2. Summary of Significant Accounting Principles

12 Months Ended

Dec. 31, 2017

Accounting Policies [Abstract]

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.

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

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.

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.

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.