.

The Board believes that Mr. Frederick is qualified to serve on our board of directors because of his extensive experience in residential real estate and his leadership ability, particularly in managing growth.

 

 

 

 

 67 
 

 

Richard S. Miller

 

Mr. Miller has served as an independent director of the Company since July 2016. For over 25 years, Mr. Miller has held senior leadership positions in companies ranging in size from a Fortune 10 company to a startup. His extensive experience as a turnaround specialist and an expert in sustainable growth has been applied as an executive inside organizations and as a consultant advising from outside companies. Mr. Miller began his career as a sales trainee at Sperry/Unisys and left 15 years later as Divisional VP/GM of North America. Mr. Miller was recruited by AT&T where he served as President of the $13 billion Global Services unit. He later served as President, COO, and as a Board member at internet startup OPUS360 where he led the company’s successful IPO. Mr. Miller was later recruited by Lucent Technologies to lead their $21 billion world-wide sales efforts. Later, he was named President, Lucent Government Solutions. Mr. Miller also served as CEO at the Balance & Stretch Center, a non-profit focused on supporting children with diabetes.

 

Mr. Miller is currently CEO at Being Chief LLC, where he serves as an advisor to a broad range of executives, across a diverse number of industries. He is also an author and public speaker. Mr. Miller’s success and unconventional approach has been highlighted in Harvard Business Review, Selling Power, USA Today, Yahoo, and MSN Business. Most recently, Mr. Miller was named to serve on the Executive Committee for the Strategic Innovation Lab at Case University’s Weatherhead School of Management, focusing on sustainable growth.

 

Mr. Miller earned a Bachelor of Arts degree in Management from Bentley University and a Master’s degree in Business Administration from Columbia University. The Board believes that Mr. Miller is well qualified to serve on the Company’s board of directors because of his extensive management experience, particularly in managing sustainable growth.

 

Randall D. Miles

 

Mr. Miles has served as an independent director of the Company since July 2016 and was appointed Vice-Chairman on January 20, 2018. For over 25 years Mr. Miles has held senior leadership positions in global financial services, financial technology and investment banking companies.  His extensive investment banking background at bulge bracket, regional and boutique firms advising financial services companies on strategic and financial needs has crossed many disciplines.  Mr. Miles transactional and advisory experience is complemented by leadership of public and private equity backed financial technology, specialty finance and software companies that have included Chairman and CEO at LIONMTS where he was nominated for the Ernst & Young Entrepreneur of the Year award, CEO at Syngence Corporation, COO of AtlasBanc Holdings Corp. and CEO of Advantage Funding / NAFCO Holdings which grew to in excess of $1 billion. 

 

Mr. Miles was Managing Partner at SCM Capital Group, a global strategic and financial advisory firm, where he served beginning in 2000 through January 2013. Subsequently, he served as a Managing Director at Riparian Partners, a division of Oppenheimer & Co., Inc. Since June 2014, Mr. Miles has served as Senior Managing Director, Head of FIG and COO, Investment Banking at Cantor Fitzgerald & Co. Mr. Miles has held senior leadership roles at Oppenheimer& Co., D.A. Davidson and & Co., The First Boston Corporation (Credit Suisse) Meridian Capital and Greenwich Capital Markets. Mr. Miles has broad public, private and nonprofit board experience and has been active for many years in leadership roles with the Make-A-Wish Foundation. He presently serves on the boards of Kuity, Corp. and Posiba, Inc. as Vice Chairman and Chairman respectively.

 

Mr. Miles holds a BBA from the University of Washington and holds FINRA licenses Series 7, 24, 63 and 79. The Board believes that Mr. Miles is well qualified to serve on the Company’s board of directors because of his extensive background in investment banking and financial services.

 

 

 

 68 
 

 

Darren Jacklin

 

Mr. Jacklin has serviced as an independent director of the Company since May 22, 2014. For over 19 years, Darren Jacklin has traveled four continents and over 40 countries mentoring entrepreneurs and business owners on specific and measurable strategies that they can consistently use to increase their income, transform their obstacles into cash flow and turn their passion into profits.

 

His uncanny ability to increase wealth and success by uncovering hidden assets, overlooked opportunities and undervalued possibilities has captured the attention of Tiger 21, The Wall Street Journal, Yahoo Finance, NBC TV, CBS TV, Global TV international radio stations, magazines and newspapers, movie producers, best-selling authors, CEO’s and business experts worldwide.

 

Darren Jacklin currently sits on paid international boards of directors of public companies and advisory boards. Darren has personally trained over 150 Fortune 500 companies such as Microsoft, AT&T, Black & Decker, Barclays Bank, as well as high school, college, university students and professional athletes and has connected with people in more than 126 countries.

 

We believe Mr. Jacklin is qualified to serve on our board of directors because of his business experience and venture capital background.

 

Susan Truax

 

Susan (Suzy) Truax brings to the Board 15 years of experience in the real estate industry. Since March 2017, she has served as the Chief Executive Officer and Founder of The Smart Move Realty Group, a brokerage powered by eXp Realty. From April 2016 to March 2017, Ms. Truax served as Chief Executive Officer of Keller Williams Realty in San Carlos, California, and from November 2015 to May 2016, she served as Productivity Coach and a real estate professional with Keller Williams Realty in San Francisco, California. From September 2014 to November 2015, Ms. Truax served as a real estate professional with Alain Pinel Realtors in the San Francisco Bay Area. From May 2013 to September 2014, she served as a Realtor with Berkshire Hathaway and Fox & Roach Realtors in Blue Bell, Pennsylvania and Cape May County, New Jersey. Previously, from February 2011 to December 2012, she served as Vice President and Realtor with Coldwell Banker Realty Corp. Associates. Ms. Truax is a licensed Realtor in the San Francisco Bay Area, Greater Philadelphia, South New Jersey and Florida.

 

The Board believes that Ms. Truax is well qualified to serve on our Board because of her experience as both a realtor and having management roles in various brokerages across the United States, in addition to her role on eXp’s Agent Advisory Council.

 

Family Relationships

 

There are no family relationships between our directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

None of our directors or executive officers has been involved in any of the following events during the past ten years:

 

(a)       any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

 

(b)       any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offences);

 

 

 

 

 69 
 

 

(c)       being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities;

 

(d)       being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

 

(e)       being the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of: (i) any federal or state securities or commodities law or regulation; or (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease- and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

 

(f)       being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Securities Exchange Act of 1934), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

Code of Ethics

 

As of March 15, 2018, the Company has not yet adopted a code of ethics. Our governance committee in conjunction with our management team is currently working on and expects to adopt and implement a code of ethics in the 2018 fiscal year.

 

Security Holder Nominating Procedures

 

We do not have any formal procedures by which our stockholders may recommend nominees to our board of directors.

 

Committees of the Board of Directors

 

We do not have a Nomination Committee. In 2017, we established a compensation committee.

 

As of the date of this report, our directors served on the committees of the Board indicated in the following table:

 

Director Independent Compensation Committee Audit Committee Governance Committee
Darren Jacklin X   X  
Randall Miles X X Chair X
Richard Miller X X X Chair
Glenn Sanford   Chair   X
Susan Truax   X    

 

Audit Committee

 

Our audit committee consists of three independent members: Randall Miles, Chairman and financial expert; Darren Jacklin and Richard Miller. Our audit committee approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the audit committee reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.

 

 

 

 

 70 
 

 

Compensation Committee

 

Our Compensation Committee is appointed by the Board of Directors and is responsible to the Board for carrying out their duties, namely, determining and approving the Executive Compensation Packages. Our Compensation Committee has the ultimate responsibility to oversee the development, implementation, and effectiveness of all pay and benefit programs.

 

Governance Committee

 

Our Corporate Governance Committee is appointed by the Board of Directors to oversee and evaluate the Board’s performance and the Company’s compliance with corporate governance regulations, guidelines and principles. Additionally, our Governance Committee identifies individuals qualified to be Board members and recommends to the Board directors to serve on each standing committee.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who owned more than 10% of the Company’s common stock (collectively, “Reporting Persons”) to file reports of ownership and changes in ownership of common stock and other securities of the Company on Forms 3, 4 and 5 with the SEC. Reporting Persons were required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they filed.

 

Based solely on review of reports received by the Company or written representations from the Reporting Persons, the Company believes that with respect to the fiscal year ended December 31, 2017, all Reporting Persons complied with all applicable Section 16(a) filing requirements. except that Messrs, Frederick Jacklin, and Petronis, Ms. Truax and Ms. Coleman have not yet filed Form 3 reports, and Messrs, Sanford, Gesing, Jacklin, Frederick, Miller, Miles and Goldman have not timely filed certain Form 4 and Form 5 reports.

 

Item 11. EXECUTIVE COMPENSATION

 

The particulars of the compensation paid to:

 

·our principal executive and principal financial officer;
·our president;
·and certain other officers, all of whom will collectively refer to as the “named executive officers” of our company,

 

are set out in the following summary compensation table:

 

SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary
($)
Bonus
($)
Stock Awards
($)(1)
Option Awards
($)
Non-Equity Incentive Plan Compensation
($)
Change in Pension Value and Nonqualified Deferred Compensation Earnings
($)
All Other Compensation
($)(2)
Total
($)

Glenn Sanford

Chief Executive Officer and Chairman of the Board 

2017

2016

49,500

54,000

-0-

-0-

6,008

16,532

-0-

-0-

-0-

-0-

-0-

-0-

723,687(3)

418,606(3)

773,188

489,138

Jason Gesing,

Director and Former President

2017

2016

146,104

90,376

58,000

-0-

66,179

51,414

-0-

-0-

-0-

-0-

-0-

-0-

155,656 (3)

82,105 (3)

425,940

223,894

                   

Alan Goldman,

Chief Financial Officer

2017

2016

160,313

118,750

70,625

-0-

44,741

37,050

-0-

91,818

-0-

-0-

-0-

-0-

-0-

-0-

275,678

247,618

                   

Peter Nobel,

Chief Operating Officer (4)

2017

2016

-0-

138,542

-0-

-0-

-0-

-0-

-0-

91,818

-0-

-0-

-0-

-0-

-0-

-0-

-0-

230,360

                   

Russ Cofano,

President and General Counsel (5)

2017

2016

251,441

73,590

-0-

-0-

26,466

6,981

-0-

-0-

-0-

-0-

-0-

109,401

-0-

387,309

220,088

 

 

 

 71 
 

 

(1)   Stock awards represent stock and options issued to the individuals noted, with the fair value determined at the date of grant and recognized in accordance with U.S. GAAP over the requisite service period. Director compensation as part of stock awards for Glenn Sanford amounted to $6,008 and $16,532 in 2017 and 2016 respectively. Director compensation as part of stock awards for Jason Gesing amounted to $6,008 and $16,378 in 2017 and 2016, respectively.     
   
(2)   The value of privileges and other personal benefits, perquisites and property for the officers that do not exceed the lesser of $10,000 or 10% of the total of the annual salary and bonus and is not reported herein.
   

(3)  

Consists of revenue sharing and commissions earned.

   

(4)  

Mr. Nobel resigned as the Company’s Chief Operating Officer effective January 1, 2017.

   
(5)

Mr. Cofano resigned as the Company’s President and General Counsel effective July 27, 2017. The Company entered into a Separation Agreement and Release (the “Separation Agreement”) with Mr. Cofano under which the Company paid Mr. Cofano a separation payment of $239,301, net of applicable taxes, of which $150,000 was paid ten days following the effective date of the Agreement and the remainder paid in three monthly installments in the gross amount of $29,767 each. In addition, in exchange for relinquishing his rights under prior option and stock awards, the Company agreed to pay Mr. Cofano $341,700, net of applicable taxes, in monthly installment payments of $20,100 beginning on the fourth month following the effective date of the Agreement.

 

Retirement or Similar Benefit Plans

 

There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. Our directors and executive officers may receive stock options and stock grants at the discretion of our board of directors. We do not have any bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options or stock grants may be granted at the discretion of our board of directors. Mr. Sanford and Mr. Gesing are participants in the Company’s revenue share plan and would continue to receive those benefits similar to all other agents and brokers of eXp Realty on a long-term basis. Any revenue share bonuses that are paid to officers and directors would discontinue at the point that they are no longer in an executive position with the Company, however revenue share benefits based on their position in the revenue share system would continue as would be consistent with the revenue share plan.

 

Resignation, Retirement, Other Termination, or Change in Control Arrangements

 

In February 2016, the Company entered into an Offer of Employment with Alan Goldman, Chief Financial Officer. In September 2017, the Company and Alan Goldman entered into an Employment Agreement to amend certain agreed upon terms and conditions of the Offer of Employment. The Employment Agreement was filed as an Exhibit to our September 30, 2017 Form 10-Q.

 

Our former President and General Counsel, Russ Cofano, resigned effective July 27, 2017. The Company entered into a Separation Agreement and Release with Mr. Cofano, under which the Company paid Mr. Cofano a separation payment of $239,301, net of applicable taxes, of which $150,000 was paid ten days following the effective date of the Agreement and the remainder paid in three monthly installments in the gross amount of $29,767 each. In addition, in exchange for relinquishing his rights under prior option and stock awards, the Company agreed to pay Mr. Cofano $341,700, net of applicable taxes, in monthly installment payments of $20,100 beginning on the fourth month following the effective date of the Agreement.

 

 

 

 72 
 

 

Outstanding Equity Awards at Fiscal Year End

 

Name Option awards Stock awards
Number of securities underlying unexercised options
(#) exercisable
Number of securities
underlying
unexercised
options
(#) unexercisable
Equity incentive
plan awards: Number of securities underlying unexercised
unearned options
(#)
Option
exercise price
($)
Option
expiration date
Number of shares or units of stock that have not vested
(#)
Market value of shares of units of stock that have not vested
($)
Equity
incentive
plan awards: Number of
unearned
shares, units or other rights that have not vested
(#)
Equity
incentive
plan awards: Market or payout value of
unearned
shares, units or other rights that have not vested
($)
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j)

Glenn Sanford

Chief Executive Officer and Chairman of the Board 

1,617,000 - - $0.13 10/1/2022 - - - -
Alan Goldman, Chief Financial Officer 218,750 281,250 - $0.80 3/16/2026 - - - -

 

Compensation of Directors

 

Mr. Sanford is also our Chief Executive Officer (see Executive Compensation table for services acting as Officers).

 

Through March 2017, Mr. Sanford and Mr. Gesing were compensated $2,000 per month in common stock for directorship activities. During the year-ended December 31, 2017, Mr. Jacklin and Mr. Frederick were compensated $2,000 per month for directorship actives which was paid in common stock. Newly appointed directors received $75,000 a year as compensation. Directors are reimbursed for reasonable out-of-pocket expenses incurred.

 

Director Compensation

 

The following table sets forth certain information regarding the compensation earned by or awarded to each non-employee director during fiscal year 2017 who served on our Board during the fiscal year 2017:

 

Name  Fees Earned or Paid in Cash  

Options

Awards(1)

   All Other Compensation   Total 
Darren Jacklin  $   $   $24,006   $24,006 
Randall Miles  $75,000   $2,407,888   $   $2,482,888 
Richard Miller  $75,000   $2,407,888   $37,500   $2,520,388 

 

1 The dollar amounts shown represent the aggregate grant date fair value of common stock awards granted, determined in accordance with U.S. GAAP, but not what has fully vested as of December 31, 2017.

 

 

 

 73 
 

 

We have agreed to compensate each of Mr. Miles and Mr. Miller as follows:

 

  · cash of $75,000 per year;
  · the award of stock options to purchase 1,350,000 shares of the Company’s common stock at an exercise price equal to fair market value on the grant date, with such shares vesting over a three-year period in equal monthly installments; and
  · reimbursement of expenses reasonably incurred in the performance of duties as a Board member.

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Principal Stockholders and Management

 

The following table provides certain information regarding the ownership of our common stock, as of March 15, 2018 by:

 

  ·  each person known to us to own more than 5% of our outstanding common stock;

  ·  each of our executive officers;

  ·  each of our directors; and

  ·  all of our executive officers and directors and as a group.

 


Title of Class

Name and Address of Beneficial Owner
Amount and Nature of 
Beneficial Ownership(1)
Percentage of 
Class(2)
  More than 5% stockholders:    

Common Stock

Penny Sanford
2219 Rimland Drive, Suite 301

Bellingham, WA 98226


16,779,325

27.00% 
  Directors and named executive officers:    

Common Stock 

Glenn Sanford
2219 Rimland Drive, Suite 301

Bellingham, WA 98226


22,701,144(3) 

36.53% 

Common Stock 

Jason Gesing
2219 Rimland Drive, Suite 301

Bellingham, WA 98226


1,939,045(4) 

3.12% 

Common Stock

Darren Jacklin
2219 Rimland Drive, Suite 301

Bellingham, WA 98226


120,594 


0.19% 

Common Stock

Gene Frederick

2219 Rimland Drive, Suite 301

Bellingham, WA 98226

793,128 1.28%
Common Stock

Randall Miles

2219 Rimland Drive, Suite 301

Bellingham, WA 98226

863,190(5)  1.03%
Common Stock

Richard Miller

2219 Rimland Drive, Suite 301

Bellingham, WA 98226

863,190(5)  1.03%
Common Stock

Susan Truax

2219 Rimland Drive, Suite 301

Bellingham, WA 98226

15,000(5)  0.02%
Common Stock

Alan Goldman

2219 Rimland Drive, Suite 301

Bellingham, WA 98226

350,000(6)  0.51%
Common Stock

Mary Frances Coleman

2219 Rimland Drive, Suite 301

Bellingham, WA 98226

18,750 (7) 0.03%
Common Stock

Scott Petronis

2219 Rimland Drive, Suite 301

Bellingham, WA 98226

63,750 (8) 0.10%
Common Stock All executive officers and directors as a group (10 persons)
27,748,417

39.86%

 

 

 74 
 

 

Notes

 

(1) Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.

 

(2) Percentage of ownership is based on 56,100,047 shares of our common stock issued and outstanding as of March 15, 2018. Common stock subject to options or warrants exercisable within 60 days of March 15, 2018 are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.

 

(3) Includes 21,084,144 shares of our common stock and stock options to acquire 1,617,000 shares of our common stock exercisable within 60 days of March 15, 2018.

 

(4) Includes of 264,915 shares of our common stock and stock options to acquire 1,674,130 shares of our common stock exercisable within 60 days of March 15, 2018.

 

(5) Consists of stock options to acquire shares of our common stock only exercisable within 60 days of March 15, 2018.

 

(6) Includes 100,000 shares of our common stock and stock options to acquire 250,000 shares of our common stock exercisable within 60 days of March 15, 2018.

 

(7) Consists of stock options to acquire shares of our common stock only exercisable within 60 days of March 15, 2018.

 

(8) Includes 6,250 shares of our common stock and stock options to acquire $71,875 shares of our common stock exercisable within 60 days of March 15,2018.

 

Changes in Control

 

We are unaware of any arrangement the operation of which may at a subsequent date result in a change of control of our company.

 

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Transactions with Related Persons

 

None

 

Director Independence

 

Our bylaws provide that we have at least one director, and as of the date this report, our Board consisted of a total seven directors, consisting of Glenn Sanford, Jason Gesing, Darren Jacklin, Randall Miles, Susan Truax, Gene Frederick, and Richard Miller. Our common stock is quoted on the OTCQB operated by the OTC Markets Group, which does not impose any director independence requirements. Under NASDAQ Marketplace Rule 5605(a)(2), a director is not considered to be independent if he or she is also an executive officer or employee of the Company, or otherwise has any material relationship with the Company or its affiliates that would impair independence. Using this definition of director independence, each of the following directors are considered independent; Darren Jacklin, Randall Miles, and Richard Miller.

 

 

 

 75 
 

 

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Principal Accounting Fees

 

The following table sets forth fees billed or accrued by our independent registered public accountants during the fiscal years ended December 31, 2017 and 2016:  

 

   Year Ended December 31,
   2017   2016 
         
Audit Fees  $490,000   $170,000 
Audit Related Fees        
Tax Fees   10,503    25,000 
All Other Fees        
Total Fees  $500,503   $195,000 

 

Audit fees pertain to the audit of our annual Consolidated Financial Statements, including reviews of the interim financial statements contained in our Quarterly Reports on Form 10-Q and services that are normally provided by an independent registered accountant in connection with statutory and regulatory filings or engagements. Our current principal accountant BDO USA, LLP was engaged to audit our Consolidated Financial Statements for the years ended December 31, 2017 and December 31, 2016.

 

Audit-related fees consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements, which are not reported under “Audit Fees.” There were no audit related fees provided in the fiscal year end December 31, 2017 and 2016.

 

Tax fees consist of fees billed for professional services for tax compliance, tax advice, and tax planning.

 

The principal accountant for the current year and for the most recently completed fiscal year is not expected to present at the stockholders’ meeting and, therefore, will not make a statement or be available to respond to questions.

 

All other fees consist of fees for products and services other than the services reported above. There were no management consulting services provided in the fiscal year end December 31, 2017 and 2016.

 

Pre-Approval Policies and Procedures

 

All services provided by our independent registered accountants were pre-approved by the Audit Committee. The Audit Committee is presented, for approval, a description of the Audit-related, Tax and Other services expected to be performed by the independent registered accounts during the fiscal year.

 

The Audit Committee determined that all services provided by our independent registered accountants were compatible with maintaining their independence.

 

 

 

 76 
 

 

PART IV

 

Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

EXHIBITS

 

Exhibit   Exhibit
Number   Description
     
2.1   Merger Agreement dated August 15, 2013 with eXp Realty International, Inc. and eXp Acquisition Corp. (incorporated by reference on Form 8-K, filed on August 20, 2013)
     
3.1   Certificate of Incorporation (incorporated by reference from our Registration Statement on Form S-1, filed on July 7, 2010)
     
3.2   Certificate of Amendment of Certificate of Incorporation dated effective September 9, 2013 (incorporated by reference from our Form 8-K, filed on September 9, 2013)
     
3.3   Bylaws (incorporated by reference from our Registration Statement on Form S-1, filed on July 7, 2010)
     
10.1   Affiliate Stock Purchase Agreement (incorporated by reference from Form 8-K, filed on March 18, 2013)
     
10.2   Stock Option Plan (incorporated by reference from Form 8-K, filed on October 2, 2013)
     
10.3   eXp Realty International Corporation 2015 Equity Incentive Plan (incorporated by reference to Company’s Definitive Information Statement on Schedule 14C filed on April 2, 2015)
     
10.4  

eXp Realty International Corporation 2015 Agent Equity Program Enrollment Form (incorporated by reference to Exhibit 99.2 to the Company’s Current Report on Form 8-K filed on April 30, 2015)

     
21   Subsidiaries of the Registrant
     
31.1   Certification of the Chief Executive pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
31.2   Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1   Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
32.2   Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
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

 

Item 16. Form 10-K Summary

 

None 

 

 77 
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  eXp World Holdings, Inc.
  (Registrant)
   
Date: April 17, 2018 /s/ Glenn Sanford
  Glenn Sanford
  Chief Executive Officer (Principal Executive Officer)
   
   
Date: April 17, 2018 /s/ Alan Goldman
  Alan Goldman
  Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name   Title   Date
         
/s/  Glenn sanford   Chief Executive Officer and Chairman of the Board   April 17, 2018

Glenn Sanford

  (Principal Executive Officer)    
         
/s/  Alan Goldman   Chief Financial Officer   April 17, 2018

Alan Goldman

  (Principal Financial Officer)    
         
/s/  Gene Frederick   Director   April 17, 2018

Gene Frederick

       
         
/s/ Jason Gesing   Director    April 17, 2018

Jason Gesing

       
         

/s/ Randall Miles

  Director   April 17, 2018

Randall Miles

       
         
/s/ Richard Miller   Director   April 17, 2018

Richard Miller

       
         
/s/ Susan Truax   Director   April 17, 2018

Susan Truax

       
         
/s/ Darren jacklin   Director   April 17, 2018

Darren Jacklin

       

 

 

 

 78