EXP World Holdings, Inc. - Annual Report: 2017 (Form 10-K)

Table of Contents

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

FORM 10-K

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

For the fiscal year ended December 31, 2017

or

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

For the transition period from ________ to _________

Commission File Number: 000-53300

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

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

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

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

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

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

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

Yes [_]    No [X]

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

Yes [_]    No [X]

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

Yes [X]    No [_]

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

Yes [X]    No [_]

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

Yes [_]    No [X]

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

If an emerging growth company, indicate by check mark if the registrant has selected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

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

Yes [_]    No [X]

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

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

TABLE OF CONTENTS

EXPLANATORY NOTE

Overview of Restatement

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

Background on the Restatement

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

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

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

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

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

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

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

The restated financial statements correct the following errors:

Equity-Based Payments – Stock Options

Equity-Based Payments – Stock Compensation

Other Adjustments

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

Effects of Restatement

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

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

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

Statement Regarding Forward-Looking Statements

This Annual Report and our other public filings contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements give expectations or forecasts of future events. Forward-looking statements can be identified by words such as “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,” “may,” “will,” “would,” “potential” and similar expressions to future periods. Forward-looking statements are not based on historical facts but rather represent current expectations and assumptions. Forward-looking statements include statements we make about matters such as: future revenues; future industry market conditions; future changes in our capacity and operations; future operating and overhead costs; operational and management restructuring activities (including implementation of methodologies and changes in the board of directors); future employment and contributions of personnel; tax and interest rates; capital expenditures and their impact on us; productivity, business process, rationalization, investment, acquisition, consulting, operational, tax, financial and capital projects and initiatives; contingencies; changes in the regulatory environment; and future working capital, costs, revenues, business opportunities, cash flows, margins, earnings and growth.

Forward-looking statements relate to the future and are subject to many risks, assumptions and uncertainties, including those risks described in Part I, Item IA Risk Factors. Although we believe the expectations reflected in the forward-looking statements are reasonable, actual results, developments and business decisions could differ materially from those contemplated by such forward-looking statements. The environment for which we operate in is highly competitive and rapidly changing and it is not possible for our management to predict all risks, as new risks emerge from time to time.

While no list of uncertainties could be complete, some factors that could cause actual results to differ materially from those in the forward-looking statements include the following, without limitation: current and future business and economic uncertainties may adversely affect our revenues, profitability and financial condition; changes in the residential mortgage markets and housing markets may adversely affect our earnings and financial condition; our earnings may decrease because of increases or decreases in interest rates; we are exposed to capital markets risk related to changes in foreign exchange rates which may adversely affect our results of operations, financial condition and cash flows; our business, financial condition and results of operations could be adversely affected by new government regulations; potential inability to attract and retain skilled personnel, including real estate agent, could harm our business; we may pursue strategic opportunities which could result in operating difficulties or dilution; assertions of claims, lawsuits and proceedings against us could harm our business, results of operations and reputation; changes in the United States or other monetary or fiscal policies and regulations that impact the real estate market; and our potential inability to list our securities on any securities exchange or market.

All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirely by these factors. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future developments or otherwise, except as may be required by law.

PART I

Item 1. BUSINESS

Overview

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

Operations

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

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

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

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

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

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

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

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

Fee Structure

The lower overall cost of operating our cloud office has enabled us to offer our agents and brokers a higher split of the gross commissions generated from real estate transactions than most traditional real estate brokerages. This higher fee split along with our unique delivery of support services and the flexibility it provides for brokers and agents has facilitated our growth over the past several years.

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

Revenue Sharing Plan

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

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

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

Our Markets

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

Competition

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

Intellectual Property

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

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

If necessary, we will aggressively assert our rights under trade secret, unfair competition, trademark and copyright laws to protect our intellectual property, including product design, product research and concepts and registered trademarks. These rights are protected through the acquisition of patents and trademark registrations, the maintenance of trade secrets, the development of trade dress, and, where appropriate, litigation against those who are, in our opinion, infringing these rights.

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

Seasonality of Business

Seasons and weather traditionally impact the real estate industry. Continuous poor weather or natural disasters negatively impact listings and sales. Spring and summer seasons historically reflect greater sales periods in comparison to fall and winter seasons. We have historically experienced lower revenues during the fall and winter seasons, as well as during periods of unseasonable weather, which reduces our operating income, net income, operating margins and cash flow.

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

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

Furthermore, the residential real estate market and the real estate industry in general is often cyclical, characterized by protracted periods of depressed home values, lower buyer demand, inflated rates of foreclosure and often changing regulatory or underwriting standards applicable to mortgages. Such depressed real estate cycles are often followed by extended periods of higher buyer demand, lower available real estate supply and increasing home values. Our business is affected by these cycles in the residential real estate market, which can make it difficult to compare or analyze our financial performance effectively across successive periods.

Internal Use Software Development

Our Company continues to increase our investment in the development of our own cloud-based transaction processing platforms. During 2017, we hired several employees and engaged third party vendors focused on creating process efficiencies and providing our agents and brokers with mobile applications designed to facilitate transactions in an efficient and consumer friendly way.

Government Regulation

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

We are also subject to federal and state regulations relating to employment, contractor, and compensation practices. Except for our employed state brokers, all real estate professionals in our brokerage operations have been retained as independent contractors, either directly or indirectly through third-party entities formed by these independent contractors for their business purposes. With respect to these independent contractors, like most brokerage firms, we are subject to the Internal Revenue Service regulations and applicable state law guidelines regarding independent contractor classification. These regulations and guidelines are subject to judicial and agency interpretation.

Real Estate Regulation - Federal

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

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) moved authority to administer RESPA from the Department of Housing and Urban Development to the new Consumer Financial Protection Bureau (“CFPB”). At present, leadership at the CFPB is in transition, with a new acting director. The CFPB released a five-year strategic plan in February 2018 indicating that it intends to continue to focus on protecting consumer rights while engaging in rulemaking to address unwarranted regulatory burdens. As a result, the regulatory framework of RESPA applicable to our business may be subject to change. The Dodd-Frank Act also increased regulation of the mortgage industry, including: (i) generally prohibiting lenders from making residential mortgage loans unless a good faith determination is made of a borrower's creditworthiness based on verified and documented information;(ii) requiring the CFPB to enact regulations, to help assure that consumers are provided with timely and understandable information about residential mortgage loans that protect them against unfair, deceptive and abusive practices; and (iii) requiring federal regulators to establish minimum national underwriting guidelines for residential mortgages that lenders will be allowed to securitize without retaining any of the loans’ default risk. In addition, federal fair housing laws generally make it illegal to discriminate against protected classes of individuals in housing or brokerage services. Other federal laws and regulations applicable to our business include (i) the Federal Truth in Lending Act of 1969; (ii) the Federal Equal Credit Opportunity; (iii) the Federal Fair Credit Reporting Act; (iv) the Fair Housing Act; (v) the Home Mortgage Disclosure Act; (vi) the Gramm-Leach-Bliley Act; (vii) the Consumer Financial Protection Act; (viii) the Fair and Accurate Credit Transactions Act; and (ix) the Do Not Call/Do Not Fax Act and other state and federal laws pertaining to the privacy rights of consumers, which affects our opportunities to solicit new clients.

Real Estate Regulation - State and Local Level

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

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

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

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

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

In each of the states where we have operations, we assign appropriate personnel to manage and comply with applicable laws and regulations.

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

Third-Party Rules

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

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

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

Employees

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

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

Available Information

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

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

Item 1A. RISK FACTORS

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

Risks Related to Our Business and Industry

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

We have a history of operating at losses since our inception in October 2009. Our ability to realize consistent, meaningful revenues and profit over a sustained period has not been established and cannot be assured.

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

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

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

Our profitability is closely related to the strength of the residential real estate market which is cyclical in nature and typically is affected by changes in national, state and local economic conditions which are beyond our control. Macroeconomic conditions that could adversely impact the growth of the real estate market and have a material adverse effect on our business include, but are not limited to, economic slowdown or recession, increased unemployment, increased energy costs, reductions in the availability of credit or higher interest rates, increased costs of obtaining mortgages, an increase in foreclosure activity, inflation, disruptions in capital markets, declines in the stock market, adverse tax policies or changes in other regulations, lower consumer confidence, lower wage and salary levels, war or terrorist attacks, natural disasters or adverse weather events, or the public perception that any of these events may occur. Unfavorable general economic conditions, such as a recession or economic slowdown, in the United States, Canada or other markets we enter and operate within could negatively affect the affordability of, and consumer demand for, our services which could have a material adverse effect on our business and profitability. In addition, federal and state governments, agencies and government-sponsored entities such as Fannie Mae and Freddie Mac could take actions that result in unforeseen consequences to the real estate market or that otherwise could negatively impact our business.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Seasons and weather traditionally impact the real estate industry. Continuous poor weather or natural disasters negatively impact listings and sales. Spring and summer seasons historically reflect greater sales periods in comparison to fall and winter seasons. We have historically experienced lower revenues during the fall and winter seasons, as well as during periods of unseasonable weather, which reduces our operating income, net income, operating margins and cash flow.

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

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

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

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

The Application, disclosure and safeguarding of this information is regulated by federal and state privacy laws. To comply with privacy laws, we invested resources and adopted a privacy policy outlining policies and procedures for the use of safeguarding personal information. This policy includes informing consumers, independent contractors and employees that we will not share their personal information with third parties without their consent unless required by law.

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

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

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

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

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

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

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

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

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

Our intellectual property rights, including existing and future trademarks, trade secrets, patents and copyrights, are important assets of the business. We have taken measures to protect our intellectual property, but these measures may not be sufficient or effective. We may bring lawsuits to protect against the potential infringement of our intellectual property rights and other companies, including our competitors, could make claims against us alleging our infringement of their intellectual property rights. There can be no assurance that we would prevail in such lawsuits. Any significant impairment of our intellectual property rights could harm our business.

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

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

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

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

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

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

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

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

Risk Related to Our Stock

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

Glenn Sanford beneficially owns approximately 37% of our outstanding common stock as of December 31, 2017. Penny Sanford beneficially owns approximately 27% of our outstanding common stock as of December 31, 2017. In December 2017 Mr. Sanford and Ms. Sanford filed a Schedule 13D with the Securities and Exchange Commission (“SEC”) indicating that they had entered into an agreement to vote their shares as a group with respect to the election of directors and any other matter on which our shares of common stock are entitled to vote. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors may perceive disadvantages in owning stock in companies with a controlling stockholder group. The group can significantly influence all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, due to his significant ownership stake and his service as our Principal Executive Officer and Chairman of the Board and Director, Mr. Sanford controls the management of our business and affairs. This concentration of ownership could have the effect of delaying, deferring or preventing a change in control, or impeding a merger or consolidation, takeover or other business combination that could be favorable to our other stockholders.

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

We are authorized to issue up to 220,000,000 shares of common stock, of which approximately 56.1 million shares were issued and outstanding as of March 15, 2018. Our board of directors has the authority to cause us to issue additional shares of common stock without consent of any of our stockholders. Consequently, the stockholders may experience more dilution in their ownership of our stock in the future.

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

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

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

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

Our common stock has been subject to the Securities and Exchange Commission’s “penny stock” regulations, which may limit a stockholder’s ability to buy and sell our common stock.

The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Based on its trading prices, our securities have been covered by the penny stock regulations in the past. The penny stock regulations impose additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors, which may have the effect of reducing the level of trading activity in the secondary market for such stock. If our securities become subject to the penny stock regulations, it may affect the ability of broker-dealers to trade our securities, which we believe would discourage investor interest in, and limit the marketability of, our common stock.

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

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

Item 1B. UNRESOLVED STAFF COMMENTS

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

Item 2. PROPERTIES

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

Item 3. LEGAL PROCEEDINGS

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

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

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

Market Information

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

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

Transfer Agent

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

Dividends

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

Securities Authorized for Issuance under Equity Compensation Plans

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

2013 Stock Option Plan

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

2015 Equity Incentive Plan

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

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

Recent Sales of Securities

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

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

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

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

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

Item 6. SELECTED FINANCIAL DATA

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

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

Overview of Restatement

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

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

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

Background on the Restatement

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

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

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

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

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

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

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

The restated financial statements correct the following errors:

Equity-Based Payments- Stock Options

Equity-Based Payments – Stock Compensation

Other Adjustments

The following discussion should be read together with our consolidated financial statements and related notes included elsewhere within this report. The Management’s Discussion and Analysis of Financial Condition and Results of Operations contain forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements. See “Forward-Looking Statements” and “Item 1 A. – Risk Factors” for a discussion of certain risks, uncertainties and assumptions associated with these statements.

OVERVIEW

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

Continued Accelerated Growth

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

Agent Ownership

The Company maintains equity incentive programs whereby agents and brokers of eXp Realty can become eligible for awards of the Company’s common stock through the achievement of production and agent attraction benchmarks. Under this program, agents and brokers who qualify can be issued shares of the Company’s common stock.

The Company also administers a program whereby agents and brokers could elect to receive 5% of their commission payable in the form of Company common stock which is issued at a 20% discount to market on the date of issuance. In 2017, approximately 2,700 eXp Realty agents and brokers took advantage of this program resulting in 1,464,997 shares of common stock being issued. This agent equity program continues to be another element in creating a culture of agent-ownership. 

RECENT BUSINESS DEVELOPMENTS

Initiatives

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

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

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

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

Tax Cuts and Jobs Act of 2017

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

The law includes provisions that, among other things:

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

MARKET CONDITIONS AND INDUSTRY TRENDS

According to the NAR, home sale transactions of single family homes volume increased 8.4% in 2017 as compared to the same period in 2016 as a result of both an increase in the number of home sale transactions, combined with average home sale price growth. Also, according to NAR, the housing affordability index has continued to be at historically favorable levels. When the index is above 100, it indicates that a family earning the median income has sufficient income to purchase a median-priced home, assuming a 20 percent down payment and ability to qualify for a mortgage. The composite housing affordability index was 157.5 for 2017 and 167.1 for 2016.

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

According to the Federal Housing Finance Agency, mortgage rates on commitments for 30-year, conventional, fixed-rate first mortgages averaged 3.88% for 2016 and the rate rose to 4.17% in December 2017. To the extent mortgage rates increase further, consumers continue to have financing alternatives such as adjustable rate mortgages or shorter-term mortgages which can be utilized to obtain a mortgage rate that is lower than a comparable 30-year fixed-rate mortgage.

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

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

Existing Home Sales

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

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

Existing Home Sales Price

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

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

Results of Operations

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

Revenues

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

Operating Expenses

Cost of revenues was $139.6 million for the year ended December 31, 2017 compared to $46.4 million for the year ended December 31, 2016, an increase of $93.2 million, or 200.6%. Cost of revenues includes costs related to sales agent commissions and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase in cost of revenue was primarily attributable to a higher amount of net revenues and increase in agent commissions paid.

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

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

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

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

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

Operating Expenses

Cost of revenues was $46.4 million for the year ended December 31, 2016 compared to $19.1 million for the year ended December 31, 2015, an increase of $27.3 million, or 142.8%. Cost of revenues includes costs related to sales agent commissions and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase in cost of revenue was primarily attributable to a higher amount of net revenues and increase in agent commissions paid.

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

Our future capital requirements will depend on many factors, including our level of investment in technology and our rate of growth into new markets. Our capital requirements may be affected by factors which we cannot control such as changes in demographics, interest rates, the economy and government policies and could impact the manner in which we operate. We believe that our current available cash and cash flow from ongoing operations will provide the necessary resources to continue operating our business over the next 12 months. In order to support and achieve our future growth plans, however, we may need or seek to obtain additional funding through equity or debt financing.

During the year ended 2017, we secured a $500,000 line of credit. We currently have no borrowings against the line of credit or any other term loan bank debt. In the event that additional financing is required in the future, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired or needed, our business and results of operations will likely suffer.

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

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

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

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

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

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

Our future capital requirements will depend on many factors, including our level of investment in technology and our rate of growth into new markets. Our capital requirements may be affected by factors which we cannot control such as changes in demographics, interest rates, the economy and government policies and could impact the manner in which we operate. We believe that our current available cash and cash flow from ongoing operations will provide the necessary resources to continue operating our business over the next 12 months. In order to support and achieve our future growth plans, however, we may need or seek to obtain additional funding through equity or debt financing.

For the year ended December 31, 2016, we have no bank debt or line of credit facilities. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with U.S. GAAP requires us to make certain judgments and assumptions, based on information available at the time of our preparation of the financial statements, in determining accounting estimates used in the preparation of the statements. Our significant accounting policies are described in Note 2 of the Consolidated Financial Statements.

Accounting estimates are considered critical if the estimate requires us to use judgments and/or make assumptions about matters that were uncertain at the time the accounting estimate was made and if different accounting estimates could have been used in the reporting period or changes in the accounting estimates are likely to occur that would have a material impact on our financial condition, results of operations or cash flows.

Revenue Recognition

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

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

Income Taxes

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

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

Stock Based Compensation

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

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

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

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

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

OFF-BALANCE SHEET ARRANGEMENTS

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

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

Shareholders and Board of Directors

eXp World Holdings, Inc.

Bellingham, Washington

Opinion on the Consolidated Financial Statements

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

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

Restatement to Correct 2016 Misstatements

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

Basis for Opinion

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

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

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

/s/ BDO USA, LLP

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

Salt Lake City, Utah

April 17, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

eXp World Holdings, Inc.

Bellingham, Washington

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

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

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

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

/s/ WSRP, LLC

WSRP, LLC

Salt Lake City, Utah

March 15, 2016

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, 2017

(Expressed in U.S. dollars)

1.        BASIS OF PRESENTATION

eXp World Holdings, Inc. (the “Company” or “we” or “eXp”) was incorporated in the State of Delaware on July 30, 2008. Through various operating subsidiaries, the Company operates a cloud-based real estate brokerage operating in most U.S. States, the District of Columbia and the provinces of Alberta and Ontario, Canada. The Company focuses on a number of cloud-based technologies in order to grow an international brokerage without the burden of physical bricks and mortar or redundant staffing costs.

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

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

2.       SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Principles of consolidation

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

Non-controlling interests

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

Use of estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to provisions for doubtful accounts, legal contingencies, income taxes, revenue recognition, stock-based compensation, expense accruals, and deferred income tax asset valuation allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

Cash and cash equivalents

The Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents. From time to time, the Company’s cash deposits exceed federally insured limits. The Company has not experienced any losses resulting from these excess deposits.

Restricted cash

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

Fair value measurements

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

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

Allowance for doubtful accounts

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

The Company typically does not experience material uncollectible accounts.

Foreign currency translation

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

Fixed assets

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

Computer hardware and software: 3 to 5 years

Furniture, fixtures and equipment: 5 to 7 years

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

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

Impairment of long-lived assets

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

Stock based compensation

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

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

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

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

Revenue recognition

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

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

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

Advertising costs

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

Income taxes

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

Comprehensive income (loss)

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

Net income (loss) per share

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

Recently issued accounting pronouncements

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

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

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

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

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

Recently adopted accounting pronouncements

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

3.       RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

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

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

Equity-Based Payments

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

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

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

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

Other Adjustments 

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

eXp World Holdings Inc.

Consolidated Statement of Operations

For the fiscal year ended December 31, 2016