EXP World Holdings, Inc. - Quarter Report: 2015 June (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 June 30, 2015

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 REALTY INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

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

N/A

(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.

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 August 11, 2015 the registrant’s outstanding common stock consisted of 49,624,196 shares.

TABLE OF CONTENTS

Statement Regarding Forward-Looking Statements

Certain statements contained in this report on Form 10-Q contains certain 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, 2014, 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; 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.

PART I – FINANCIAL INFORMATION

Item 1.     FINANCIAL STATEMENTS

eXp Realty International Corporation

(unaudited)

June 30, 2015

EXP REALTY INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

EXP REALTY INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

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

EXP REALTY INTERNATIONAL CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

eXp Realty International Corporation

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Expressed in U.S. dollars)

eXp Realty International Corporation formerly known as Desert Canadians, Ltd. (the “Company” or “eXp”) was incorporated in the State of Delaware on July 30, 2008.

The Company is a cloud-based real estate brokerage operating in 30 States and in both Alberta and Ontario, Canada. As a cloud-based real estate brokerage for the residential real estate market, eXp 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 six month period ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

Basis of Presentation and Fiscal Year

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States, and are expressed in US dollars. All material intercompany accounts and transactions have been eliminated upon consolidation.

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.

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, to the date of these financial statements, entered into derivative instruments to offset the impact of foreign currency fluctuations.

Other Comprehensive Loss

Other comprehensive loss for the six months ended June 30, 2015 and June 30, 2014 consisted of foreign exchange translation in the amount of $14,462 and $58, respectively.

Recently Issued Accounting Pronouncements

There have been no recently issued accounting pronouncements through the date of this report that the Company believes will have a material impact on the financial position, results of operations, or cash flows.

The Company had advances outstanding to the current President in the amount of $3,523 and $6,000 as of June 30, 2015 and December 31, 2014 respectively.

In February of 2015 we re-purchased and retired 12,530 shares of our common stock for $3,132 in cash.

During the six months ended June 30, 2015, the Company issued 1,069,817 restricted shares of common stock to directors, employees, and contractors for services totaling $772,115.

At June 30, 2015 the Company had 7,211,479 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 six months ended June 30, 2015 the Company’s stock options had intrinsic values between $0.03 and $0.81 and the Company recognized a stock option expense of $4.21 million, which consists of a $4.08 million change in intrinsic value and $123 thousand in current vesting costs. For the six months ended June 30, 2014 the Company’s stock options had intrinsic values between $0.03 and $0.17 and recognized an expense of $28 thousand.

During the six months ended June 30, 2015 the Company granted 217,750 stock options and has elected to account for fair value using the Black-Scholes option-pricing model. Expected volatility has been determined using the historical stock price. The expected term of options represents the period of time that options granted are expected to be outstanding giving consideration to vesting schedule. The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected term of the stock options. The Company has not paid and does not anticipate paying dividends on its common stock; therefore, the expected dividend yield is assumed to be zero. The Company recognized a stock option expense of $6,317 for the six months ended June 30, 2015.

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.

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 and results of operations as of June 30, 2015, and for the six month period ended June 30, 2015, as well as our future results.

OVERVIEW

eXp Realty International Corporation, formerly known as Desert Canadians, Ltd. (the “Company” or “eXp”), was incorporated in the State of Delaware on July 30, 2008. The Company is a cloud-based real estate brokerage operating in 30 States and in Alberta and Ontario, Canada. As a cloud-based real estate brokerage for the residential real estate market, eXp 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.

RECENT BUSINESS DEVELOPMENTS

The Company has continued its geographic expansion into new US States (and into sub-markets within those states). The Company added approximately 254 new agents during the six months ended June 30, 2015.

The net loss for the six month period ended June 30, 2015 arose primarily due to the change in intrinsic value of 7,211,479 outstanding stock options that were granted prior to Company becoming public in September 2013. The compensation cost of these stock options are measured by the change in intrinsic value on each reporting date. The fair value of the Company’s stock price at June 30, 2015 gave rise to the increase in the intrinsic value of these stock options resulting in a non-cash expense of $4.03 million that is classified as a part of general and administrative expense ($4.03 million out of $5.6 million in overall general and administrative expense) impacting the Company’s statement of operations. We do not believe the additional expense or benefit that has been or will be recognized in future periods from these instruments accurately portrays our results of our operations. Furthermore, until these instruments are either exercised or modified the change in intrinsic value will continue to add variability to our results of operations. We as a management team are cognizant of this variability and its impact on our financials, but do not currently include these changes when we are assessing our current performance or in our forward looking business plan.

In the second quarter of 2015 the Company introduced its Direct Purchase Program pursuant to which the Company’s agents and brokers can elect to be compensated in the form of eXp stock at an amount equal to 5% of their gross commission on transactions towards the purchase of Company stock. In furtherance of the Company’s commitment to agent ownership, the initiative provides the opportunity for the Company’s agents and brokers to invest on their own behalf and for their own benefit what they might otherwise pay in the form of a franchise fee at competing brokerages within the industry. In the short period since its introduction, and with relatively minimal promotion, nearly 30% of the Company’s agent and broker base has enrolled in the program, increasing the ownership interest of participants, augmenting the long-term shareholder base of the Company, and also creating a self-funding mechanism with which the Company can invest in initiatives and infrastructure aimed at stimulating continued growth. The Direct Purchase Program operates under the Company’s 2015 Equity Incentive Plan, which was approved by the Company’s stockholders on March 12, 2015.

On April 23, 2015, at its first ever meeting of agent-owners and shareholders, the Company announced that Gene Frederick had joined the Company. Mr. Frederick previously was the top recruiter of real estate professionals in 4 out of the last 10 years (2005, 2006 and 2012, 2013) at Keller Williams Realty, the brokerage with which he had been affiliated since 1994 and the largest real estate brokerage in the United States measured by agent count. Since the announcement, Mr. Frederick has attracted a group of nearly 50 high-performing professionals in the Austin, Texas area, as well as other leaders with a demonstrated history of recruiting productive agents in markets outside of Austin.

The Company’s growth in 2014 and during the six months ended June 30, 2015 generated significant attention from members of the industry media, most notably in feature pieces published by REALTOR^Ⓡ Magazine and Inman News illuminating our growth and performance as well as the opening of our new, campus style, cloud office environment. The new campus, in addition to providing additional room for meetings, training and professional development sessions, agent services, and an investor kiosk, provides a much more open and hospitable space for agents and brokers to meet, collaborate and socialize. The new environment also provides a home for our RE Tech Campus initiative which was formally introduced on March 26, 2015. Since opening, RE Tech Campus has provided a forum for presenters, educators, and vendors to present and share with the industry professionals irrespective of their brokerage affiliation as well as the Company’s own agent and broker base.

The Company’s Making it Rain lead generation program was launched in early 2015 for the benefit of the Company’s agents and brokers in response to the high cost of lead subscription programs marketed and sold by popular third-party data aggregators and syndicators such as Zillow, Trulia and REALTOR.com. The program continues to utilize a number of strategies as well as the Company’s own aggregated data as a result of its memberships in a large and growing number of multiple listing services across the United States and Canada to generate leads at up to a 75% discount to what agents across the industry are paying for leads through syndicator subscriptions. The Company anticipates continuing to develop and expand the Making it Rain program, providing a direct benefit to the Company’s agents and brokers as well as an additional revenue source to the Company.

On July 23, 2015 the Company announced its intention to form a majority-owned mortgage brokerage company that would leverage technologies to redefine the career and income opportunities available to reputable, credible, service-oriented and compliance-minded mortgage professionals while providing premium loan products and outstanding service to borrowers in a manner that is fully transparent and informative. The Company expects to obtain licensure initially in markets where it has grown its real estate brokerage operations most effectively, brokering mortgage and loan offerings available from various wholesale lenders.

The Company continues to offer and administer a program whereby agents and brokers 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, will be awarded shares, thereby allowing them to increase their ownership stake in the organization, in further fulfillment of the Company’s objective to be an agent-owned brokerage. The board of directors will likely reduce the number of shares issued for these activities and modify vesting requirements so as not to overly dilute the value of the overall company by these awards.

In 2015 the Company began to adopt the Net Promoter System methodology, asking each of its agents and brokers how likely they are to recommend their experience with the Company to another professional within the industry. The Company has conducted three Net Promoter System surveys since the beginning of the calendar year and the results consistently have been in the favorable range of 76-81. Moreover, the survey yields additional substantive feedback from our agents and brokers who are the Company’s primary customer on ways in which we can augment and improve the agent experience. Encouraged as we are by NPS results to date, we believe that if we continually strive towards providing the optimum experience for our agents and brokers, and if we take action in response to feedback and suggestions elicited in the surveys where we can, we can achieve continued growth rates and rates of retention that surpass industry standards.

The Company continues to introduce and execute on a number of initiatives aimed at accelerating expansion and looks to fully integrate a number of systems that will support scalable growth. In the second quarter of 2015, the Company agreed to adopt a new agent-facing transaction management platform that will provide a friendlier and more intuitive user interface, and which will provide additional tools and features that will significantly improve the agent’s experience in storing and accessing transaction documents and transaction-related correspondence in a centralized location. The decision to move to a new transaction management platform was driven in large part by the feedback received from our agents and brokers as part of the Net Promoter System surveys.

In 2015, and in response to our accelerated rate of growth the Company continues to increase staffing levels in the areas of Agent Services, Technology Support and Transaction Support, continuing to leverage technology to avoid redundancies in cost while delivering an interpersonal and engaging experience for our agents and brokers in support of their business objectives. The Company also continues to provide dedicated support staff for its agents and brokers, which has helped to streamline and improve an introduction to new agents, maintain agent access, adoption, engagement, participation, education and socialization. This has allowed the Company to continue to build an increasingly robust culture of collaboration across borders, personal interaction among agents and staff; and continued entry into new markets at relatively minimal cost.

MARKET CONDITIONS AND TRENDS

Residential Real Estate Market. 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, 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.

Continued upward trends in market activity and continued acceleration of home values is susceptible to macroeconomic conditions, including signals by the Federal Reserve Bank that it intends to raise interest rates which increases could take effect in 2015 and which could impact the ability of new home buyers seeking purchase money mortgages as well as existing borrowers with adjustable mortgage rates. In the event that market activity slows, many traditional 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.

Technology and Opportunities. Technology continues to disrupt traditional business models in many different ways. Recently there has been a viral post in social media talking about the largest media company by market cap being Facebook and yet it generates none of its own content. Instead, it is supplied by its members. Uber now has one of the largest market caps for a transportation company and yet it does not own any of the underlying assets, the automobiles. Those are owned by its drivers. Alibaba which went public last year as one of the all time largest IPO’s is an ecommerce company in China that doesn’t manage or own physical inventory. Everyone is familiar with Amazon which has its roots in books and which has no physical footprint bookstore. 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 everywhere we tend to see the office be more and more mobile for all agents and brokers in all areas of the business and 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-office and other mobile collaboration platforms. We believe this is great for the agents, brokers, and consumers who understand it but more importantly it is a much easier business model to facilitate and grow than trying to grow and manage the hundreds of physical offices that would be necessary to cover the geographic footprint that eXp Realty currently covers.

The eXp Realty Cloud Office has enabled would be brokerage owners who join the Company to shed enormous overhead expenses and staffing costs while still retaining a percentage of commissions generated by the agents they bring with them or attract and while availing themselves of an opportunity to scale their business in a way that traditional models do not easily support.

Market conditions prospectively are susceptible to impact from, among other factors, employment growth or decline, population trends, the re-entry into the market of former homeowners who suffered delinquencies, foreclosures, short-sales, or bankruptcies during the downturn. 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.

We believe that the opportunities in the real estate business are what might be considered the industry’s Sacred Cows, or those things that the majority of agents and brokers believe to be the way it will always be but which will be challenged by up and coming companies. We are challenging the notion of there needing to be a physical office in order to run a growing and thriving real estate brokerage model. There are many broker owners that believe this is necessary and will challenge eXp Realty for pursuing this path and may suggest that it is bad for the agent and the consumer in order to defend what has been the model for so many years. There are millions of dollars being poured into start-ups all over the United States aimed at disrupting the cooperative commission model that we rely on as a brokerage in order to continue to be profitable. If someone figures out a way to credibly crack the commission model this may adversely impact eXp Realty as well as many other more traditional real estate brokerages. We are not focusing our energy there as a brokerage however we do look to see what is happening in the industry in order to stay ahead and relevant to our agents and brokers who are our effective customers and partners.

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 very real threat to us as a 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. Over 10% of our agent base signed up and since then we have seen leads generated by participants in a range between $7.00 - $40.00 / 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.

Developments in Education. Over the last number of years, again propelled by technology, numerous firms whether brokerage, vendor or even those outside of the real estate brokerage business have used education as a major attractor in order to develop a following and/or customers. ActiveRain was one of the first companies to push into education with ActiveRain University. They were later acquired by Market Leader which was eventually purchased by Trulia and most recently acquired by Zillow. Zillow had their own educational outreach initiatives called Zillow Academy. Both of these initiatives were facilitated by eXp Realty’s own Brad Andersohn when he was with the respective companies, first at ActiveRain and then eventually at Zillow prior to all of the consolidation of the above companies. Chris Smith and Jimmy Mackin provide free classes and training in support of their company Curaytor. Numerous real estate coaches provide training and classes in facilitation of selling coaching services. Brian Buffini, the largest real estate coaching business in the world, does livestream events where brokerages and others can sponsor these events to provide education to real estate professionals for free while facilitating a flow of coaching clients to the Buffini organization. Education is a differentiator however the space is getting crowded. Even outside of the real estate space, free education is part of the larger MOOC movement or Massive Open Online Course movement where major Universities and Educational Institutions are taking some of their most popular classes and putting them online so that individuals can take the classes and in some cases get degrees at a very low cost if not free from certain institutions. Technology has allowed for this disrupting of education such that education is less valuable as a differentiator and yet not offering education is definitely a detractor of a brokerage business model.

Agile Management Systems. One of the ways that we believe that we have been able to grow into as many states and again in our opinion remain relevant is by adopting an agile mindset as a company. By running eXp Realty by regularly delivering value to our 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 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. Recently our CEO during the Indy Track at Inman asked the group of Indy brokers during a Q&A, as a follow up on what did they measure, where the typical answers were profit and agent count, if any of them used NPS with their agents. None of the broker owners used or understood the metric. We feel 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 June 30, 2015

Revenues

During the current three month period ended June 30, 2015 net revenues increased $2.03 million to $5.58 million as compared to the prior three month period ended June 30, 2014 when we generated $3.55 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

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 $1.79 million in the current three month period ended June 30, 2015 as compared to the prior three month period ended June 30, 2014 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 in general and administrative costs in the three month period ended June 30, 2015 as compared to the three month period ending June 30, 2014 was driven primarily from a change of $4.23 million in intrinsic value and $123 thousand in current vesting costs of the outstanding stock options in addition to $637 thousand in stock compensation expense.

Professional fees include costs related to legal, accounting, and other consultants. Costs increased $48 thousand during the three month period ending June 30, 2015 as compared to the three month period ended June 30, 2014 due to higher legal and accounting fees of $17 and consulting fees of $31 thousand.

Sales and marketing include costs related to lead capture, digital and print media, trade shows, in addition to other promotional materials. The Company spent approximately $18 thousand more in lead capture and $9 thousand more primarily due to more internet marketing and promotional material created in the three month period ending June 30, 2015 as compared to the three month period ending June 30, 2014.

Six months ended June 30, 2015

Revenues

During the current six month period ended June 30, 2015 net revenues increased $3.10 million to $9.03 million as compared to the prior six month period ended June 30, 2014 when we generated $5.93 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

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 $2.65 million in the current six month period ended June 30, 2015 as compared to the prior six month period ended June 30, 2014 was driven by the higher volume 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 in general and administrative costs of $5.26 million in the six month period ended June 30, 2015 as compared to the six month period ending June 30, 2014 was driven primarily from a change of $4.03 million in intrinsic value and $123 thousand in current vesting costs of the outstanding stock options in addition to $712 thousand in stock compensation expense.

Professional fees include costs related to legal, accounting, and other consultants. Costs increased $46 thousand during the six month period ending June 30, 2015 as compared to the six month period ended June 30, 2014 due to higher legal and consulting fees of $53 thousand offset by lower accounting fees of $7 thousand.

Sales and marketing include costs related to lead capture, digital and print media, trade shows, in addition to other promotional materials. The Company spent approximately $29 thousand more in lead capture and $30 thousand more primarily due to more internet marketing and promotional material created in the six month period ending June 30, 2015 as compared to the six month period ending June 30, 2014.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s net working capital decreased $70 thousand during the six month period ending June 30, 2015 as compared to December 31, 2014. The decrease is primarily attributable to a decrease in cash and cash equivalents.

The following table presents our cash flows for the six months ended June 30, 2015 and 2014:

Net cash provided by operating activities for the six months ended June 30, 2015 was approximately $2 thousand as compared to $79 thousand for the six months ended June 30, 2014. Our cash provided by operations for the first six months of 2015 was primarily caused by increases in accrued expenses of $157 thousand and accounts payable of $15 thousand offset by increases in accounts receivable of $101 thousand and prepaid expenses of $55 thousand respectively.

Net cash used in investing activities for the acquisition of fixed assets was $34,974 and $33,000 for the six months ended June 30, 2015 and June 30, 2014 respectively.

Net cash used by financing activities for the six months ended June 30, 2015 of $18,132 was for the principal payment on notes payable of $15,000 and the repurchase and retirement of common stock in the amount of $3,132. Net cash provided by financing activities for the six months ended June 30, 2014 comprised of $59 thousand of net proceeds from the issuance of restricted common stock.

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.

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

Stock-Based Compensation (Intrinsic Value Method)

As of the date of this report we had 7,211,479 options under our 2013 Incentive Plan outstanding accounted for in accordance with intrinsic value method that were issued prior to becoming a public company. In accordance with US GAAP we are required to remeasure these awards at each reporting date through the date of exercise or other settlement. The changes are recorded as a component of earnings and included in general and administrative expenses. These fluctuations based on, among other factors, our thinly traded market, volatility, and potentially wide bid/asks spreads result in the need for our management to use estimates and judgements related to compensation cost recognition associated with these awards.

Based on our current analysis, a 10% change in fair value as of June 30, 2015 would potentially result in the recognition of approximately $625 thousand in compensation expense (benefit) during a three month period.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

We currently have one short-term debt obligation with a principal balance of approximately $47 thousand accruing interest at 3% and is payable upon demand. The short-term debt was renegotiated and is scheduled to be paid in full by the end of August 2015.

We also have non-cancelable operating lease agreements with various expiration dates through November of 2016.

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.

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, 2014:

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 three months ended June 30, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 six months ended June 30, 2015 the Company did not issue any restricted common stock for cash proceeds.

During the six months ended June 30, 2015 the Company repurchased and retired 12,530 shares of common stock for $3,132 in cash, all of which were repurchased during the first quarter of 2015.

Item 3.     DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.     MINE SAFETY DISCLOSURES

Not applicable.

Item 5.     OTHER INFORMATION

None.

Item 6.     EXHIBITS

SIGNATURES

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