EXP World Holdings, Inc. - Annual Report: 2016 (Form 10-K)

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

FORM 10-K

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

For the fiscal year ended December 31, 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: 000-55300

EXP WORLD HOLDINGS, INC.
(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

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

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

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

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

Yes [   ]    No [X]

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

Yes [   ]    No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]    No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X]    No [   ]

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

Yes [   ]    No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 Act).

Yes [   ]    No [X]

The aggregate market value of the voting and nonvoting common equity held by non-affiliates of eXp World Holdings, Inc. was $21,321,475 based on 12,183,700 shares of common stock held by non-affiliates as of June 30, 2016, being $1.75 per share.

The number of shares of the registrant's $0.00001 par value common stock outstanding as of March 31, 2017 was 52,372,181.

TABLE OF CONTENTS

Statement Regarding Forward-Looking Statements

Certain statements contained in this report on Form 10-K 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 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. Except as otherwise required by law, including the securities law of the United States, we undertake no obligation to publicly update or revise any forward-looking statement.

PART I

Item 1. Business

Corporate Overview

eXp World Holdings, Inc.(“Company” ”we”) is a cloud-based residential real estate brokerage. Our operations are focused on the use of cloud-based technologies in order to grow an international brokerage without the burden of physical bricks and mortar or redundant staffing costs. Our technology focus includes the development of a proprietary cloud based real estate transactional platform.

Description of Business

Operations

We launched our operation in October 2009 with a small number of agents in Washington and Arizona, and have grown to a team of over 3,000 real estate professionals, and operate in most U.S. states and one Canadian province.

We operate over the internet through our website, http://exprealty.com and rely on a cloud-based platform to provide our residential real estate brokerage services. Through our website, buyers can search real-time property listings, and sellers list their properties and gain exposure across the various markets we operate within. We also provide buyers and sellers access to a network of professional, consumer-centric agents and brokers. Additionally, – we deliver marketing, training and other support services to our brokers and agents through a combination of proprietary technology enabled services and technology and support services contracted to third parties. Our brokers and agents leverage our technology, services, data, lead generation and marketing tools to represent residential real estate buyers and sellers to list, find and consummate the purchase or sale of a home.

Internally, we use our technology to provide agents, teams of agents, and brokerage owners with opportunities for increased profitability, reduced risk, and greater levels of professional development while fostering an organizational culture that values collaboration, strength of community, and commitment to serving the consumer’s best interests. We provide agents, teams of agents, and brokerage-owners with the systems, support, professional development and infrastructure to survive and then thrive in unpredictable and, at times, challenging economic conditions. This includes delivering 24/7 access to collaborative tools and training for real estate brokers and agents.

We have adopted a number of cloud-based technologies. Among the technologies we use to operate our business, is our 3D, fully-immersive, cloud office complex which has conference rooms, training centers, individual offices, and in which our management, staff, agents and brokers all work on a daily basis learning from, sharing with, transacting business with, and socializing with their colleagues from different geographic regions by utilizing avatars and USB headsets. In these virtual spaces agents and brokers meet for state-based sales meetings, attend live interactive training and classes, go over commission disbursement authorization forms, build websites and online branding materials, and work on purchase and sales agreements. Moreover, in these virtual spaces new managing brokers are evaluated and approved, our management meets to discuss strategy and vision, and personnel interviews occur. In addition, we have face-to-face meetings, conferences, presentations, retreats and other physical interaction from time to time where circumstance warrant. We also provide physical space to brokers and agents when they need it through a relationship with Regus, which provides access to offices, work space and meeting rooms at Regus locations worldwide.. Furthermore, our cloud office has a fully-staffed transaction and administration office, and a fully-staffed web development, search engine optimization and technical support office. Thus, our cloud office provides agents, teams of agents and brokers with training, education, coaching, mentoring, transaction support, broker support, and technical support. Consequently, our cloud office is our company office for brokers, agents, management and staff, and the cloud office has also eliminated redundant staffing costs. The utilization of this cloud office platform permits us to serve our entire geographic reach.

We also serve real estate agents, which are independent contractors affiliated with our company, teams of agents, and real estate brokers by providing a full suite of back office functions ranging from paperless file sharing and transaction management, web design, social media, digital campaigns, customer relationship management platforms, business coaching, tech support, and live training that places a premium on engagement, discussion and collaboration.

Furthermore, we allow our brokers, some of whom are former real estate brokerage owners, to leverage our infrastructure to reduce their fixed costs and be empowered to build scalable teams of agents in any of the markets that we serve while preserving and enhancing the broker’s personal brand. In this way our brokers can attract agents and build a co-brand in any of markets currently served by the Company without any additional capital requirements.

Fee Structure

Our fee structure resulting directly from the cloud office and its impact on profitability has enabled us to offer our agents and brokers a higher split of the gross commission generated from transactions than most traditional real-estate brokerages. This higher fee split along with our unique delivery of support services and the flexibility it provides for brokers and agents has facilitated our growth over the past several years.

We also differentiate ourselves by not charging our agents and brokers royalties or franchise fees. Because we do not house agents in physical brick and mortar offices our agents and brokers also do not pay desk or office fees that are commonplace among competitors. Our agents pay a small monthly technology fee, a modest tuition fee for eXp University (curriculum of professional development classes and real estate vision and training), a transaction processing fee and a liability insurance fee.

Revenue Sharing Plan

Our cloud office has enabled us to introduce and maintain a gross revenue sharing plan whereby each of our agents and brokers can participate in and from which they can realize significant monthly and annual residual overrides on the gross commission income resulting from transactions consummated by agents and brokers who they have attracted to our company, effectively contributing to our growth.

Our gross revenue sharing plan unties one of the industry’s longstanding compensation challenges by providing a vehicle through which agents and brokers can potentially retire with a vested monthly revenue share plan distribution.

Consistent with our commitment to enabling and empowering agents and brokers in pursuit of building a scalable business and organization, our revenue sharing plan allows brokers and agents a financial mechanism to build teams across borders without incurring any expense, oversight responsibility, or liability.

Our Markets

Our primary market is the United States where we currently operate in most U.S. states and one Canadian Province.

Competition

We compete with local, regional, national and international residential real estate brokerages to attract agents, teams of agents, brokers and consumers. We compete primarily on the basis of our culture, collaboration, utilization of cloud based systems and technologies that reduce costs, provide relevant and substantial professional development opportunities, and provide our agents and brokers with an opportunity to generate more business and participate in the growth of our company. We believe that we are the only national real estate brokerage in the United States presently using a 3D immersive office environment  in place of physical brick and mortar locations and as such, we believe that we are well-positioned in our competitive landscape.

Intellectual Property

“eXp Realty” is one of our registered trademarks in the United States. We have also placed the marks “3D MLS”, “3D Listing Service” and “RE Tech Campus” on the United States Patent and Trademark Office’s Supplemental Register. We also own the rights to the domain name http://exprealty.com.

We license software and other proprietary technology upon which we depend to provide our 3D immersive cloud office environment from a third party vendor and the Company holds exclusivity to this technology within the real estate industry. While we currently depend on our relationship with this vendor to provide our cloud office environment in the short term, we believe other alternatives are available in the longer term, should they be needed, to license or develop technology for our cloud office environment.

While we haven’t yet had to, we intend to aggressively assert our rights under trade secret, unfair competition, trademark and copyright laws to protect our intellectual property, including product design, product research and concepts and recognized trademarks. These rights are protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing these rights.

While there can be no assurance that registered trademarks will protect our proprietary information, we intend to assert our intellectual property rights against any infringer. Although any assertion of our rights could result in a substantial cost to, and diversion of effort by, management believes that the protection and defense against infringement of our intellectual property rights are essential to our business.

Seasonality of Business

Seasons and weather, while seemingly predictable, traditionally impact the real estate industry. Continuous poor weather or natural disasters negatively impact listings and sales. Spring and summer seasons historically reflect greater sales periods in comparison to fall and winter seasons. Seasonal or weather related lower revenue also reduces our operating income, net income, operating margins and cash flow.

Real estate listings precede sales and a period of poor list activity will negatively impact revenue. Past performance be it weather, seasons, prior month or prior quarter is no assurance of the following month’s or quarter’s revenue and macroeconomic shifts in the markets served could conceal the impact of poor weather and/or seasonality.

Home sales in successive quarters can fluctuate widely due to holidays, national or international emergencies, the school year calendar’s impact on relocation and/or interest rate changes or speculation of pending interest rate changes. Our revenue and operating margins each quarter will remain subject to seasonal fluctuations, poor weather and natural disasters, that combined with macroeconomic market changes may make it difficult to compare or analyze our financial performance effectively across successive quarters.

Furthermore, the residential real estate market and the real estate industry in general has a cyclical nature often defined by a protracted periods of depressed revenues, values, demand, inflated rates of foreclosure, and then economic relief. Consequently, our business is affected by such cycles.

Internal Use Software Development

Beginning in late 2015, we increased our investment in the development of our own cloud-based transaction processing platforms. In this regard, we hired several employees and engaged third party vendors focused on providing our agents and brokers with mobile applications designed to facilitate transactions in an efficient and consumer friendly way. 

Government Regulation

We serve the residential real estate industry which is regulated by federal, state and local authorities as well as private associations or state sponsored associations or organizations. We are required to comply with each state, province, county or country’s laws and as well as private governing bodies’ regulations, which combined results in a highly-regulated industry.

We are also subject to federal and state regulations relating to employment, contractor, and compensation practices. All of our company’s agents and brokers are classified as independent contractors, which are subject to Internal Revenue Service and state law guidelines as they apply to this classification. The only exception is our managing brokers (one per each state where we are registered to conduct business) that are classified as part-time employees to fulfill state or local real estate business requirements.

Real Estate Regulation - Federal

The Real Estate Settlement Procedures Act of 1974 (“RESPA”) became effective on June 20, 1975. The RESPA requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process. The RESPA also protects borrowers against certain abusive practices, such as kickbacks, and places limitations upon the use of escrow accounts.

The Department of Housing and Urban Development promulgated by Regulation X, which implements RESPA.

The National Affordable Housing Act of 1990 amended RESPA to require detailed disclosures concerning the transfer, sale, or assignment of mortgage servicing. It also requires disclosures for mortgage escrow accounts at closing and annually thereafter, itemizing the charges to be paid by the borrower and what is paid out of the account by the servicer.

The Dodd-Frank Wall Street Reform and Consumer Protection Act bestowed the administration of RESPA from the Department of Housing and Urban Development to the new Consumer Financial Protection Bureau (“CFPB”). In addition, the Dodd-Frank Act increased regulation of the mortgage industry, including: generally prohibiting lenders from making residential mortgage loans unless a good faith determination is made of a borrower's creditworthiness based on verified and documented information; requiring the CFPB to enact regulations, which have been finalized, to help assure that consumers are provided with timely and understandable information about residential mortgage loans that protect them against unfair, deceptive and abusive practices; and requiring federal regulators to establish minimum national underwriting guidelines for residential mortgages that lenders will be allowed to securitize without retaining any of the loans’ default risk. In addition, federal fair housing laws generally make it illegal to discriminate against protected classes of individuals in housing or brokerage services. Other federal regulations protect the privacy rights of consumers, which affects our opportunities to solicit new clients.

Real Estate Regulation - State and Local Level

States licensing laws and/or requirements vary from state to state. In general, all individuals and entities lawfully conducting businesses as real estate brokers, agents or sales associates must be licensed in the state in which they carry on business and at all times be in compliance.

States will require a real estate broker to be employed by the brokerage firm or permit an independent contractor classification, and the broker may work for another broker conducting business on behalf of the sponsoring broker.

States may require a person licensed as a real estate agent, sales associate or salesperson, be affiliated with a broker in order to engage in licensed real estate brokerage activities or allow the agent, sales associate or salesperson to work for another agent, sales associate or salesperson conducting business on behalf of the sponsoring agent, sales associate or salesperson. Agents, sales associates or salespersons are generally classified as independent contractors; however, real estate firms can offer employment.

Engaging in the real estate brokerage business requires obtaining a real estate broker license (although in some states the licenses are personal to individual brokers). In order to obtain this license, most jurisdictions require that a member or manager of the limited liability company be licensed individually as a real estate broker in that jurisdiction. If applicable, this member or manager is responsible for supervising the licensees and the entity’s real estate brokerage activities within the state.

Real estate licensees, whether they are brokers, salespersons, individuals, agents or entities, must follow the state’s real estate licensing laws and regulations. These laws and regulations generally specify minimum duties and obligations of these licensees to their clients and the public, as well as standards for the conduct of business, including contract and disclosure requirements, record keeping requirements, requirements for local offices, escrow trust fund management, agency representation, advertising regulations and fair housing requirements.

In each of the states where we have operations, we assign appropriate personnel to manage and comply with laws and regulations be it equal to, or greater than federal law.

Most states have local regulations (city or county government) that govern the conduct of the real estate brokerage business. Local regulations generally require additional disclosures by the parties to a real estate transaction or their agents or brokers, or the receipt of reports or certifications, often from the local governmental authority, prior to the closing or settlement of a real estate transaction as well as prescribed review and approval periods for documentation and broker conditions for review and approval.

Third-Party Rules

Beyond federal, state and local governmental regulations, the real estate industry is subject to rules established by private real estate groups and/or trade organizations, including, among others, state Associations of REALTORS® (AOR), and local Associations of REALTORS® (AOR), the National Association of Realtors® (NAR), and local Multiple Listing Services (MLSs). “REALTOR” and “REALTORS” are registered trademarks of the National Association of REALTORS®.

Each third-party organization generally has prescribed policies, bylaws, codes of ethics or conduct, and fees and rules governing the actions of members in dealings with other members, clients and the public, as well as how the third-party organization’s brand and services may or may not be deployed or displayed.

We assign appropriate personnel to manage and comply with third party organization policies and bylaws.

Employees

We presently have approximately 50 full-time employees and approximately 44 real estate brokers which are classified as part-time employees.

All of our agents and non-state managing brokers are classified as independent contractors. Currently, we have over 3,000 agents and brokers.

Our operations are overseen directly by management that engages our employees to carry on our business. Our management oversees all responsibilities in the areas of corporate administration, business development, and research. We intend to expand our current management to retain skilled directors, officers, and employees with experience relevant to our business focus. Our management’s relationships with agents, brokers, technology providers, and customers will provide the foundation through which we expect to grow our business in the future. We believe that the skill-set of our management team will be a primary asset in the development of our brands and trademarks.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the following factors, which could materially affect our business, financial condition or results of operations in future periods. The risks described below are not the only risks facing our company. Additional risks not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or results of operations in future periods.

Risks Related to Our Business and Industry

We have experienced net losses in recent years, and because we have a limited operating history, our ability to fully and successfully develop our business is unknown.

We have a history of operating at losses since our inception in October 2009, although a significant portion of our net losses for fiscal years 2016 and 2015 resulted from increases in intrinsic value of historical stock options, as further described throughout this annual report. Our ability to realize consistent, meaningful revenues and profit over a sustained period has not been established and cannot be assured.

While we believe that we have made significant progress in revenue growth, and managing our overhead by implementing our cloud-based technology strategy, our services must achieve broad market acceptance by consumers and we must continue to grow our geographical reach, attract more agents and brokers, and increase the volume of our residential real-estate transactions. If we are unsuccessful in continuing to gain market acceptance, we will not be able to generate sufficient revenue to continue our business operations and could sustain on-going operating and net losses.

Despite our ongoing efforts to build revenue growth, both organically and through acquisitions, and to control the anticipated expenses associated with the continued development, marketing and provision of our services, we may not be able to generate significant net income from operations in the future.

Our profitability is tied to the strength of the residential real estate market, which is subject to a number of macroeconomic conditions beyond our control.

Our profitability is closely related to the strength of the residential real estate market which traditionally follows economic cycles and which can be impacted by national, state and local production, distribution, and consumption of goods and services from the economy. Macroeconomic conditions that could adversely impact our business include, but are not limited to, economic slowdown or recession, increased unemployment, increased energy costs, reductions in the availability of credit, increased costs of obtaining mortgages, an increase in foreclosure activity, rising interest rates, inflation, disruptions in capital markets, declines in the stock market, adverse tax policies or changes in other regulations, lower consumer confidence, lower wage and salary levels, war or terrorist attacks, natural disasters, or actions taken by the Federal Reserve Board to regulate the supply of money, or the public perception that any of these events may occur. In addition, federal and state governments, agencies and government-sponsored entities such as Fannie Mae and Freddie Mac could take actions that result in unforeseen consequences or that otherwise could negatively impact our business.

We may be unable to effectively manage rapid growth in our business.

We may not be able to scale our business quickly enough to meet the growing needs of our affiliated real estate professionals and if we are not able to grow efficiently, our operating results could be harmed. As the Company adds new real estate professionals, we will need to devote additional financial and human resources to improving our internal systems, integrating with third-party systems, and maintaining infrastructure performance. In addition, we will need to appropriately scale our internal business systems and our services organization, including support of our affiliated real estate professionals as our demographics expand over time. Any failure of or delay in these efforts could cause impaired system performance and reduced real estate professional satisfaction. These issues could reduce the attractiveness of our Company to existing real estate professionals who might leave the Company as well as resulting in decreased attraction of new real estate professionals. Even if we are able to upgrade our systems and expand our staff, any such expansion will be expensive and complex, requiring management time and attention. We could also face inefficiencies or operational failures as a result of our efforts to scale our infrastructure. Moreover, there are inherent risks associated with upgrading, improving and expanding our information technology systems. We cannot be sure that the expansion and improvements to our infrastructure and systems will be fully or effectively implemented on a timely basis, if at all. These efforts may reduce revenue and our margins and adversely impact our financial results.

We cannot guarantee that we will be able to grow in the various local markets that we serve.

To capture and retain market share in the various local markets that we serve, we must compete successfully against other brokerages for agents and brokers and for the consumer relationships that they bring. Our competitors could lower the fees that they charge to agents and brokers or could raise the compensation structure for those agents. Our competitors may have access to greater financial resources than us, allowing them to undertake expensive local advertising or marketing efforts. In addition, our competitors may be able to leverage local relationships, referral sources, strong local brand and name recognition that we have not established. Our competitors could, as a result, have greater leverage in attracting new and established agents in the market and in generating business among local consumers. Our ability to grow in the local markets that we serve will depend on our ability to compete with these local brokerages.

The utilization of a 3D cloud based immersive office as a suitable substitute for a physical brick and mortar location is a new and unproven strategy and we cannot guarantee that we will be able to operate and grow within its confines.

Currently, our cloud office adequately supports the needs of our agent population located across the United States and Canada. We cannot guarantee that our cloud office platform will continue to support our agent population and meet our business needs as we grow. The effectiveness of our cloud office platform is tied to a number of variables at any given time including server capacity and concurrent users. In addition, we do not own certain technology upon which we depend to provide our 3D immersive cloud office platform. Our need to license this technology exposes us to the risk that we are unable to maintain agreements with our vendor on favorable terms in the future. It is possible that disruptions to certain of our services could result from an unexpected switch in vendors, which could adversely affect our business, financial condition and results of operations. Furthermore, the use of the cloud office platform, and the use generally of 3D immersive office environments as an acceptable substitute among agents and brokers for physical office locations is unproven. We cannot guarantee that industry rank and file will adopt or accept cloud-based 3D office environments as a substitute for a physical office environment in a sustainable, long-term manner.

We face significant risk to our brand and revenue if we fail to maintain compliance with the law and regulations of federal, state, foreign, county governmental authorities, or private associations and governing boards

We operate in a heavily regulated industry with regulated labor classifications which present significant risk in general for each potential instance where we fail to maintain compliance.

Our brokers and can be classified as an employee or independent contractor and we could potentially misclassify or fail to consistently achieve compliance. Classifications and compliance are subject to the Internal Revenue Service regulations and applicable state law guidelines and penalties.

Classifications, regulations and guidelines for brokers and agents are subject to judicial and agency interpretation as well as periodic changes. Changes, or any indication of changes, may adversely impact our workforce classifications, expenses, compensation, commission structure, roles and responsibilities and broker organization.

Beyond workforce regulations and classifications, there exist complex, heavily regulated federal, state, foreign, local authority laws and regulations and national, state, foreign and local third party organization’s regulations, policies and bylaws governing our real estate business.

In general, the laws, rules and regulations that apply to our business practices include, without limitation, the federal Real Estate Settlement Procedures Act, the federal Fair Housing Act, the Dodd-Frank Act, and federal advertising and other laws, as well as comparable state statutes; rules of trade organization such as NAR, local MLSs, and state and local AORs; licensing requirements and related obligations that could arise from our business practices relating to the provision of services other than real estate brokerage services; privacy regulations relating to our use of personal information collected from the registered users of our websites; laws relating to the use and publication of information through the Internet; and state real estate brokerage licensing requirements, as well as statutory due diligence, disclosure, record keeping and standard-of-care obligations relating to these licenses.

Additionally, the Dodd-Frank Wall Street Reform and Consumer Protection Act contains the Mortgage Reform and Anti-Predatory Lending Act (“Mortgage Act”), which imposes a number of additional requirements on lenders and servicers of residential mortgage loans, by amending certain existing provisions and adding new sections to RESPA and other federal laws. It also broadly prohibits unfair, deceptive or abusive acts or practices, and knowingly or recklessly providing substantial assistance to a covered person in violation of that prohibition. The penalties for noncompliance with these laws are also significantly increased by the Mortgage Act, which could lead to an increase in lawsuits against mortgage lenders and servicers.

Maintaining legal compliance is challenging and increases our costs due to resources required to continually monitor business practices for compliance with applicable laws, rules and regulations, and to monitor changes in the applicable laws themselves.

We may not become aware of all the laws, rules and regulations that govern our business, or be able to comply with all of them, given the rate of regulatory changes, ambiguities in regulations, contradictions in regulations between jurisdictions, and the difficulties in achieving both company-wide and region-specific knowledge and compliance.

If we fail, or we have alleged to have failed, to comply with any existing or future applicable laws, rules and regulations, we could be subject to lawsuits and administrative complaints and proceedings, as well as criminal proceedings. Our noncompliance could result in significant defense costs, settlement costs, damages and penalties.

Our business licenses could be suspended or revoked, our business practices enjoined, or we could be required to modify our business practices, which could materially impair, or even prevent, our ability to conduct all or any portion of our business. Any such events could also damage our reputation and impair our ability to attract and service home buyers, home sellers and agents, as well our ability to attract brokerages, brokers, teams of agents and agents to our company, without increasing our costs.

We do carry general liability insurance; however, insurance may not cover all claims or claims of these types or may be inadequate to protect us from all liability.

Further, if we lose our ability to obtain and maintain all of the regulatory approvals and licenses necessary to conduct business as we currently operate, our ability to conduct business may be harmed. Lastly, any lobbying or related activities we undertake in response to mitigate liability of current or new regulations could substantially increase our operating expenses.

If we do not remain an innovative leader in the real estate industry, we may not be able to grow our business and leverage our costs to achieve profitability.

Innovation has been critical to our ability to compete against other brokerages for clients and agents. For example, we have pioneered the utilization of a 3D immersive online office environment in the residential real estate market which reduces our need for office space and facilitates the transaction of business away from an office. If competitors follow our practices or develop innovative practices, our ability to achieve profitability may diminish or erode. For example, certain other brokerages could develop or license cloud-based office platforms that are equal to or superior to ours. If we do not remain on the forefront of innovation, we may not be able to achieve or sustain profitability.

The market for Internet products and services including, without limitation, 3D immersive experiences, virtual reality and augmented reality is characterized by rapid technological developments, evolving industry standards and customer demands, and frequent new product introductions and enhancements. The Company’s future success will depend in significant part on its ability to continually improve the performance, features and reliability of its Internet-based virtual environment, its tools and other properties in response to both evolving demands of the marketplace and competitive product offerings, and there can be no assurance that the Company will be successful in doing so. In addition, the widespread adoption of new virtual reality and augmented reality applications through new technology developments could require fundamental changes in the Company’s services.

Our value proposition for agents and brokers includes allowing them to participate in the gross revenues of our company and is not typical in the real estate industry. If agents and brokers do not understand our value proposition or value its attributes, we may not be able to attract, retain and incentivize agents.

Participation in our gross revenue sharing plan represents a key component of our agent and broker value proposition. Agents and brokers may not understand or appreciate its value. In addition, agents may not appreciate other components of our value proposition including the cloud office platform, the mobility it affords, the systems and tools that we provide to agents and brokers, and the professional development opportunities we create and deliver. If agents and brokers do not understand the elements of our agent value proposition, or do not perceive it to be more valuable than the models used by most competitors, we may not be able to attract, retain and incentivize new and existing agents and brokers to grow our revenues.

We may be unable to attract and retain additional qualified personnel.

To execute our business strategy, we must attract and retain highly qualified personnel. In particular, we compete with many other real estate brokerages for qualified brokers who manage our operations in each state. We must also compete with technology companies for developers with high levels of experience in designing, developing and managing cloud-based software, as well as for skilled service and operations professionals, and we may not be successful in attracting and retaining the professionals we need. We have from time to time in the past experienced, and we expect to continue to experience in the future, difficulty in hiring and difficulty in retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we do. In addition, in making employment decisions, particularly in the software industry, job candidates often consider the value of the stock options or other equity incentives they are to receive in connection with their employment. If the price of our stock declines, or continues to experience significant volatility, our ability to attract or retain key employees will be adversely affected. If we fail to attract new personnel or fail to retain and motivate our current personnel, our growth prospects could be severely harmed.

As we pursue new lines of business and opportunities to increase revenues, our profit margins may decline sharply.

We may implement changes to the business model and operations to improve revenues that cause a disproportionate increase in our expenses and cost of goods sold, or reduce profit margins. For example, we may allocate resources to acquiring lower margin brokerage models, the development of a mortgage servicing division, a commercial real estate division, a title and escrow company or a continuing education division. These decisions could involve significant start-up costs that may only be recovered after lengthy periods of time. Any of these attempts to improve our revenues could result in a disproportionate increase in our expenses and in reduced profit margins. In addition, any of these additional activities could expose us to additional compliance obligations and regulatory risks.

Our operating results are subject to seasonality and vary significantly among quarters during each calendar year, making meaningful comparisons of successive quarters difficult.

Seasons and weather, while seemingly predictable, traditionally impact the real estate industry. Continuous poor weather or natural disasters negatively impact listings and sales. Spring and summer seasons historically reflect greater sales periods in comparison to fall and winter seasons. Seasonal or weather related lower revenue also reduces our operating income, net income, operating margins and cash flow.

Real estate listings precede sales and a period of poor listings activity will negatively impact revenue. Past performance be it weather, seasons, prior month or prior quarter is no assurance or predictor of the following month’s or quarter’s revenue and macroeconomic shifts in the markets served could conceal the impact of poor weather or seasonality.

Home sales in successive quarters can fluctuate widely due to holidays, national or international emergencies, the school year calendar’s impact on relocation and/or interest rate changes or speculation of pending interest rate changes. Our revenue and operating margins each quarter will remain subject to seasonal fluctuations, poor weather and natural disasters, combined with macroeconomic market changes may make it difficult to compare or analyze our financial performance effectively across successive quarters.

If we fail to protect the privacy of employees, independent contractors, or consumers or personal information that they share with us, our reputation and business could be significantly harmed.

Tens of thousands of consumers, independent contractors, and employees have shared personal information with us during the normal course of our business processing residential real estate transactions. This includes, but is not limited to, social security numbers, annual income amounts and sources, consumer names, addresses, telephone and cell phone numbers, and email addresses.

Our application, disclosure and safeguard of the information is regulated by federal and state privacy laws. To comply with privacy laws, we invested resources and adopted a privacy policy outlining the use and care as well as how and with whom we may share personal information. This policy includes informing consumers, independent contractors and employees that we will not share their personal information with third parties without their consent unless required by law.

Privacy policies and compliance with federal and state privacy laws presents risk and could incur legal liability for failing to maintain compliance. We may not become aware of all privacy laws, changes to privacy laws, or third party privacy regulations governing the real estate business, or be unable to comply with all of these regulations, given the rate of regulatory changes, ambiguities in regulations, contradictions in regulations between jurisdictions, and the difficulties in achieving both company-wide and region-specific knowledge and compliance.

Our policy and safeguards could be deemed insufficient if third parties with whom we have shared personal information fail to protect the privacy of that information. Our legal liability could include significant defense costs, settlement costs, damages and penalties, plus, damage our reputation with consumers, which could significantly damage our ability to attract and maintain customers. Any or all of these consequences would result in meaningful unfavorable impact on our brand, business model, revenue, expenses, income and margins.

Our business could be adversely affected if we are unable to expand, maintain and improve the systems and technologies upon which we rely on to operate.

As the number of agents and brokers in our company grows, our success will depend on our ability to expand, maintain and improve the technology that supports our business operations, including, but not limited to, our cloud office platform. Loss of key personnel or the lack of adequate staffing with the requisite expertise and training could impede our efforts in this regard. If our systems and technologies lack capacity or quality sufficient to service agents and their clients, then the number of agents who wish to use our products could decrease, the level of client service and transaction volume afforded by our systems could suffer, and our costs could increase. In addition, if our systems, procedures or controls are not adequate to provide reliable, accurate and timely financial and other reporting, we may not be able to satisfy regulatory scrutiny or contractual obligations with third parties and may suffer a loss of reputation. Any of these events could negatively affect our financial position.

Our business, financial condition and reputation may be substantially harmed by security breaches, interruptions, delays and failures in our systems and operations.

The performance and reliability of our systems and operations are critical to our reputation and ability to attract agents, teams of agents and brokers into our company as well as our ability to service home buyers and sellers. Our systems and operations are vulnerable to security breaches, interruption or malfunction due to certain events beyond our control, including natural disasters, such as earthquakes, fire and flood, power loss, telecommunication failures, break-ins, sabotage, computer viruses, intentional acts of vandalism and similar events. In addition, we rely on third party vendors to provide the cloud office platform and to provide additional systems and related support. If we cannot continue to retain these services on acceptable terms, our access to these systems and services could be interrupted. Any security breach, interruption, delay or failure in our systems and operations could substantially reduce the transaction volume that can be processed with our systems, impair quality of service, increase costs, prompt litigation and other consumer claims, and damage our reputation, any of which could substantially harm our financial condition.

Loss of our current executive officers or other key management could significantly harm our business.

We depend on the industry experience and talent of our current executives, including our Chairman and Chief Executive Officer, Glenn Sanford; and President and General Counsel, Russell Cofano, Chief Financial Officer Alan Goldman and Chief Executive Officer of eXp Realty, Jason Gesing. We believe that our future results will depend in part upon our ability to retain and attract highly skilled and qualified management. The loss of our executive officers could have a material adverse effect on our operations because other officers may not have the experience and expertise to readily replace these individuals. This is especially relevant because we have not entered into an employment agreement with either our chairman and chief executive officer or our president. To the extent that one or more of our top executives or other key management personnel depart from the Company, our operations and business prospects may be adversely affected. In addition, changes in executives and key personnel could be disruptive to our business. The Company does not have any key person insurance.

Failure to protect intellectual property rights could adversely affect our business.

Our intellectual property rights, including existing and future trademarks, trade secrets, patents and copyrights, are important assets of the business. We have taken measures to protect our intellectual property, but these measures may not be sufficient or effective. We may bring lawsuits to protect against the potential infringement of our intellectual property rights; other companies, including our competitors, could make claims against us alleging our infringement of their intellectual property rights. Any significant impairment of our intellectual property rights could harm our business.

We may evaluate potential vendors, suppliers and other business partners for acquisition in order to accelerate growth, but may not succeed in identifying suitable candidates or may acquire businesses that negatively impact us.

As part of our growth strategy, we may evaluate the potential acquisition of businesses offering products or services that complement our services offerings. If we identify a business that we deem to be suitable for acquisition and complete an acquisition, our evaluation may prove faulty and the acquisition may prove unsuccessful. In addition, an acquisition may prove unsuccessful to us because of our inability to effectively execute post-acquisition strategy. We may be unable to successfully integrate the systems and personnel of the acquired businesses. An acquisition could negatively impact our culture or undermine its core values. Acquisitions could disrupt our existing operations or cause management to neglect to focus adequately on our core business. An acquisition could cause potentially dilutive issuances of equity securities, incurrence of debt, contingent liabilities or could cause us to assume or incur unknown or unforeseen liabilities. We intend to evaluate other brokerages for acquisition in order to accelerate growth and may not succeed in identifying suitable candidates or may acquire brokerages that negatively impact us.

Unfavorable general economic conditions in the United States and other markets that we enter and operate within could negatively impact our financial performance.

Unfavorable general economic conditions, such as a recession or economic slowdown, in the United States and other markets we enter and operate within could negatively affect the affordability of, and consumer demand for, our services in the United States. Under difficult economic conditions, consumers may seek to reduce spending by forgoing real estate purchases. Lower consumer demand for our services in the United States and other markets could reduce our profitability.

We are subject to certain risks related to litigation filed by or against us, and adverse results may harm our business and financial condition.

We cannot predict with certainty the cost of defense, the cost of prosecution, insurance coverage or the ultimate outcome of litigation and other proceedings filed by or against us, including remedies or damage awards, and adverse results in such litigation and other proceedings, including treble damages, may harm our business and financial condition. Such litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, negligence and fiduciary duty claims arising from our company owned brokerage operations, actions against our title company alleging it knew or should have known others were committing mortgage fraud, standard brokerage disputes like the failure to disclose hidden defects in the property such as mold, vicarious liability based upon conduct of individuals or entities outside of our control, including our agents, brokers, third-party service or product provides, antitrust claims, general fraud claims and employment law claims, including claims challenging the classification of our employees as independent contractors and compliance with wage and hour regulations, and claims alleging violations of RESPA or state consumer fraud statutes. In addition, class action lawsuits can often be particularly vexatious litigation given the breadth of claims, the large potential damages claimed and the significant costs of defense. The risks of litigation become magnified, and the costs of settlement increase, in class actions in which the courts grant partial or full certification of a large class. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that is subject to third party patents or other third party intellectual property rights. In addition, we may be required to enter into licensing agreements (if available on acceptable terms) and be required to pay royalties.

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. We know of no material, active or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

We may suffer significant financial harm and loss of reputation if we do not comply, cannot comply, or are alleged to have not complied with applicable laws, rules and regulations concerning our classification and compensation practices for the agents in our owned-and-operated brokerage.

Except for our employed state brokers, all real estate professionals in our brokerage operations have been retained as independent contractors, either directly or indirectly through third-party entities formed by these independent contractors for their business purposes. With respect to these independent contractors, like most brokerage firms, we are subject to the Internal Revenue Service regulations and applicable state law guidelines regarding independent contractor classification. These regulations and guidelines are subject to judicial and agency interpretation, and it might be determined that the independent contractor classification is inapplicable to any of our affiliated real estate professionals. Further, if legal standards for classification of real estate professionals as independent contractors change or appear to be changing, it may be necessary to modify our compensation and benefits structure for our affiliated real estate professionals in some or all of our markets, including by paying additional compensation or reimbursing expenses.

In the future we could incur substantial costs, penalties and damages, including back pay, unpaid benefits, taxes, expense reimbursement and attorneys’ fees, in defending future challenges by our affiliated real estate professionals to our employment classification or compensation practices.

Risk Related to Our Stock

Glenn Sanford, our Principal Executive Officer and Chairman, owns a significant percentage of our stock, and as a result, the trading price for our shares may be depressed and he can take actions that may be adverse to the interests of our stockholders.

Glenn Sanford beneficially owns approximately 41% of our outstanding common stock as of March 15, 2017. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in companies with a controlling stockholder. Mr. Sanford may have the ability to significantly influence all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, due to his significant ownership stake and his service as our Principal Executive Officer and Chairman of the Board and Director, Mr. Sanford controls the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination that could be favorable to our other stockholders.

Because we can issue additional shares of common stock, our stockholders may experience dilution in the future.

We are authorized to issue up to 220,000,000 shares of common stock, of which approximately 52.4 million shares were issued and outstanding as of March 31, 2017. Our board of directors has the authority to cause us to issue additional shares of common stock without consent of any of our stockholders. Consequently, the stockholders may experience more dilution in their ownership of our stock in the future.

Our board of directors has the authority to cause us to issue additional shares of common stock without consent of any of our stockholders and we have several equity based compensation plans in place for employees and non-employees. Consequently, all stockholders may experience more dilution in their ownership of our stock in the future.

Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations.

Although our common stock is currently listed for quotation on the OTCQB (Symbol “EXPI”) operated by the OTC Markets Group, trading through the OTCQB is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.

Because we do not intend to pay any cash dividends on our shares of common stock in the near future, our stockholders will not be able to receive a return on their shares unless they sell them.

We intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividends on our common stock in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of operations, cash flows and financial condition, operating and capital requirements, and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless we pay dividends, our stockholders will not be able to receive a return on their shares unless they sell them.

Trading of our stock is restricted by the Securities Exchange Commission’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our common stock.

The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in, and limit the marketability of, our common stock.

FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.

In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (known as “FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit an investor’s ability to buy and sell our stock and have an adverse effect on the market for our shares.

Our results of operations are subject to fluctuation that is outside of our control based on the required method of valuing certain historical stock options in a manner tied to the Company’s stock price.

Prior to becoming a public company in 2013, we issued approximately 7.1 million options convertible into restricted and unregistered shares of common stock. Subsequent to becoming a public company, and in accordance with US GAAP, we are required to remeasure the intrinsic value of these awards at each reporting date through the date of exercise or other settlement. The changes are recorded as a component of earnings and included in general and administrative expenses. Based on our current analysis, a 10% change in the intrinsic value of the options, in consideration of quoted market prices as of December 31, 2016, would potentially result in the recognition of approximately $2,617,000 of compensation expense (benefit). Additionally, the recognition of any significant fluctuation in the intrinsic value of these outstanding awards could swing operating results from a loss to income, and vice versa, in future periods.

Item 1B. Unresolved Staff Comments

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

Item 2. Properties

Our principal corporate office has approximately 900 square feet and is located at 1321 King St. Suite 1, Bellingham, WA 98229 in a leased facility. The lease expires on December 31, 2017. Our principal administrative and finance operations are located in Reno, Nevada with its lease expiring on April 30, 2017. This facility accommodates our principal administrative and finance operations. We also lease small office spaces in a number of the US states that we operate in order to comply with state regulatory and licensing requirements and, in certain instances, to provide office space to our managing state brokers and drop-in space for our agents. In some of these instances, the state managing brokers are financially responsible for a significant portion of the rental expense associated with a leased office space. We generally do not provide office space for the agent workforce other than for drop-in service. We do not own any real property. We believe that leased facilities are adequate to meet current needs and that additional facilities will be available for lease to meet future needs.

Item 3. Legal Proceedings

From time to time, we are 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 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is quoted on the OTCQB operated by the OTC Markets Group under the trading symbol “EXPI”. The following table shows the low and high bid for our common stock on a quarterly basis during the last two fiscal years. These prices represent inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual transactions.

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

Transfer Agent

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

Holders of Our Common Stock

As of March 31, 2017, there are 52,372,181 issued and outstanding shares of our common stock held by a total of approximately 900 stockholders of record.

Dividends

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

Securities Authorized for Issuance under Equity Compensation Plans

The following table summarizes certain information regarding our equity compensation plan as at December 31, 2016:

2013 Stock Option Plan

On September 27, 2013, we adopted a stock option plan. The purpose of the stock option plan is to retain the services of valued key employees, directors, officers and consultants and to encourage such persons with an increased initiative to make contributions to our company. Under the stock option plan, eligible employees, consultants and certain other persons who are not eligible employees, may receive awards of “non–qualified stock options”. Individuals, who, at the time of the option grant, are employees of our company or any related company (as defined in the stock option plan) who are subject to tax in the United States may receive “incentive stock options”, and non–United States residents may receive awards of “non-qualified stock options”. The number of shares of our common stock issuable under the plan is 10,000,000. As of March 31, 2017, there were stock options to purchase an aggregate of 6,542,558 shares of our common stock outstanding with 3,297,764 available for future issuances.

2015 Equity Incentive Plan

On March 12, 2015, we adopted an equity incentive plan. The purpose of the equity incentive plan is to retain the services of valued key employees, directors, officers and consultants and to encourage commitment and motivate excellent performance. Our employees, consultants and directors are eligible to participate in the 2015 Equity Incentive Plan as determined by the Board. The following equity awards may be granted under the equity incentive plan: “incentive stock options”, “non-qualified stock options,” shares of restricted stock, restricted stock units and other stock-based awards; provided, that “incentive stock options” may be granted only to employees. The number of shares of our common stock issuable under the plan is 8,000,000. As of March 31, 2017, there were stock options to purchase an aggregate of 4,280,000 shares of our common stock outstanding with 1,533,585 available for future issuances.

Recent Sales of Unregistered Securities

The following provides a discussion of our recent sales of unregistered securities that have not been previously disclosed:

In January 2017, we issued 49,231 shares of restricted and unregistered shares of common stock to accredited investors in private placement transactions for gross cash proceeds totaling $160,000.

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

The restricted shares sold to third party investors were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act. Each such third-party investor represented to the Company that it (i) is an “accredited investor” as defined in Rule 501(a) of Regulation D promulgated under the Securities Act of 1933, as amended, (ii) is knowledgeable, sophisticated and experienced in making investment decisions of this kind, and (iii) has had adequate access to information about the Company.

During the year ended December 31, 2016, we issued 159,678 shares of restricted and unregistered common stock for cash proceeds totaling $4,900 related to the exercise of stock options.

During the year ended December 31, 2016, we issued a total of 1,804,191 shares of restricted and unregistered common stock for employee and non-employee compensation totaling $5,559,881.

During the year ended December 31, 2015, we issued a total of 1,613,816 shares of restricted and unregistered common stock for employee and non-employee compensation totaling $1,293,077.

All of the securities issued to employees and consultants were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act. With the exception of executive officers and directors, no employee or consultant received more than 5% of compensation owed to such service provider. In addition, all service providers receiving equity as compensation pursuant to the 2015 Agent Equity Program have made representations to the Company, including, without limitation, that it is knowledgeable, sophisticated and experienced in making investment decisions of this kind, or has consulted with its legal and financial advisers regarding the suitability of receiving equity as compensation; understands the restricted nature of the securities issued; and (iii) has had adequate access to information about the Company.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 6. Selected Financial Data

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

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read together with our 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 December 31, 2016, and 2015, as well as our future results.

OVERVIEW

We are a cloud-based real estate brokerage organization operating in most U.S. states and one Canadian Province. As a cloud-based real estate brokerage for the residential real estate market, we have embraced and adopted a number of cloud-based technologies in order to grow into an international brokerage without the burden of physical bricks and mortar or redundant staffing costs.

Accelerating Growth

If 2015 was a year of foundational growth, 2016 was the year that eXp Realty became a true national presence as it increased its net real estate brokerage agent and broker base from just over 850 at the beginning of the year to over 2,400 at the end of 2016, serving markets in most U.S. states and one Canadian Province.

Agent Ownership

In 2015, the Company extended equity incentive programs whereby agents and brokers of eXp Realty could become eligible for awards of the Company’s common stock through the achievement of production and agent attraction benchmarks. Under this program, agents and brokers who qualify, and who remain with eXp Realty in good standing for 3 years following their eligibility notice, can be awarded shares in the Company, in furtherance of the Company’s objective to operate an agent-owned brokerage. In 2016, approximately 1,400 of our agents and brokers were granted equity awards due to reaching milestones set around production and agent attraction efforts, all of which have a 3-year vesting requirement.

In 2015, the Company also introduced a program whereby agents and brokers could elect to receive 5% of their commission payable in the form of restricted Company common stock. In 2016, approximately 825 eXp Realty agents and brokers took advantage of this program resulting in 785,504 restricted and unregistered shares of common stock being issued. This agent equity program continues to be another element in creating a culture of agent-ownership.

EXPI and Platform Thinking

In recent years, propelled by technology, numerous brokerage firms and others that serve the real estate ecosystem have used education, training and coaching as an 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.

Numerous real estate coaches provide training and classes in facilitation of selling coaching services, whether to brokerages on a vendor basis or to individual agents outside of their brokerage relationships. Some of the largest brokerage companies have developed coaching programs internally and have plugged individual coaches into the program or system with the named program or system as the marketed brand and source of value rather than the individual coach or trainer. The consequence to the individual coach can be limiting in terms of marketing their own talents and expertise, building a business around those talents, or customizing instruction for each individual agent/client. Additionally, plugging agents and coaches into a program or system and tying their success to that program or system limits, if not prevents, an agent from identifying and selecting a coach whose skill set and approach best matches their needs and/or learning style.

eXp Realty has held firm in its belief that each individual agent delivers value to individual home buyers and sellers in different ways depending upon the knowledge, skills or niche of the agent and the needs and wants of the consumer. Consumers work with agents because of their skills and service individually and generally place greater weight on those individual skill sets, service levels and style than they do on the brokerage brand with which the agent is affiliated. eXp Realty is working to develop a model and infrastructure for an internal coaching program which approaches the relationship between coach and agent with a similar philosophy. The needs of individual agents vary as do the methods of instruction that are most effective for their learning. This approach aims to offer coaching that draws upon, highlights, promotes and supports some of the best coaches in the industry based upon their individual talents and the corresponding fit to the particular needs to our individual, entrepreneurial professionals.

MARKET CONDITIONS AND TRENDS

According to the National Association of REALTORS (“NAR”), home sale transaction volume increased 8% in 2016 as a result of both an increase in the number of home sale transactions, combined with average home sale price growth. Also according to NAR, the housing affordability index has continued to be at historically favorable levels. When the index is above 100, it indicates that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. The composite housing affordability index was 165 for 2016 and 166 for 2015. The housing affordability index remains significantly higher than the average of 127 for the period from 1970 through 2016.

A part of this involves favorable mortgage rate conditions. Mortgage rates increased approximately 75 basis points from September 30, 2016 to December 31, 2016, but continue to be at historically low levels. While any increase to mortgage rates can adversely impact housing affordability, we believe that rising wages, improving consumer confidence and continued low inventory levels will result in favorable demand conditions and existing home sale volume growth.

According to Freddie Mac, mortgage rates on commitments for a 30-year, conventional, fixed-rate first mortgages averaged 4.2% at December, 2016, and 3.7% and 3.9%, respectively, through 2016 and 2015. To the extent that mortgage rates increase further, consumers continue to have financing alternatives such as adjustable rate mortgages or shorter term mortgages which can be utilized to obtain a lower mortgage rate than a 30-year fixed-rate mortgage.

While mortgages rates are positively impacting home sale volume, low housing inventory levels have the opposite effect. According to NAR, the inventory of existing homes for sale in the U.S. was 1.7 million and 1.8 million at the end of December 2016 and December 2015, respectively. The December 2016 inventory represents a national average supply of 3.6 months at the current home sales pace which is below the 6.1 month 25-year average.

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

Beginning on October 3, 2015, the Consumer Financial Protection Bureau’s (“CFPB”) new three-day advance closing disclosure rule, known as TILA-RESPA Integrated Disclosure (“TRID”), became effective for new loan applications. These significant new regulations caused closing delays throughout the industry, including at eXp Realty. NAR’s Economists’ Outlook report published on October 12, 2016 reported that the average additional time from contract-to-close for U.S. residential home sales reached the peak at 5.7 days in December 2015 and has eased to 3.4 days in September 2016.

Existing Home Sales

According to NAR, for the year ended December 31, 2016, existing home sale transactions increased to 5.5 million homes or up 4% compared to 2015. For the year ended December 31, 2016, eXp Realty home sale transactions increased 137% compared to 2015. Our home sale transactions were impacted by the growth of our agent base which grew from approximately 850 at the end of 2015 to over 2,400 by the end of 2016.

As of their most recent releases, NAR is forecasting existing home sales to increase 2% in 2017 and another 4% in 2018.

Existing Home Sale Price

NAR reported that the existing home sale average price increased 4% compared to 2015, similar to the increases we experienced. The price increase was primarily due to a broader mix of eXp agents in more markets across the country.

We believe primary drivers to the long-term demand for housing and the growth of our company to support that demand are housing affordability, the general economic health of the U.S. economy, demographic trends such as population growth, the increase in household formation, mortgage rate levels and mortgage availability, job growth, the inherent benefits of owning a home versus renting and the influence of local housing dynamics of supply versus demand. As of the end of 2016, we believe that these factors are generally favorable. However, significant changes to one or more of these drivers could cause the demand for housing to slow, negatively affecting all real estate brokerage firms, including eXp Realty. Regardless of whether the housing market continues to grow or slows, eXp Realty expects to adhere to its low-cost, high-engagement model, affording a growing number of agents and brokers increased income and ownership opportunities while offering a scalable solution to brokerage owners looking to survive and thrive in a wide range of economic conditions.

The use of lead generation technology and customer relationship management (“CRM”) applications is seen by many real estate agents as an essential component to support a thriving business. In October, 2016, eXp Realty announced that it had entered into a strategic relationship with Commissions, Inc. (“CINC”), one of the industry’s most respected lead generation and CRM providers, to build an enterprise application for eXp Realty called “Powered by CINC”. While eXp Realty presently offers lead generation technology to its agents through a relationship with Kunversion, another industry leader, this new relationship with CINC is designed to allow eXp Realty to deliver even more value to its agents through cutting edge IDX websites and what many call the industry’s best CRM. All eXp Realty agents will receive access to the CINC platform as part of a small $50 per month technology fee. The Powered by CINC platform went live in the first quarter of 2017. Agents will also receive Kunversion for some period after the go-live date.

One of the ways that we believe we have been able to grow into as many states and in our opinion remain relevant is by adopting an agile mindset as a company. In this context eXp Realty continues to regularly deliver 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 (“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 the means 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.

Results of Operations for the years ended December 31, 2016 and 2015

Revenues

During the year ended December 31, 2016, net revenues increased approximately 137% to $54,179,511 from the prior annual period ended December 31, 2015. Our gross revenue increased partially by our on-going success in attracting additional agents and brokers resulting in a higher overall volume of completed transactions. Additionally, our success in attracting more seasoned and successful agents and brokers resulted in higher gross revenue transactions than we experienced in the prior periods. As we continue to focus our growth on organic expansion, by attracting additional agents and brokers in untapped geographical North American markets, we expect that our gross revenue will increase significantly for at least the next twelve months.

Operating Expenses

Our cost of revenue fluctuates in direct correlation with our gross revenue based on its incurrence being driven by agent commissions and revenue sharing. In addition to fees generated from residential real estate transactions, we generate revenue from fees charged to our agents for monthly access to our technology tools and training platform. The slight decrease in our gross margins, from 14.9% in 2015 to 13.8% in 2016 is related to slight increases in additional fees incurred to attract new agents and brokers to support our aggressive growth strategy.

General and administrative costs consist of wages, including non-cash based fluctuations in stock compensation, dues, operating leases, utilities, travel, and other general overhead expenses. The increase in general and administrative costs for the year ended December 31, 2016 was primarily attributable to the re-measurement in the intrinsic value of equity-awards outstanding prior to 2013 totaling $20,495,234. Excluding this re-measurement cost, our general and administrative costs increased by $7,855,669 compared to the same period ended December 31, 2015. This increase is primarily related to increases related to the 85% increase in full-time employees inclusive of officer level individuals with higher salaries and stock based awards; and additional facilities costs to support our approximate 180% increase in brokers and agents.

Professional fees include costs related to legal, accounting, and other consultants. The approximate 47% increase in our professional fees primarily related to non-recurring fees associated with the engagement of professional service providers to support the execution of our agent and broker growth initiatives. During 2016, we engaged additional third parties to expand our market awareness programs.

Sales and marketing include costs related to lead capture, digital and print media, trade shows, in addition to other promotional materials. The approximate 170% increase during 2016 was the result of our growth in the number of agents and brokers, and expanding our brand awareness in existing and prospective geographical regions.

LIQUIDITY AND CAPITAL RESOURCES

Our net working capital increase is primarily the result of the completion of a private placement of our restricted and unregistered shares sold in December 2016 for net cash proceeds of $532,206. At December 31, 2016, we had a significant number of transactions pending, resulting in receivables of $3,015,767, a 783% increase from December 31, 2015. Further, related to the large number of pending transactions as of December 31, 2016, our current liabilities increased by approximately 437% from December 31, 2015 primarily related to outstanding commissions payable of $2,417,621.

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

Net cash provided by operating activities for the year ended December 31, 2016 increased by approximately 195% from 2015 primarily as a result of the continued success we are experiencing in our Agent Equity Program providing for the settlement of commissions earned in the form of restricted and unregistered shares of common stock. Additionally, our sales volumes significantly increased year over year.

Our investing activities for December 31, 2016 and 2015 solely consisted of the acquisition of fixed assets. In addition to leasing and furnishing new office space in Reno, we continued aggressive improvement to our core cloud office platform and transactional management systems. Throughout the next year, we expect to continue to allocate additional resources for the further development and improvement of our technology.

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

Our future capital requirements will depend on many factors, including our level of investment in technology and our rate of growth into new markets. Our capital requirements may be affected by factors which we cannot control such as the residential real estate market, interest rates, and other monetary and fiscal policy changes in which we currently operate. We anticipate that between our current cash position and cash flow from ongoing operations we have the necessary resources to continue operating our business over the next 12 months. In order to support and achieve our future growth plans, we may have a need or find it advantageous to obtain additional funding through equity or debt financing.

We currently have no bank debt or line of credit facilities. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all.

CRITICAL ACCOUNTING ESTIMATES

Stock-Based Compensation (Intrinsic Value Method)

Prior to becoming a public company in 2013, we issued approximately 7.1 million options convertible into restricted and unregistered shares of common stock through April 13, 2023. While operating as a private company, our management experienced difficulty in developing reasonable estimates of the value of these options without the incurrence of unreasonable cost and effort. In this regard, our management considered fluctuations based on, among other factors, the lack of liquidity of the underlying stock; volatility in the residential real-estate market and its corporate participants; the relative lack of our brand awareness in a highly competitive industry with several participants having substantial financial means; the unprovability of the probability of our success based on our innovative agent and broker compensation models; the majority controlled ownership, and our history of operating losses. The consideration of these factors resulted in our management determining the most reasonable approach to estimating the fair value of the awards was based on the intrinsic value method.

Subsequent to becoming a public company, and in accordance with US GAAP, we are required to remeasure the intrinsic value of these awards at each reporting date through the date of exercise or other settlement. The changes are recorded as a component of earnings and included in general and administrative expenses.

Based on our current analysis, a 10% change in the intrinsic value of the options, in consideration of quoted market prices as of December 31, 2016, would potentially result in the recognition of approximately $2,617,000 of compensation expense (benefit). Additionally, the recognition of any significant fluctuation in the intrinsic value of these outstanding awards could changes operating result results from a loss to income, and vice versa, in future periods.

Non-GAAP Measurements

As further discussed above, we had approximately 7.1 million outstanding stock options exercisable into restricted shares of our common stock at a weighted average exercise price of $0.14 per share, measured using the intrinsic value method. In accordance with US GAAP and Rules and Regulations as promulgated by the Securities and Exchange Commission (“SEC”), we were unable to retroactively apply the fair value method to awards previously outstanding under the intrinsic value method. 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.

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 prior periods as the awards vested without giving effect to re-measurement through the date of exercise or expiration.

The 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 US 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 from methodologies other than in accordance with US 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 US GAAP. Some of these limitations are:

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

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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

OFF-BALANCE SHEET ARRANGEMENTS

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

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

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

Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of eXp World Holdings, Inc.

Bellingham, Washington

We have audited the accompanying consolidated balance sheet of eXp World Holdings, Inc. (“Company”) as of December 31, 2016, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eXp World Holdings, Inc. at December 31, 2016, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ BDO USA, LLP

BDO USA, LLP

Salt Lake City, Utah

March 31, 2017

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and

Stockholders of eXp World Holdings, Inc.

Bellingham, Washington

We have audited the accompanying consolidated balance sheet of eXp Realty World Holdings, Inc. as of December 31, 2015, and the related consolidated statements of operations and comprehensive income (loss), stockholders’ equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eXp World Holdings, Inc. as of December 31, 2015, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ WSRP, LLC

WSRP, LLC

Salt Lake City, Utah

March 15, 2016

EXP WORLD HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

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

EXP WORLD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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

EXP WORLD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 

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

EXP WORLD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY   

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

EXP WORLD HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS  

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

eXp World Holdings, Inc.

Notes to the Consolidated Financial Statements

December 31, 2016

(Expressed in U.S. dollars)

eXp World Holdings, Inc. (“Company” or “eXp” formerly known as eXp Realty International Corporation) was incorporated in the State of Delaware in 2008. The Company is a cloud-based real estate brokerage operating in most U.S. states and one Canadian Province. 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.

Basis of presentation and fiscal year

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

Principles of consolidation

The accompanying consolidated financial statements include the accounts of eXp World Holdings, Inc., and its subsidiaries; eXp Realty Holdings, Inc.; First Cloud Mortgage, Inc. (dormant as of December 31, 2016); eXp Realty Associates, LLC; eXp Realty, LLC; eXp Realty of California, Inc.; eXp Realty of Canada, Inc.; and eXp Realty of Connecticut, LLC. All inter-company 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 consolidated statements of operations and consolidated statements of comprehensive income (loss). As of 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, 2016 and 2015, 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 GAAP 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

The Company’s restricted cash balance of $481,704 and $148,613 at December 31, 2016 and 2015, respectively, consists of cash held in escrow by the Company’s brokers and agents on behalf of real estate buyers. The Company recognizes a corresponding customer deposit liability until the funds are released from escrow.

Fair value measurements

The Company 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:

The fair value of cash and cash equivalents, accounts and other receivables, 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. Allowances for doubtful accounts are estimated based on historical collection experience and periodically reviewed by management. 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 unregistered and restricted equity and equity linked instruments to employees and non-employees in lieu of cash for the receipt of goods and 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 goods and services are received.

The Company expenses the grant date fair value of its employee stock based compensation over the requisite service period and / or upon the achievement of certain performance milestones.

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.

Commission Revenue

The Company derives the majority of its revenue from assisting home buyers and sellers in listing, marketing, selling, and finding residential real estate. Commissions earned as agents in residential real estate transactions are recorded on a gross basis upon closing of a transaction (purchase or sale), commonly referred to gross commission income (presented net of fees and expenses in 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 statements of operations.

Non-Commission Revenue

Non-commission revenues are derived primarily from agent and broker training fees, known as “eXp University tuition” and technology fees. Technology fee revenues are recognized monthly as the contracted services are delivered.

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, 2016 and 2015, the Company incurred advertising expenses of $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 2013 to 2016.

The Company establishes reserves to remove some or all of the tax benefit of any of our tax positions at the time we determine that it becomes uncertain based upon one of the following conditions: (1) the tax position is not "more likely than not" to be sustained, (2) the tax position is "more likely than not" to be sustained, but for a lesser amount, or (3) the tax position is "more likely than not" to be sustained, but not in the financial period in which the tax position was originally taken. For purposes of evaluating whether or not a tax position is uncertain, (1) we presume the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information; (2) the technical merits of a tax position are derived from authorities such as legislation and statutes, legislative intent, regulations, rulings and case law and their applicability to the facts and circumstances of the tax position; and (3) each tax position is evaluated without consideration of the possibility of offset or aggregation with other tax positions taken. A number of years may elapse before a particular uncertain tax position is audited and finally resolved or when a tax assessment is raised.

The number of years subject to tax assessments varies depending on the tax jurisdiction. The tax benefit that has been previously reserved because of a failure to meet the "more likely than not" recognition threshold would be recognized in income tax expense in the first interim period when the uncertainty disappears under any one of the following conditions: (1) the tax position is "more likely than not" to be sustained, (2) the tax position, amount, and/or timing is ultimately settled through negotiation or litigation, or (3) the statute of limitations for the tax position has expired. 

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 October 2016, the FASB issued ASU No. 2016-16 - Income Taxes (Topic 740), which requires that the Company recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments contained in ASU No. 2016-16 are effective for periods beginning after December 15, 2017. The Company is still evaluating the potential impacts that the implementation of ASU 2016-16 may have a material effect on its financial position, operational results, or cash flows.

In March 2016, the FASB issued ASU No. 2016-09 Compensation – Stock Compensation (Topic 718) which 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 simplification guidance is effective January 1, 2017. The Company is currently evaluating the impact of implementing the stock compensation simplification on its financial position, operational results, and cash flows.

In May 2014, the FASB began issuing several accounting standards updates associated with accounting for revenue from contracts with customers. The objective of the updates, and subsequent clarifying and industry specific updates, are to 1) remove inconsistencies and weaknesses in revenue requirements, 2) provide a robust framework for addressing revenue recognition issues, 3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets 4) provide more useful information to users of financial statements through improved disclosure requirements, and 5) simplify the preparation of financial statements. The updates are 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 these new revenue standards may have on its financial position, operational results, or cash flows.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 - Leases (Topic 842). Under the new guidance a lessee will be required to recognize assets and liabilities for leases with lease terms more than 12 months, whether that lease be classified as a capital or operating lease. This update is effective in annual reporting periods beginning after December 15, 2018 and the interim periods within that year. The Company is still evaluating the potential impacts that implementing ASU No. 2016-02 may have on its financial position, operational results, or cash flows.

In November 2016, the FASB issued Accounting Standards Update No. 2016-18 – Statement of Cash Flows (Topic 240). Under the new guidance the statement of cash flows amounts generally described as restricted cash and restricted cash equivalents shall be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company is currently evaluating the impact of implementing this new guidance on its statement of cash flows and other required disclosures until its eventual adoption and incorporation.

Prepaid and other current assets consisted of the following:

Fixed assets, net consisted of the following:

Depreciation and amortization expense for the years ended December 31, 2016 and 2015 was $58,374 and $26,304, respectively.

Accrued expenses consisted of the following:

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

As of December 31, 2016, the Company had 52,316,679 shares of common stock issued and outstanding. The following provides a detailed description of the stock based transactions completed during the periods presented in this report:

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

During the year ended December 31, 2016, the Company issued 159,678 shares of restricted and unregistered common stock for cash proceeds totaling $4,900 related to the exercise of stock options.

During the year ended December 31, 2016, the Company issued a total of 1,804,191 shares of restricted and unregistered common stock for employee and non-employee compensation totaling $5,559,898.

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

During the year ended December 31, 2015, the Company issued a total of 1,613,816 shares of restricted and unregistered common stock for employee and non-employee compensation totaling $1,293,077.

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

2015 Agent Equity Program

The Company provides agents and brokers the opportunity to elect to receive 5% of commissions earned from each completed residential real estate transaction in the form of restricted and unregistered common stock. If agents and brokers elect to receive portions of their commissions in restricted and unregistered common stock, they are entitled to receive the equivalent number of shares of common stock, based on the fixed monetary value of the commission payable, at a 20% discount to the trailing 30-day volume weighted average closing market price for unrestricted shares.

During the years ended December 31, 2016 and 2015, the Company issued 785,504 and 436,184 shares, respectively, of restricted and unregistered shares of common stock to agents and brokers for total consideration of $1,442,232 and $284,105, respectively for the settlement of commissions payable.

Real Estate Agent Growth and Other Incentive Programs

The Company administers an equity incentive program whereby agents and brokers become eligible for awards of the Company’s common stock through agent attraction and performance benchmarks. Agents who qualify, and who remain with the Company in good standing for the term of the applicable agreement, are awarded shares of restricted and unregistered shares of common stock based on production milestones.

Under this program, the Company awards restricted and unregistered shares of common stock to non-employees that become issuable upon the achievement of certain milestones for the both individual and the recruited agents. Subsequent to achieving and maintaining the milestones, the awards vest ratably over service periods of three years.

Prior to becoming a member of the Company’s Board of Directors, Mr. Gene Frederick, was engaged by the Company under an Independent Contractor Agreement (“ICA”) for the purpose of introducing and attracting real estate agents and brokers, and to be a regional leader in the State of Texas. In accordance with the terms of the ICA, Mr. Frederick was provided with incentives in which 3,000,000 shares of restricted common stock would be issuable upon the achievement of certain agent attraction and revenue production milestones. Upon reaching and maintaining these performance milestones, the awards vest yearly over a three-year period.

As of December 31, 2016, the Company has granted Mr. Frederick 1,000,000 shares of restricted common stock, with cost recognition totaling $2,056,875 during the year ended December 31, 2016. Of the 1,000,000 share of restricted common stock under this award, 500,000 of the shares have vested and issued as of December 31, 2016.

The Company re-measures and recognizes the lowest aggregate fair value of certain awards granted to non-employees at each reporting date using expected performance achievement and corresponding vesting assumptions until the services are complete.

The following table illustrates the Company’s restricted stock activity for the following periods:

As of December 31, 2016, the Company had 1,813,672 unvested restricted and unregistered stock awards with unrecognized compensation costs totaling $5,512,247. 

Pre 2013 Stock Options

As of December 31, 2016, as a result of being a private company prior to September 2013, 6,384,808 outstanding options were accounted for in accordance with the intrinsic value method. In accordance with the intrinsic value method, the Company re-measures the intrinsic value of the vested portion of the outstanding options at each reporting date through the date of settlement. The change related to the intrinsic value of the applicable awards is included in general and administrative costs in the accompanying consolidated statements of operations. As of December 31, 2016 and 2015, the outstanding options subject to re-measurement had intrinsic values of $3.92 and $0.68 per option, respectively. The re-measurement of the intrinsic value of the awards resulted in the recognition of additional stock option expense of $20,495,234 and $3,371,363 for the years ended December 31, 2016 and 2015, respectively, included in general and administrative expenses in accompanying consolidated statements of operations. As of December 31, 2016, the fully vested outstanding options subject to re-measurement in accordance with the intrinsic value method had a weighted average remaining contractual term of 5.92 years.

Post 2013 Stock Option Awards

Stock option awards issued subsequent to September 2013 are recognized based on their grant date value as estimated through the utilization of a Black-Scholes option pricing model. Compensation expense associated with stock option awards granted after September 2013 is ratably recognized over the vesting period, commensurate with the goods and services received.

During the year ended December 31, 2016, the Company granted 4,130,000 stock options with an estimated grant date fair value of $6,737,951. The assumptions used to estimate the grant date fair value of the awards issued for the year ended December 31, 2016 include: expected volatility, based on historical stock prices ranging from 165% to 178%; an average expected term of 6.25 years; risk free rates based on U.S. Treasury instruments for the expected term between 1.5% and 2%; and no dividend payments.

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

For the years ended December 31, 2016 and 2015, the Company recognized compensation cost associated with all equity and equity-linked awards of $27,524,370 and $4,790,568, respectively, inclusive of intrinsic value re-measurement.

As of December 31, 2016, the Company had 10,747,558 outstanding options with unrecognized compensation cost totaling $5,860,912.

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

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

Deferred tax assets consist of the following at:

At December 31, 2016, the Company had federal net operating losses of approximately $1.113 million which will begin to expire in 2029 and could be subject to certain limitations under section 382 of the Internal Revenue Code.

The Company has provided a valuation allowance at December 31, 2016 and 2015 of $742,969 and $2,060,354 respectively for its net deferred tax assets as it cannot conclude it is more likely than not all of the estimated net deferred tax assets will be realized. The valuation allowance decreased by $1,317,385 and increased $1,676,214 in 2016 and 2015, respectively.

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

Operating leases

The Company leases its office spaces with the latest expiration date under non-cancelable arrangements of December 31, 2018. The following table illustrates the Company’s future obligations related to its non-cancellable operating leases:

Legal proceedings

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, operational results, or cash flows.

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

The Company enters into residential real estate transactions within the United States and Canada. For the year ended December 31, 2016, approximately 2% of the Company’s total net revenue of $54,179,511 was generated in Canada. For the period ended December 31, 2015, the Company generated approximately 6.7% of its total revenue from Canada. The Company did not possess material assets located outside of the United States as of December 31, 2016 and 2015.

During the year ended December 31, 2016, and as part of their agreements to join the Company’s Board of Directors, Mr. Richard Miller and Mr. Randall Miles were granted an option to purchase a total of 700,000 (350,000 each) shares of common stock from a significant shareholder at an exercise price of $1.76 per share. The Company estimated the grant date fair value of these options using a Black-Scholes model with the assumptions described in Footnote 6. The aggregate grant date fair value of these awards was $1,248,534 and the options vest monthly over a three-year period. During the year ended December 31, 2016, the Company recognized compensation cost totaling $186,995. As of December 31, 2016, the Company had unrecognized compensation cost associated with these awards totaling $1,061,539.

Upon the exercise of the options, the Company will not receive any cash proceeds nor, will it be obligated to issue additional shares.

In January 2017, we issued the remaining 49,231 shares of restricted and unregistered shares of common stock to accredited investors subsequent to the receipt of $160,000 of gross proceeds from the Company’s December 2016 private placement. The Company received total gross cash proceeds from the private placement of $760,000.

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

On September 18, 2015, we were notified that our audit team, inclusive of our engagement partner, transitioned from Haynie and Company (“Haynie”) to the registered independent accounting firm WSRP, LLC (“WSRP”). As a result, and effective the same date, our Board of Directors (“Board”) approved the dismissal of Haynie and engaged WSRP as the Company’s independent registered auditor.

Haynie’s reports on our financial statements for the fiscal years ended December 31, 2014 and 2013 did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. Further, during the fiscal years ended December 31, 2014 and 2013, and for the interim periods through the date of their dismissal, there were no disagreements with Haynie on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Haynie, would have caused it to make reference to the subject matter of the disagreements in connection with its report. Further, there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K occurring during the Company’s two most recent fiscal years and the period through September 18, 2015.

During the fiscal years ended December 31, 2014 and 2013 and during any subsequent interim period preceding the date of WSRP’s engagement on September 18, 2015, neither the Company, nor anyone acting on its behalf, consulted with WSRP regarding:

On February 3, 2017, our Board approved the dismissal of WSRP as our independent registered public accounting firm, effective immediately. WSRP’s report on the financial statements for the fiscal year ended December 31, 2015, did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. Additionally, through the date of WSRP’s dismissal on February 3, 2017, (i) there were no disagreements with WSRP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of WSRP, would have caused it to make reference to the subject matter of the disagreements in connection with its reports for such years, and (ii) there were no reportable events as described in Item 304(a)(1)(v) of Regulation S-K.

Effective February 3, 2017, we appointed BDO USA, LLP (“BDO”) as the Company’s independent registered public accounting firm for the fiscal year ended December 31, 2016. The Company’s decision to replace WSRP with BDO was approved by our Board.

In May 2016, the Company consulted with WSRP and BDO concerning the general application of accounting principles to a proposed transaction. WSRP and BDO orally confirmed the accounting treatment that the Company had believed was applicable to the transaction and further discussed the related tax consequences. Ultimately, we did not consummate the contemplated transaction. With the exception of the failed proposed transaction discussion, we did not consult with BDO during the fiscal years ended December 31, 2015 and 2014, or during any subsequent interim period preceding the date of engagement regarding:

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as such items are defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report were not effective. The ineffectiveness of our disclosure controls and procedures was due to the existence of identified material weaknesses.

The disclosure controls and procedures are controls and procedures that are designed to ensure that information we are required to disclose in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2016. In making its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework.

Based on this evaluation, management concluded that the Company’s internal control over financial reporting were not effective as of December 31, 2016.

Our management determined that our internal controls over financial reporting was not effective based on the identification of certain material weaknesses. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

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

The following provides a description of the material weaknesses identified in prior periods along with a description of our remediation actions:

Remediation actions: As of December 31, 2016, we have formalized the documentation and implementation of our key corporate governance policies resulting in our CEO and CFO’s determination that the likelihood of preventing or detecting a material misstatement in our financial reporting is probable. In this regard, we have formally documented many of our key corporate governance policies and, with the assistance of the independent committees discussed below, are working on developing further governance policies.

Remediation actions: During the year ended December 31, 2016, we engaged 9 new employees to perform our day to day accounting functions, including the addition of a controller. In addition, we substantially enhanced our oversight of those charged with financial reporting duties. We believe that this former material weakness has been remediated.

Remediation actions: During 2016, we appointed two additional independent directors, resulting in three out of six directors determined to be independent at December 31, 2016. Further, in January 2017 we appointed an additional independent director, resulting in a majority of independent directors for the first time. As of December 31, 2016, the following Board committees were in place: Audit Committee and Governance Committee. Further in March of 2017 a Compensation Committee was also formed. Each of these standing committees has been specifically charged with certain oversight functions. All of these standing committees are comprised of independent directors, except that our CEO Mr. Sanford sits on the Governance Committee.

Remediation actions: During 2016, the Board formed an Audit Committee, which is currently comprised of two independent directors. Additionally, one of the audit committee members satisfies the SEC’s definition of a “financial expert.” Our sophisticated, independent audit committee provides the appropriate level of monitoring of our financial reporting processes. Accordingly, we believe this former material weakness was fully remediated as of December 31, 2016.

Our management, including our Chief Executive Officer and Chief Financial Officer, acknowledge that because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Changes in Internal Control Over Financial Reporting

As discussed above, we made material changes in our internal control over financial reporting during the fiscal year and quarter ended December 31, 2016 that have materially affected, or are expected to further materially affect, our internal control over financial reporting.

Item 9B. Other Information

None

PART III

Item 10. Directors, Executive Officers and Corporate Governance

(a) Directors and Executive Officers

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

Business Experience

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

Glenn Sanford

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

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

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

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

Jason Gesing

Jason Gesing is an attorney licensed in Massachusetts and New Hampshire.

Mr. Gesing joined the Company in March 2010 and was appointed Chief Business Development Officer in September 2012, a position he held until June 2014. From June 2014 through September 2016, Mr. Gesing served as the Corporation’s President. With over a decade of experience in real estate in various capacities, Mr. Gesing holds broker's licenses in Massachusetts, New Hampshire, and Maine.

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

Mr. Gesing obtained a Bachelor of Arts (Magna Cum Laude) in 1996 from Syracuse University, and a Juris Doctor in 2002 from Boston College Law School.

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

Alan Goldman

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

Russ Cofano

Mr. Cofano currently serves as the Company’s President and General Counsel, having initially served as Chief Strategy Officer and General Counsel upon joining the Company in July 2016. Prior to joining the Company, Mr. Cofano was Senior Vice President of Industry Relations for Move, Inc., operator of realtor.com from June 2014 through September 2015. At Move, Mr. Cofano was instrumental in reinvigorating realtor.com’s relationship with MLSs and other real estate associations. Prior to Mr. Cofano’s experience at Move, he served as Chief Executive Officer for the Missouri REALTORS from June 2011 through June 2014.

Mr. Cofano served as Vice President and General Counsel for the Seattle Washington based real estate brokerage, John L. Scott Real Estate.

Mr. Cofano was a practicing attorney in private practice prior to becoming general counsel for John L. Scott Real Estate where he advised a diverse client base on matters involving real estate brokerage, REALTOR associations, MLSs, technology and intellectual Property, mergers and acquisitions, business transactions and franchising.

Mr. Cofano is a graduate of the University of Washington, obtaining his B.A (Business Administration) in 1983 and his Juris Doctor in 1987.

Gene Frederick

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

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

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

Richard S. Miller

Mr. Miller has served as an independent director of the Company since July 2016. For over 25 years, Mr. Miller has held senior leadership positions in companies ranging 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. Mr. Miller was recruited by AT&T where he served as President of the $13B Global Services unit. He later served as President, COO, and as a Board member at internet startup OPUS360 where he led the company’s successful IPO. Mr. Miller was later recruited by Lucent Technologies to lead their $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 executives, across a diverse number of industries. He is also an author and public speaker. Mr. Miller’s success and unconventional approach has been highlighted in Harvard Business Review, Selling Power, USA Today, Yahoo, and MSN Business. Most recently, Mr. Miller was named to serve on the Executive Committee for the Strategic Innovation Lab at Case University’s Weatherhead School of Management, focusing on sustainable growth.

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

Randall D. Miles

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

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

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

Laurie A. Hawkes

Ms. Hawkes was appointed as an independent Board member effective January 2, 2017. Ms. Hawkes has held leadership positions as an investment banker, private real estate equity investor and successful entrepreneur. Beginning in 2008, she co-founded American Residential Properties, LLC, ARP Phoenix Fund I, and American Residential Management, Inc., to invest in and manage single-family rental housing. Subsequently, in 2012, Ms. Hawkes co-founded American Residential Properties, Inc., a REIT, and led the financing and operations from a start-up entity to a $2 billion enterprise.  Ms. Hawkes currently serves as President, Chief Operating Officer and a member of the Board of Directors of American Residential Properties, Inc. Ms. Hawkes co-led the initial public offering of American Residential Properties, Inc., which listed on the New York Stock Exchange in May 2013 and subsequently was merged with American Homes 4 Rent (NYSE: “AMH”) in March 2016. 

From 1995 to 2007, Ms. Hawkes worked at U.S. Realty Advisors, a $3 billion real estate private equity firm, becoming a Partner in 1997 and serving as President of the firm and Head of Acquisitions from 2003 to 2007. In the fifteen years prior to joining U.S. Realty Advisors, Ms. Hawkes was a Wall Street investment banker specializing in real estate and mortgage finance. From 1993 to 1995, Ms. Hawkes was a Managing Director in the Real Estate Investment Banking Division at CS First Boston Corp., and, from 1979 to 1993, was a Director in the Real Estate Investment and Mortgage Banking Departments at Salomon Brothers Inc. Throughout her career, Ms. Hawkes has structured and negotiated more than $20 billion in corporate finance and real estate transactions including common stock offerings, convertible exchange notes, corporate secured and unsecured credit facilities, and real estate acquisitions. She has securitized debt transactions for all property types by utilizing numerous sources of financing, including private equity, capital markets, financial institutions and direct institutional investors.

Ms. Hawkes has had public, private and nonprofit board experience, including American Residential Properties, Inc., and the Board of Trustees for Bowdoin College where she served on the governing boards for 22 years. She presently serves on the boards of Broadstone Net Lease and Broadtree Residential, both privately owned REITs. In addition, she has been active for many years in leadership roles with Opportunity International, an international non-profit organization which focuses in large part on micro-finance for women. Ms. Hawkes is a former principal of the NASD, former member of the Urban Land Institute, and most recently, was the recipient of Housingwire’s Women of Influence for Top Women Business Leaders in 2014 and 2015 honoring her work in the housing sector.  Ms. Hawkes is an accomplished public speaker for real estate and housing related conferences.  She received a Bachelor of Arts from Bowdoin College and a Masters in Business Administration from Cornell University.

Ms. Hawkes is amply qualified to serve as a director due to her extensive experience as an investment banker focusing on the real estate and mortgage industries, and her experience as an executive at a private equity firm focusing on real estate investment acquisition and financing. Ms. Hawkes does not have any current or prior relationship with the Company that would require disclosure under Item 404(a) of Regulation S-K.

Darren Jacklin

For over 19 years, Darren Jacklin has traveled four continents and over 40 countries mentoring entrepreneurs and business owners on specific and measurable strategies that they can consistently use to increase their income, transform their obstacles into cash flow and turn their passion into profits.

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

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

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

Family Relationships

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

Involvement in Certain Legal Proceedings

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

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

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

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

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

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

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

Code of Ethics

As of March 31, 2017 the Company has not yet adopted a code of ethics. Our governance committee in conjunction with our management team is currently working on and fully expects to adopt and implement a code of ethics in the 2017 fiscal year.

Security Holder Nominating Procedures

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

Committees of the Board of Directors

We do not have a nominating committee, and until early 2017, we did not have a compensation committee. Throughout 2016, we expanded our Board of Directors to a total of seven members, of which 5 are independent. In 2016, in addition to forming our audit committee as discussed below, we formed a governance committee. Our governance committee is made up of Richard Miller (Chair), Randall Miles, and Glen Sanford. Our compensation committee consists of Laurie Hawkes (Chair) and Richard Miller.

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

Audit Committee

In 2016, we formed our audit committee, consisting of two independent members: Randall Miles, Chairman and financial expert; and Richard Miller.  Our audit committee approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the audit committee reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers and persons who owned more than 10% of the Company’s common stock (collectively, “Reporting Persons”) to file reports of ownership and changes in ownership of common stock and other securities of the Company on Forms 3, 4 and 5 with the SEC. Reporting Persons were required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they filed. Based solely on review of reports received by the Company or written representations from the Reporting Persons, the Company believes that with respect to the fiscal year ended December 31, 2016, all of the Reporting Persons complied with all applicable Section 16(a) filing requirements.

Item 11. Executive Compensation

The particulars of the compensation paid to:

Compensation of Executive Officers

As of December 31, 2016, we had formal compensation plans in place for Alan Goldman, Peter Nobel and Russ Cofano with regards to expected remuneration including either salary or potential bonus programs. Mr. Cofano’s plan was previously filed as an Exhibit to our June 30, 2016 Form 10-Q filed on August 15, 2016; and Messrs. Goldman and Nobel were filed as Exhibit’s to our Current Report on Form 8-K filed on March 21, 2016.

We have not entered into any written employment agreement or consulting agreement with Glenn Sanford or Jason Gesing.

Retirement or Similar Benefit Plans

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

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

We have no plans or arrangements with respect to remuneration received or that may be received by our executive officers to compensate such officers in the event of termination of employment (as a result of resignation, retirement, change of control) or a change of responsibilities following a change of control.

Outstanding Equity Awards at Fiscal Year End

Compensation of Directors

Mr. Sanford is also our Chief Executive Officer (see Executive Compensation table for services acting as Officers). Additionally, Messrs. Sanford, Gesing, Jacklin, and Frederick are compensated $2,000 per month for directorship activities which is paid in common stock. Effective in the second half of 2016, our newly appointed directors receive $75,000 a year as compensation. Directors are reimbursed for reasonable out-of-pocket expenses incurred.

Director Compensation

The following table sets forth certain information regarding the compensation earned by or awarded to each non-employee director during fiscal year 2016 who served on our Board during the fiscal year 2016:

¹ The dollar amounts shown represent the aggregate grant date fair value of stock option awards granted, determined in accordance with US GAAP, but not necessarily what has fully vested as of December 31, 2016.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Principal Stockholders and Management

The following table provides certain information regarding the ownership of our common stock, as of March 15, 2016 by:

Notes

⁽¹⁾ Except as otherwise indicated, we believe that the beneficial owners of the common stock listed above, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Common stock subject to options or warrants currently exercisable or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage ownership of the person holding such option or warrants, but are not deemed outstanding for purposes of computing the percentage ownership of any other person.

⁽²⁾ Percentage of ownership is based on 52,372,181 shares of our common stock issued and outstanding as of March 31, 2017 in addition to 4,516,567 of estimated exercisable shares through May 14, 2017.

⁽³⁾ Includes 21,081,520 shares of our common stock and stock options to acquire 1,617,000 shares of our common stock.

⁽⁴⁾ Includes of 263,291 shares of our common stock and stock options to acquire 1,674,130 shares of our common stock.

⁽⁵⁾ Consists of exercisable stock options to acquire shares of common stock only.

⁽⁶⁾ Includes of 75,000 shares of our common stock and stock options to acquire 150,685 shares of our common stock.

⁽⁷⁾ Includes 6,000 shares of our common stock and stock options to acquire 135,788 shares of our common stock.

Changes in Control

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

Item 13. Certain Relationships and Related Transactions, and Director Independence

Transactions with Related Persons

During the year ended December 31, 2016, and as part of their agreements to join the Company’s Board of Directors, Mr. Richard Miller and Mr. Randall Miles were granted an option to purchase a total of 700,000 (350,000 each) shares of common stock from a significant shareholder at an exercise price of $1.76 per share. The Company estimated the grant date fair value of these options using a Black-Scholes model with the assumptions described in Footnote 6. The aggregate grant date fair value of these awards was $1,248,534 and the options vest monthly over a three-year period. During the year ended December 31, 2016, the Company recognized compensation cost totaling $186,995. As of December 31, 2016, the Company had unrecognized compensation cost associated with these awards totaling $1,061,539.

Upon the exercise of the options, the Company will not receive any cash proceeds nor, will it be obligated to issue additional shares.

Director Independence

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

Item 14. Principal Accounting Fees and Services

Principal Accounting Fees

The following table sets forth fees billed or accrued by our independent registered public accountants during the fiscal years ended December 31, 2016 and 2015:

Audit fees consist of fees billed for professional services rendered for the audit of our consolidated financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by an independent registered accountant in connection with statutory and regulatory filings or engagements. The principal accountant for the calendar periods 2016 and 2015 was WSRP, LLC. Our current principal accountant, BDO, engaged to audit our financial statements for the year ended December 31, 2016 was not engaged until February 2017, correspondingly, we did not incur any 2016 fees due to BDO.

Audit-related fees consists of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our consolidated financial statements, which are not reported under “Audit Fees.” There were no audit related fees provided in the fiscal year end December 31, 2016 and 2015.

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

The principal accountant for the current year and for the most recently completed fiscal year is not expected to present at the stockholder’s meeting, will not be able to make a statement if desired, and will not be available to respond to questions.

All other fees consist of fees for products and services other than the services reported above.  There were no management consulting services provided in the fiscal year end December 31, 2016 and 2015.

Pre-Approval Policies and Procedures

Until the formation of audit committee in late 2016, our Board of Directors pre-approved all services provided by our independent registered accountants. All of the above services were reviewed and approved by our Board of Directors and subsequent to its 2016 formation our Audit Committee, before such services were rendered.

PART IV

Item 15. Exhibits, Financial Statement Schedules

EXHIBITS

SIGNATURES

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

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