10-Q 1 exp_10q-093016.htm FORM 10-Q

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

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2016

 

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: 333-168025

 

 

 

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

 

Delaware 333-168025 98-0681092
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)

 

1321 King Street, Suite 1
Bellingham, WA 98229
(Address of principal executive offices and Zip Code)

 

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

 

EXP REALTY INTERNATIONAL CORPORATION

(Former name or former address, if changed since last report)

 

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 require 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 (of for such shorter period that the registrant was required to submit and post such files). 
Yes [X]     No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [   ]      Accelerated filer [   ]      Non-accelerated filer [   ]   Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 
Yes [   ]    No [X]

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of November 11, 2016, the registrant’s outstanding common stock consisted of 51,370,962 shares.

 

   
 

 

TABLE OF CONTENTS

 

    Page
  Forward Looking Statements 3
     
  PART I – FINANCIAL INFORMATION  
Item 1. Financial Statements 4
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
     
  PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Mine Safety Disclosures 21
Item 5. Other information 21
Item 6. Exhibits 22

 

 

 

 

 

 

 

 

 

 

 2 
 

 

Statement Regarding Forward-Looking Statements

 

Certain statements contained in this report on Form 10-Q are forward-looking statements which are intended to be covered by the safe harbors created thereby. All statements, other than statements of historical facts, are forward-looking statements. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,” “may,” “will,” “would,” “potential” and similar expressions identify forward-looking statements, but are not the exclusive means of doing so. Forward-looking statements may include statements 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; nature and timing of restructuring charges and the impact thereof; productivity, business process, rationalization, investment, acquisition, consulting, operational, tax, financial and capital projects and initiatives; contingencies; environmental compliance and changes in the regulatory environment; and future working capital, costs, revenues, business opportunities, debt levels, cash flows, margins, earnings and growth.

 

These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical and current trends, current conditions, possible future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees, representations or warranties and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements. Some of those risks and uncertainties include the risk factors set forth in this report and our Annual Report on Form 10-K for our prior fiscal year ended December 31, 2015, and the following: current global economic and capital market uncertainties; potential dilution to our stockholders from our recapitalization and balance sheet restructuring activities; potential inability to continue to comply with government regulations; adoption of, or changes in legislation or regulations adversely affecting our businesses; permitting constraints or delays, business opportunities that may be presented to, or pursued by, us; changes in the United States or other monetary or fiscal policies or regulations; changes in generally accepted accounting principles; geopolitical events; potential inability to implement our business strategies; potential inability to grow revenues organically; potential inability to attract and retain key personnel; assertion of claims, lawsuits and proceedings against us; potential inability to maintain an effective system of internal controls over financial reporting; potential inability or failure to timely file periodic reports with the SEC; and potential inability to list our securities on any securities exchange or market. Occurrence of such events or circumstances could have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our securities. All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We undertake no obligation to publicly update or revise any forward-looking statement.

 

 

 

 

 

 

 3 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

eXp World Holdings, Inc.

(unaudited)

September 30, 2016

 

 

    Page
  Condensed Consolidated Balance Sheets 5
     
  Condensed Consolidated Statements of Operations 6
     
  Condensed Consolidated Statements of Comprehensive Loss 7
     
  Condensed Consolidated Statements of Cash Flows 8
     
  Notes to the Condensed Consolidated Financial Statements 9

 

 

 

 

 

 

 

 4 
 

  

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

           

   September 30,   December 31, 
   2016   2015 
ASSETS        
CURRENT ASSETS          
Cash and cash equivalents  $944,096   $571,814 
Restricted cash   533,374    148,613 
Accounts receivable, net of allowance $130,867 and $2,342, respectively   1,333,674    341,643 
Prepaids and other assets   404,565    84,451 
           
TOTAL CURRENT ASSETS   3,215,709    1,146,521 
           
OTHER ASSETS          
Fixed assets, net   352,288    110,195 
           
TOTAL OTHER ASSETS   352,288    110,195 
           
TOTAL ASSETS  $3,567,997   $1,256,716 
           
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
CURRENT LIABILITIES          
Accounts payable  $395,422   $89,984 
Customer deposits   533,374    148,613 
Accrued expenses   615,268    425,613 
           
TOTAL CURRENT LIABILITIES   1,544,064    664,210 
           
Commitments and contingencies        
           
STOCKHOLDERS' EQUITY          
eXp World Holdings, Inc. Stockholders' Equity:          
Common Stock, $0.00001 par value 220,000,000 shares authorized; 51,370,962 shares and 50,168,195 shares issued and outstanding at September 30, 2016 and December 31, 2015, respectively   512    502 
Additional paid-in capital   29,322,379    6,611,781 
Accumulated deficit   (27,263,960)   (5,991,088)
Accumulated other comprehensive income (loss)   6,491    (9,113)
Total eXp World Holdings, Inc. stockholders' equity   2,065,422    612,082 
Non-controlling interests in subsidiary   (41,489)   (19,576)
           
TOTAL STOCKHOLDERS' EQUITY   2,023,933    592,506 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $3,567,997   $1,256,716 

 

 

 

 

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

 

 5 
 

 

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

   Three Months Ended
September 30,
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2016   2015   2016   2015 
                 
Net revenues  $15,756,956   $7,419,103   $36,181,796   $16,453,307 
                     
Operating expenses                    
Cost of revenues   13,294,452    6,354,951    30,868,564    14,000,222 
General and administrative   16,810,567    (661,707)   25,801,423    5,457,334 
Professional fees   140,804    138,001    414,197    313,436 
Sales and marketing   158,968    77,011    358,396    166,374 
                     
Total expenses   30,404,791    5,908,256    57,442,580    19,937,366 
                     
Net income (loss) from operations   (14,647,835)   1,510,847    (21,260,784)   (3,484,059)
                     
Other income and (expenses)                    
Other income   (432)   319    14    6,902 
Interest expense       (202)       (1,127)
                     
Total other income and (expenses)   (432)   117    14    5,775 
                     
Income (loss) from before income tax expense   (14,648,267)   1,510,964    (21,260,770)   (3,478,284)
                     
Income tax expense   (7,444)   (1,244)   (33,015)   (26,967)
                     
Net income (loss)   (14,655,711)   1,509,720    (21,293,785)   (3,505,251)
                     
Net loss attributable to non-controlling interest in subsidiary   8,613    7,388    20,913    7,388 
                     
Net income (loss) attributable to common shareholders  $(14,647,098)  $1,517,108   $(21,272,872)  $(3,497,863)
                     
Net income (loss) per share attributable to common shareholders                    
Basic from continuing operations  $(0.29)  $0.03   $(0.42)  $(0.07)
Diluted from continuing operations  $(0.29)  $0.03   $(0.42)  $(0.07)
                     
Weighted average shares outstanding                    
Basic   51,225,817    49,714,285    50,929,102    49,211,822 
Diluted   51,225,817    51,163,219    50,929,102    49,211,822 

 

 

 

 

 

 

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

 

 6 
 

 

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
                 
Net income (loss)  $(14,655,711)  $1,509,720   $(21,293,785)  $(3,505,251)
Other comprehensive loss:                    
Foreign currency translation adjustments, net of tax   10,515    (13,251)   15,604    (22,663)
Comprehensive income (loss)   (14,645,196)   1,496,469    (21,278,181)   (3,527,914)
Comprehensive loss attributable to non-controlling interest in subsidiary   8,613    7,388    20,913    7,388 
Comprehensive income (loss) attributable to common shareholders  $(14,636,583)  $1,503,857   $(21,257,268)  $(3,520,526)

 

 

 

 

 

 

 

 

 

 

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

 

 7 
 

 

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   Nine Months Ended September 30, 
   2016   2015 
         
OPERATING ACTIVITIES          
Net loss  $(21,293,785)  $(3,505,251)
Adjustments to reconcile net loss to cash used in operating activities:          
Depreciation   38,110    19,010 
Stock compensation expense   1,527,110    985,076 
Stock option expense   21,183,498    2,751,138 
           
Changes in operating assets and liabilities:          
Accounts receivable   (992,031)   (318,223)
Accounts receivable, related party       4,744 
Prepaids and other assets   (320,114)   (79,172)
Accounts payable   305,438    (9,606)
Accrued expenses   189,655    380,754 
Accrued interest       (9,397)
           
CASH PROVIDED BY OPERATING ACTIVITIES   637,881    219,073 
           
INVESTING ACTIVITIES          
Acquisition of property and equipment   (281,203)   (37,821)
           
CASH USED IN INVESTING ACTIVITIES   (281,203)   (37,821)
           
FINANCING ACTIVITIES          
Proceeds from issuance of subsidiary common stock       1,950 
Repurchase and retirement of subsidiary common stock   (1,000)    
Exercise of options   1,000     
Repurchase and retirement of shares       (3,132)
Principal payments of notes payable       (61,877)
           
CASH USED IN FINANCING ACTIVITIES       (63,059)
           
Effect of changes in exchange rates on cash and cash equivalents   15,604    (22,663)
           
Net change in cash and cash equivalents   372,282    95,530 
           
Cash and cash equivalents, beginning of period   571,814    353,374 
           
CASH AND CASH EQUIVALENTS, END OF PERIOD  $944,096   $448,904 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:          
Cash paid for interest  $   $10,524 
Cash paid for income taxes  $33,015   $26,967 

 

 

 

 

 

 

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

 

 8 
 

 

eXp World Holdings, Inc.

Notes to the Condensed Consolidated Financial Statements

September 30, 2016

(Expressed in U.S. dollars)

 

1.  BACKGROUND AND BASIS OF PRESENTATION

 

eXp World Holdings, Inc. formerly known as eXp Realty International Corporation (the “Company” or “we” or “eXp”) was incorporated in the State of Delaware on July 30, 2008.

 

The Company’s primary operating subsidiary, eXp Realty is a cloud-based real estate brokerage operating in 41 States, the District of Columbia, and in Alberta, Canada. The Company also operates a residential mortgage origination company which currently operates in California, Arizona, New Mexico, Virginia, and Texas. As a cloud-based company, eXp Realty has embraced and adopted 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 interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine-month period ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

 

Principles of Consolidation

 

The accompanying condensed consolidated unaudited financial statements include the accounts of eXp World Holdings, Inc. (formerly eXp Realty International Corporation) and its subsidiaries eXp Realty Holdings, Inc. (formerly eXp Acquisition Corp); First Cloud Mortgage, Inc.; eXp Realty Associates, LLC; eXp Realty, LLC; eXp Realty of California, Inc.(formerly eXp Realty of Washington, Inc.); eXp Realty of Canada, Inc.; and eXp Realty of Connecticut, LLC. All material intercompany accounts and transactions have been eliminated upon consolidation.

 

Non-controlling interests

 

Non-controlling interests in the Company’s subsidiaries are reported as a component of equity, separate from the parent company’s equity. Results of operations attributable to the non-controlling interests are included in the Company’s condensed consolidated statements of operations and condensed consolidated statements of comprehensive loss. The Company owns an 89.4% interest in First Cloud Mortgage, Inc.

 

Use of Estimates

 

The preparation of financial statements in conformity with US 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.

 

 

 

 9 
 

 

Foreign currency translation

 

The Company’s functional and reporting currency is the United States dollar. Occasional transactions may occur in Canadian dollars and management has adopted ASC 830, Foreign Currency Translation Matters. 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 has not, at the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

 

Other Comprehensive Income / Loss

 

The Company incurred other comprehensive income of $10,515 and a loss of $15,604 for the three and nine months ended September 30, 2016, respectively. For the three and nine months ended September 30, 2015 the Company incurred losses of $13,251 and $22,663, respectively. Other comprehensive income and loss consisted of foreign exchange translations for all periods presented.

 

Recently Issued Accounting Pronouncements

 

In March 2016, FASB issued Accounting Standards Update ASU No. 2016-07 Investments – Equity Method and Joint Ventures (Topic 323). The amendment eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments require that an entity that has an available-for-sale equity security that becomes qualified for the equity method of accounting recognize through earnings the unrealized holding gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendment is effective for fiscal years and interim periods beginning after December 15, 2016 and should be adopted prospectively with early adoption permitted. The Company is currently evaluating the applicability of the amendment on its future consolidated results of operations and cash flows.

 

In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments (Topic 230). The amendment provides guidance on the following eight specific cash flow issues:

 

1.Debt prepayment or debt extinguishment costs
2.Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing
3.Contingent consideration payments made after a business combination
4.Proceeds from the settlement of insurance claims
5.Proceeds from the settlement of corporate owned life insurance policies including bank-owned life insurance policies
6.Distributions received from equity method investees
7.Beneficial interests in securitization transactions
8.Separately identifiable cash flows and application of the predominance principle

 

The amendment is effective for fiscal years beginning after December 15, 2017 with early adoption permitted. The Company will evaluate the applicability of the provisions of the amendment on specifically covered transactions as they arise. In the event the Company elects early adoption for one of the specific provisions, the amendment requires early adoption for all eight of the cash flow issues.

 

In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which eliminates the current requirement to present deferred tax liabilities and assets as current and noncurrent amounts in a classified statement of financial position. Instead, entities will be required to classify all deferred tax assets and liabilities as noncurrent in a statement of financial position. This standard is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted. The Company is currently evaluating the impacts of adoption of this ASU on its financial statements.

 

 

 

 10 
 

 

3. RELATED PARTY TRANSACTIONS

 

The Company had no known related party balances as of September 30, 2016 or December 31, 2015, respectively.

 

4. STOCKHOLDERS’ EQUITY

 

As of September 30, 2016, the Company had 51,370,962 shares of common stock issued and outstanding.

 

The following provides a summary description of the shares issued during the period ended September 30, 2016:

 

The Company re-purchased and retired 1,000 shares of common stock in our subsidiary First Cloud Mortgage, Inc. for $1,000 in cash.

 

The Company issued a total of 133,678 shares of restricted common stock for the exercise of stock options for $1,000 in cash.

 

During the nine months ended September 30, 2016, the Company issued a total of 1,069,089 shares of common stock and recognized a total of $1,527,110 in compensation cost.

 

5. STOCK BASED COMPENSATION

 

Equity Incentive Programs

 

The Company has various equity based incentive programs available to its officers, directors, employees, real estate agents, consultants, and other independent contractors. The Company measures and recognizes the compensation cost associated with these awards when the applicable performance milestones are achieved and systematically over the requisite service (vesting) period.

 

On July 29, 2016, the Company granted 128,000 restricted shares of common stock its newly appointed Chief Strategy Officer and General Counsel with a total grant date fair value of $261,120. The first 96,000 restricted shares of common stock vest quarterly over a four-year period from the date of the grant. The remaining 32,000 shares of restricted common stock vest in accordance with the achievement of performance milestones over a four-year period.

 

As of September 30, 2016, the Company had 1,722,846 unvested shares committed for issuance related to its equity incentive programs.

 

Intrinsic Value Options

 

At September 30, 2016, the Company had 6,785,808 stock options outstanding that were granted prior to Company becoming public in September 2013, which the Company accounts for based on the intrinsic value method and re-measures the intrinsic value at each reporting date through the date of exercise or other settlement. Compensation cost or benefit is recognized based on the change in intrinsic value at each reporting date. For the nine months ended September 30, 2016 the Company’s stock options had intrinsic values between $3.61 and $3.74 and the Company recognized stock option expense associated with the change in intrinsic value of $20.4 million. For the nine months ended September 30, 2015 the Company’s stock options had intrinsic values between $0.44 and $0.57 and the Company recognized stock option expense of $2.5 million associated with the change in intrinsic value.

 

Traditional Fair Value Options

 

All option awards granted to employees and non-employees subsequent to becoming a public company are recognized, as vested, at their grant date fair value.

 

During the nine months ended September 30, 2016 the Company granted 4,100,000 stock options. The total grant date fair value of $6,165,294 for the awards issued during the nine months ended September 30, 2016 was calculated with a Black-Scholes Option pricing model with the following assumptions: expected volatility, based on historical stock prices ranging from 165% to 185%; an average expected term of 9.8 years; risk free rates based on U.S. Treasury instruments for the expected term; and no dividend payment expectations.

 

 

 

 11 
 

 

For the three and nine months ended September 30, 2016 the Company recognized $544 thousand and $727 thousand, respectively, of compensation cost associated with its stock options, exclusive of changes in intrinsic value. The Company recognized $143 thousand and $272 thousand of stock option compensation cost, exclusive of changes in intrinsic value, for the three and nine months ended September 30, 2015, respectively.

 

As of September 30, 2016, the Company had 4,437,750 options issued and 448,654 exercisable with a weighted average exercise price of $1.45 and a weighted average remaining term of 9.63 years. The options outstanding as of September 30, 2016 had unrecognized compensation cost of $5.85 million.

 

6. COMMITMENTS AND CONTINGENCIES

 

The Company is subject to legal proceedings and claims that arise in the ordinary course of business. In the opinion of Management, the ultimate liability with respect to current proceedings and claims will not have a material adverse effect upon the Company’s financial position or results of operations.

 

7. GEOGRAPHIC INFORMATION

 

The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon net revenues.

 

The geographic segment information provided below is classified based on the geographic location of the Company’s subsidiaries.

 

For the nine months ended September 30, 2016  US   CANADA   TOTAL 
Net revenues  $35,405,251   $776,545   $36,181,796 
Total assets   3,349,537    218,460    3,567,997 
                
For the nine months ended September 30, 2015               
Net revenues  $15,393,120   $1,060,187   $16,453,307 
Total assets   1,433,417    244,763    1,678,180 

 

8. SUBSEQUENT EVENTS

 

Discontinued Operations

 

In October 2016, the Company's Board of Directors approved an action plan to wind down operations of its majority-owned subsidiary, First Cloud Mortgage, Inc. The Company made this determination in order to focus on its core real estate business. For the three and nine months ended September 30, 2016 the Company incurred a loss of $74,023 and $177,046, respectively, net of its non-controlling interest. First Cloud Mortgage has immaterial assets and liabilities primarily consisting of cash and computer equipment.

 

 

 

 

 

 

 

 

 

 12 
 

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking statements based upon current expectations that involve numerous risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Those reasons include, without limitation, those described at the beginning of this report under “Statement regarding forward-looking statements,” as well as those that may be set forth elsewhere in this report. Except as otherwise required by law, we do not intend to update any information contained in these forward-looking statements. The following discussion also addresses matters we consider important for an understanding of our financial condition as of September 30, 2016, and results of operations for the three and nine month periods ended September 30, 2016, as well as our future results.

 

OVERVIEW

 

eXp World Holdings, Inc., formerly known as eXp Realty International Corporation (the “Company” or “eXp”), was incorporated in the State of Delaware in July 2008. The Company operates a cloud-based real estate company division (“eXp Realty”) currently in 41 States, the District of Columbia, and in Alberta, Canada. As of September 30, 2016, the Company also operated a residential mortgage loan origination company which operates in California, Arizona, New Mexico, Virginia and Texas. As a cloud-based company, eXp has embraced and adopted a number of cloud-based technologies in order to grow an international real estate brokerage without the burden of physical bricks and mortar or redundant staffing costs.

 

Continued Accelerated Growth – During the three-month period ending September 30, the Company expanded U.S. geographic reach to 41 states, including the additions of Alaska, New Jersey, and Utah. The Company increased its net real estate brokerage agent and broker base as of September 30, 2016 by 151%, from 721 to 1,816 agents as compared to September 30, 2015; and increased its net sales by 120% from $16.45 million to $36.18 million for the nine months ended September 30, 2016 as compared to September 30, 2015.

 

RECENT BUSINESS DEVELOPMENTS

 

On April 6, 2016, the company announced that it had entered into an agreement with Virbela, LLC (“VirBELA”), one of the leading developers of 3-D, avatar-based, immersive online worlds, the same type of environments that the Company has utilized since its inception in building its real estate brokerage. On August 26, 2016, the Company launched its new VirBELA-powered Cloud Campus and migrated all of its real estate agents, brokers and staff into the new environment to facilitate and accommodate engagement by and among the Company’s fast growing base of real estate professionals. With this new Cloud Campus, the Company will be able to support a larger number of individuals on campus than the previous campus which the company licensed from Avaya.

 

Significant Director Additions - On July 26, 2016, the Company introduced Rick Miller and Randall Miles as new independent members of its Board of Directors.

 

Rick Miller has held senior leadership positions in companies ranging from a Fortune 10 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 confidant 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. 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 $21B 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 Chiefs, 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 has earned a Bachelor of Arts degree in Management from Bentley University and a Master's degree in Business Administration from Columbia University.

 

 

 

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Randall Miles has held senior leadership positions in global financial services, financial technology and investment banking companies for more than 25 years. 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 including as 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 is currently Managing Partner at SCM Capital Group, a global strategic and financial advisory firm and Senior Managing Director at Tigress Financial Partners, a full service institutional broker dealer where is he is head of Investment Banking. Most recently, Mr. Miles 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 Company believes that the additions of Mr. Miller and Mr. Miles to its Board of Directors will provide the Company with experienced counsel as it continues to grow and expand operationally and as it matures within the public markets. In addition, the Company believes that Mr. Miller and Mr. Miles will provide greater independence and oversight while being actively engaged in the Company’s progression.

 

On July 29, 2016, the Company announced that Russ Cofano had joined the Company as Chief Strategy Officer and General Counsel. Mr. Cofano brings more than twenty-five-years of real estate industry experience to the Company. Mr. Cofano most recently served as Senior Vice President of industry relations for MOVE, Inc. operator of REALTOR.com® developing strategy and building relationships with the real estate industry's leading organizations, MLSs and technology companies. Mr. Cofano has also served as Chief Executive Officer for the Missouri REALTORS®, the largest trade association in the state of Missouri, and as Vice President and General Counsel for John L. Scott Real Estate, consistently ranked as one of the largest real estate brokerage companies in the nation. He has also served as an advisor to a number of REALTOR® associations and MLSs and as CEO of a real estate CRM technology company. The Company believes that the addition of Mr. Cofano will help the Company manage the rapid rate of growth within its real estate division, and develop and pursue new strategic initiatives across each of its operating divisions while identifying and mitigating risk. On September 23, 2016, Mr. Cofano was promoted to President and General Counsel and is now responsible for all day to day operations of the Company and its subsidiaries.

 

The Company and its subsidiaries are also planning to hire key employees in mid-level management over the next year to facilitate expanding operational growth and to help evaluate potential new business lines in strategic areas at the operational level.

 

Corporate Governance - The Company’s efforts to enhance corporate governance as the Company expands and matures include the significant addition of independent directors Miller and Miles. The Company believes the following developments represent steps to address some of the material weaknesses in the Company’s internal control over financial reporting:

 

The Company now has three independent directors, representing half of the current Board seats.

 

On July 26, 2016, the Board of Directors established an Audit Committee, comprised of independent directors Miller and Miles.

 

The Board determined that Mr. Miles qualifies as an “audit committee financial expert” within the meaning of the rules and regulations promulgated by the SEC.

 

In October 2016, the Board of Directors established a Governance Committee; comprised of directors Miller, Sanford, and Miles.

 

Agent Ownership - In 2016 the Company extended equity incentive programs whereby agents and brokers could become eligible for awards of the Company’s common stock through the achievement of production and agent attraction benchmarks. Agents who qualify, and who remain with the Company in good standing for the duration of a 3-year period following their eligibility notice, can be awarded shares, thereby allowing them to increase their ownership stake in the Company, in further fulfillment of the objective to be an agent-owned brokerage. Towards the end of 2015 the Company set forth and announced what it anticipates will constitute the performance-based incentive programs for the foreseeable future and beyond any particular calendar year. Going forward, the number of shares awarded for performance-based achievements will correspond with the number of agents who are in the organization and, as a result, with the growth and value of our agent-owned company and its underlying stock. The Company, in this way, is maintaining value of awards for those agents who join us in the future, while recognizing the accomplishments and contributions of those who are with us today, minimizing dilution. In 2016, the Company is also continuing a program whereby agents and brokers can elect to receive 5% of their commission payable in the form of restricted Company common stock.

 

 

 

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Enterprise Application - To date, the Company has evolved through substantial dependence on independent third-party software and applications which, when taken together, constitute a patchwork that has sustained and supported the Company’s growth but which could become unwieldy prospectively, both for the Company and for its agents and brokers. As the Company continues to introduce and execute on a number of initiatives aimed at accelerating expansion, it has commenced development of an enterprise application in order to move away from the integrations of external systems. The Company continues to work on the development of the enterprise application which the Company hopes will enable it to scale the growth of its real estate brokerage operations without experiencing limitations on functionality.

 

Building Corporate Infrastructure - To address the rapid growth in agent count, the Company is exerting considerable effort to build scalable systems and processes to support this growth. Some of these include:

 

·We hired a controller to manage the accounting department
·Migrated to a new accounting system and supporting service providers
·Retained an outside HR consultant to enhance the HR process and well-position the Company to handle new employee growth
·Retained new outside law firms to handle real estate brokerage compliance, litigation and IP-related matters
·Retained a new insurance brokerage firm to assess potential gaps in insurance coverage and make application for renewal policies

 

MARKET CONDITIONS AND TRENDS

 

The United States housing market was adversely impacted beginning in 2006 by the combination of a number of factors, including but not limited to more stringent lending guidelines, increased unemployment, and an overall macroeconomic decline. Overall U.S. sales volume declined as did the market value of homes which in turn created a swell in foreclosures and mortgage defaults. It was this combination of factors which, in part, served as the impetus for the Company’s business model as traditional real estate brokerages on a large scale experienced a diminishment of revenues without, in many cases, a corresponding reduction in fixed expenses, resulting in an erosion of profits. While markets throughout much of the United States have recovered, recent commentary by the Chief Economist for the National Association of REALTORS® suggests that the recovery may have reached its apex. The Company still estimates that a significant number of real estate brokerages today are not profitable or are marginally profitable due to the impact of high or fixed overhead and a costly struggle to drive higher productivity among their agents. In the event that market activity slows, many traditional real estate brokerage owners will again be pressured by an operating cost structure that isn’t responsive to cyclical turns in the market with overhead costs that hold steady or continue to climb.

 

Market activity and home values are susceptible to macroeconomic conditions, including, among others, monetary policy decisions by the Federal Reserve Bank relative to interest rates; employment growth or decline; population trends; and, the re-entry into the market of former homeowners who suffered delinquencies, foreclosures, short-sales, or bankruptcies during the downturn. These factors, coupled with uncertain Federal Reserve policy, suggests that the real estate industry could continue to see growth in sales during the upcoming fiscal year but at the same time could experience a decline. In either turn, the Company 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.

 

Technology continues to disrupt traditional business models in many different ways. eXp Realty as a residential real estate brokerage generally speaking only maintains the physical footprint of a brokerage that is required by the states we operate in rather than trying to have an office on every corner. With the continual improvement of high speed internet availability, we tend to see the office be more and more mobile for all agents and brokers. We believe that in some cases the physical office actually detracts from collaboration rather than encourages it. We plan on continuing to pursue these efforts through the use of the Cloud Campus and other mobile collaboration platforms. We believe this is beneficial for agents, brokers, and consumers and is a far easier business model to facilitate and grow than one requiring management of the hundreds or thousands of physical offices that would be necessary in a traditional approach in order to cover the geographic footprint that eXp World Holdings currently covers. The eXp Cloud Office has enabled would be real estate brokers who join the Company to shed enormous overhead expenses and staffing costs while still retaining a percentage of commissions generated by the agents they attract while availing themselves of an opportunity to scale their business in a way that traditional models do not easily support.

 

 

 

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Potential challenges for eXp Realty and other brokerages come our way through the large third party syndicators. The relevancy of a brokerage in the face of a significant percentage of lead generation for the agents who work for the firm being generated through third party portals does raise the question of relevancy to the agents that work for the brand. We see this as a real threat to us as a real estate brokerage and we are proactively developing low cost lead generation platforms that our agents can take advantage of which provide significant cost savings vs going through third party syndicators.

 

As a small brokerage covering a large geographic area, it is relatively easy for eXp Realty to generate leads at a lower cost than the portals however as we grow this may become harder and harder to do. In the first quarter of 2015 we launched the Making It Rain program for our agents and brokers to take advantage of. Agents participating in this program have seen leads generated by participants in a range between $7.00 - $40.00 per lead. Leads may become more expensive over time and in some cases may exceed the cost of leads from other third party syndicators so we need to be aware of this and continually innovate on behalf of our agents and brokers again with the goal of being relevant in their business. If agents believe that their business is generated from third party syndicators then it may follow that agents may pursue the lowest expense brokerage in order to maximize their income.

 

One of the ways that we believe we have been able to grow into as many states and remain relevant is by adopting an agile mindset as a company. In this context eXp Realty continues to regularly deliver value to its agents and brokers, and by prioritizing work based on what our agents and brokers have told us they want, we have been able to develop a company framework that is relevant to our agents and brokers. We have started to implement the Net Promoter Score (“NPS”) into how we evaluate ourselves as a company, as well as introducing NPS into how we support our agents and manage transaction flow. By using both NPS and more agile management style, systems we have been able to launch and implement value added features and benefits in short order. We believe this offers us a unique advantage in terms of developing value for our agents and brokers. We believe that using tools like NPS and having an Agile management mindset provides us with a way to stay more relevant to our agents and brokers in an always changing business. We expect that more and more brokerages will eventually use tools similar to NPS and Agile in their management process which may again reduce the speed at which we are able to add value compared to other brokerages however at this point in time we feel this does give us a competitive advantage in growing eXp Realty.

 

COMPARATIVE FINANCIAL INFORMATION FROM OUR RESULTS OF OPERATIONS

 

Three months ended September 30, 2016, compared to the three months ended September 30, 2015

 

Revenues

 

During the current three-month period ended September 30, 2016 net revenues increased $8.34 million to $15.76 million as compared to the three-month period ended September 30, 2015 when we generated $7.42 million. The increase as compared to the prior period is a direct result of the increases in sales agent base by over 150% to over 1,800 in 41 states and Canada, resulting in higher sales volume realized.

 

Operating Expenses

 

   Three months Ended     
   September 30,     
   2016   2015   Change 
             
Operating expenses:               
Cost of revenues  $13,294,452   $6,354,951   $6,939,501 
General and administrative   16,810,567    (661,707)   17,472,274 
Professional fees   140,804    138,001    2,803 
Sales and marketing   158,968    77,011    81,957 
Total operating expenses  $30,404,791   $5,908,256   $24,496,535 

 

 

 

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Cost of revenues includes costs related to sales agent commissions and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase of $6.94 million in the current three-month period ended September 30, 2016 as compared to the three-month period ended September 30, 2015 was driven by the higher amount of net revenues and agent commission rates.

 

General and administrative includes costs related to wages, stock compensation, dues, operating leases, utilities, travel, and other general overhead expenses. The increase of $17.47 million in general and administrative costs in the three-month period ended September 30, 2016 as compared to the three-month period ending September 30, 2015 was driven primarily from an increase of $14.6 million in stock option expense of which approximately $14.1 million was attributable to changes in the intrinsic value and $581 thousand in payroll expense.

 

Professional fees include costs related to legal, accounting, and other consultants. Costs increased $3 thousand during the three-month period ending September 30, 2016 as compared to the three-month period ended September 30, 2015. Professional fees fluctuate on a periodic basis in correlation to non-recurring transactions.

 

Sales and marketing include costs related to lead capture, digital and print media, and trade shows, in addition to other promotional materials. The cost increase of approximately $82 thousand was due to increased cost in lead capture and other internet marketing for the three-month period ending September 30, 2016 as compared to the three-month period ending September 30, 2015.

 

Nine months ended September 30, 2016, compared to the nine months ended September 30, 2015

 

Revenues

 

During the current nine-month period ended September 30, 2016 net revenues increased $19.73 million to $36.18 million as compared to the nine-month period ended September 30, 2015 when we generated $16.45 million. The increase as compared to the prior period is a direct result of the increased sales agent base and higher sales volume realized.

 

Operating Expenses

   Nine months ended     
   September 30,     
   2016   2015   Change 
             
Operating expenses:               
Cost of revenues  $30,868,564   $14,000,222   $16,868,342 
General and administrative   25,801,423    5,457,334    20,344,089 
Professional fees   414,197    313,436    100,761 
Sales and marketing   358,396    166,374    192,022 
Total operating expenses  $57,442,580   $19,937,366   $37,505,214 

 

Cost of revenues includes costs related to sales agent commissions and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase of $16.87 million in the current nine-month period ended September 30, 2016 as compared to the nine-month period ended September 30, 2015 was driven by the higher amount of net revenues and agent commission rates.

 

General and administrative includes costs related to wages, stock compensation, dues, operating leases, utilities, travel, and other general overhead expenses. The increase of $20.34 million in general and administrative costs in the nine-month period ended September 30, 2016 as compared to the nine-month period ending September 30, 2015 was driven primarily from an increase of $21.2 million in stock option expense of which $20.4 million was related to changes in the intrinsic value and $1.2 million in payroll expense.

 

 

 

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Professional fees include costs related to legal, accounting, and other consultants. Costs increased approximately $101 thousand during the nine-month period ending September 30, 2016 as compared to the nine-month period ended September 30, 2015 due to higher accounting fees associated with the preparation of its annual report in addition to legal fees associated with the changes to our Corporate governance during the period.

 

Sales and marketing include costs related to lead capture, digital and print media, trade shows, in addition to other promotional materials. The cost increase of approximately $192 thousand was due to increased cost in lead capture, internet marketing, and printing materials for the nine-month period ending September 30, 2016 as compared to the nine-month period ending September 30, 2015.

 

LIQUIDITY AND CAPITAL RESOURCES

   September 30,   December 31,     
   2016   2015   Change 
             
Current assets  $3,215,709   $1,146,521   $2,069,188 
Current liabilities   (1,544,064)   (664,210)   (879,854)
Net working capital  $1,671,645   $482,311   $1,189,334 

 

The Company’s net working capital increased $1.2 million during the nine-month period ended September 30, 2016 as compared to December 31, 2015. This increase was primarily driven from an increase in accounts receivable as of September 30, 2016 as compared to December 31, 2015. The increased receivables were primarily driven by higher total sales volumes during the period ended September 30, 2016 resulting from our increased sales agent base.

 

The following table presents our cash flows for the nine months ended September 30, 2016 and 2015:

 

   Nine months ended     
   September 30,     
   2016   2015   Change 
             
Cash provided by operating activities  $637,881   $219,073   $418,808 
Cash used in investment activities   (281,203)   (37,821)   (243,382)
Cash used in financing activities       (63,059)   63,059 
Net change in cash  $356,678   $118,193   $238,485 

 

Net cash provided by operating activities for the nine months ended September 30, 2016 was approximately $638 thousand as compared to $219 thousand for the nine months ended September 30, 2015. Our increase in cash provided by operations for the first nine months of 2016 was primarily caused by the increased participation in the Agent Equity Program which some agents have been paid a portion of their commission income in the form of common stock of the Company resulting in reduced cash outflows for the nine months ended September 30, 2016.

 

Net cash used in investing activities for the acquisition of fixed assets was $281 thousand and $38 thousand for the nine months ended September 30, 2016 and September 30, 2015, respectively. The increase in spending on investing activities is associated with the Company’s efforts devoted to creating its enterprise application.

 

The Company did not engage in any material financing transactions as of September 30, 2016. Net cash used in financing activities for the nine months ended September 30, 2015 primarily consisted of $62 thousand used to pay down principal on its notes payable.

 

Our future capital requirements will depend on many factors, including our level of investment in technology and our rate of growth into new markets. Our capital requirements may be affected by factors which we cannot control such as the residential real estate market, interest rates, and other monetary and fiscal policy changes in which we currently operate. We may have a greater need to fund our business by using our cash and cash equivalents, which could not continue indefinitely without raising additional capital. We believe that we currently have sufficient liquidity and capital resources to meet our existing obligations over the next twelve months.

 

 

 

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The Company anticipates that it may desire to raise some financing to help expand operations during the next twelve months through debt and/ or equity instruments, depending on the availability of such financing on terms acceptable to the Company.

 

We currently have no bank debt or line of credit facilities. 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, our business and results of operations will likely suffer.

 

CRITICAL ACCOUNTING ESTIMATES

 

There has been no change in our critical accounting estimates as previously disclosed in our Annual Report on Form 10-K for the period ended December 31, 2015.

 

Non-GAAP Measurements

 

Prior to becoming a public company in 2013, we issued approximately 7.7 million stock options convertible into restricted shares of our common stock at a weighted average exercise price of $0.14 per share. As a private Company, we recognized the related compensation cost associated with these grants under the intrinsic value method in accordance with US GAAP. As required by US GAAP for private companies, and in accordance with the intrinsic value method, we are required to re-measure the intrinsic value at each reporting date through the date of exercise or other settlement, while recognizing the applicable changes in the intrinsic value as a component of operations in the accompanying consolidated statements of operations. Subsequent to becoming a public, and until such time as the options previously issued under the intrinsic value are exercised, canceled, forfeited or modified, we are required to continue to apply the intrinsic value.

 

Upon becoming a public company, we value stock options at their grant date fair value, and recognize the associated compensation cost systematically over the requisite service or performance period, with no consideration given to market changes in the underlying equity instruments or other assumptions used for valuation purposes on the grant date. If we had the ability to reasonably estimate the fair value of options issued at our inception as a private company, all associated expenses would have been recognized in periods prior to those presented in this report.

 

The Securities and Exchange Commission (“SEC”) has adopted rules to regulate the use in filings with the SEC and in public disclosures of financial measures that are not in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), such as EBITDA, omission of non-recurring or infrequent items, and other omissions of non-cash items whether recurring or non-recurring. These measures are derived on the basis of methodologies other than in accordance with U.S. GAAP.

 

We believe that the omission of non-cash income or expense based on fluctuations in the Company’s stock price, significantly outside of its control, is more reflective of the key factors that affect our operating performance. Since the equity-linked instruments were issued early in our existence, and there being no further performance requirements associated with earning the awards, we believe that omitting these fluctuations provide a useful supplemental measure in evaluating the performance of our operations and provides better transparency into our results of operations. Our management does not evaluate the Company’s performance, either financial or operational, inclusive of fluctuations in the intrinsic value of the awards issued prior becoming a public company.

 

Eliminating non-cash fluctuations for awards fully earned in prior periods, has limitations as an analytical tool, and you should not consider these omissions either in isolation or as a substitute for analyzing our results as reported under U.S. GAAP. Some of these limitations are:

 

  · this measure does not reflect changes in, or cash requirements for, our working capital needs;
  · this measure does not reflect the further issuance of equity and equity-linked instruments based on grant date fair values with continuing performance and service requirements;
  · this measure does not reflect historical cash expenditures or future requirements for expenditures or contractual commitments.

 

The following table represents the impacts of the intrinsic value variances on our results of operations for the periods presented:

 

   Three Months Ended Sept 30, 2016   Three Months Ended Sept 30, 2015   Nine Months Ended Sept 30, 2016   Nine Months Ended Sept 30, 2015 
Net income (loss) attributable to common shareholders   (14,647,098)   1,517,108    (21,272,872)   (3,497,863)
Increase (decrease) in intrinsic value   14,088,341    (1,527,334)   20,456,078    2,478,942 
Adjusted net income (loss) attributable to common shareholders   (558,757)   (10,226)   (816,794)   (1,018,921)

 

OFF-BALANCE SHEET ARRANGEMENTS

 

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our stockholders.

 

 

 

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

Item 4. CONTROLS AND PROCEDURES

 

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 (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 we carried out an evaluation of the effectiveness of our disclosure controls and procedures with the participation of our Chief Executive Officer and Chief Financial Officer. In making this assessment, management used the criteria for effective internal control over financial reporting described in the “Internal Control-Integrated Framework” (2013) set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer 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.

 

The determination that our disclosure controls and procedures were not effective was based on the following material weaknesses in our internal control over financial reporting, which were identified in our Annual Report on Form 10-K for the year ended December 31, 2015:

 

  · Insufficient corporate governance policies. Not all of our corporate processes are formally documented. Decisions made by the board and carried out by management may not be consistently applied or completed timely thereby increasing the likelihood of potential misunderstandings or incorrect implementation regarding key decisions affecting our operations and management.
  · Lack of segregation of accounting duties. We currently do not have a sufficient number of employees to segregate our accounting and recording functions.
  · Our lack of independent directors exercising an oversight role increases the risk of management override and potential fraud.
  · We do not have an independent audit committee with a defined financial expert to provide the appropriate level of monitoring of our financial reporting process.

 

In light of these material weaknesses, we performed additional analysis and procedures in order to conclude that our financial statements included in this report were fairly stated in accordance with accounting principles generally accepted in the United States. Accordingly, we believe that despite our material weaknesses, our financial statements included in this report are fairly stated, in all material respects, in accordance with United States generally accepted accounting principles.

 

CHANGES IN INTERNAL CONTROL

 

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the period ended September 30, 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

During the nine months ended September 30, 2016, our Board of Directors was expanded to six members and two new independent directors, Rick Miller and Randall Miles joined the Board. We believe the following developments represent steps to address some of the material weaknesses in our internal control over financial reporting, which were identified in our Annual Report on Form 10-K for the year ended December 31, 2015:

 

·The Company now has three independent directors, representing half of the current Board seats.
·On July 26, 2016, the Board of Directors established the following an Audit Committees, comprised solely of independent directors of Messrs. Miller and Miles.
·The Board determined that Messr. Miles qualifies as an “audit committee financial expert” within the meaning of the rules and regulations promulgated by the SEC.

 

 

 

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PART II – OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

From time to time, we are involved in lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. There are no matters pending or threatened that we expect to have a material adverse impact on our business, results of operations, financial condition or cash flows.

 

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the nine months ended September 30, 2016 the Company did not issue any restricted common stock for cash proceeds.

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

Item 5. OTHER INFORMATION

 

Not applicable.

 

 

 

 

 

 

 

 

 

 

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Item 6. 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   Certificate of Amendment of Certificate of Incorporation (incorporated by reference from our Form 10-Q, filed on May 13, 2016)
     
3.4   Bylaws (incorporated by reference from our Registration Statement on Form S-1, filed on July 7, 2010)
     
10.1   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)
     
10.2   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)
     
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 and 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

 

 

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

  eXp World Holdings, Inc.
  (Registrant)
   
Date: November 14, 2016 /s/ Alan Goldman
  Alan Goldman
  Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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