EXP World Holdings, Inc. - Quarter Report: 2017 March (Form 10-Q)

Table of Contents

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

FORM 10-Q

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

For the quarterly period ended March 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: 000-55300

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

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

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

EXP REALTY INTERNATIONAL CORPORATION

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was require to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes ☒     No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (of for such shorter period that the registrant was required to submit and post such files). 
Yes ☒     No ☐

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

If an emerging growth company, indicate by check mark if the registrant has elected 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 Exchange Act). 
Yes ☐    No ☒

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of May 10, 2017 the registrant’s outstanding common stock consisted of 52,611,239 shares.

TABLE OF CONTENTS

Statement Regarding Forward-Looking Statements

Certain statements contained in this report on Form 10-Q are forward-looking statements which are intended to be covered by the safe harbors created thereby. All statements, other than statements of historical facts, are forward-looking statements. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” “plan,” “should,” “intend,” “may,” “will,” “would,” “potential” and similar expressions identify forward-looking statements, but are not the exclusive means of doing so. Forward-looking statements may include statements about matters such as: future revenues; future industry market conditions; future changes in our capacity and operations; future operating and overhead costs; operational and management restructuring activities (including implementation of methodologies and changes in the board of directors); future employment and contributions of personnel; tax and interest rates; capital expenditures and their impact on us; nature and timing of restructuring charges and the impact thereof; productivity, business process, rationalization, investment, acquisition, consulting, operational, tax, financial and capital projects and initiatives; contingencies; environmental compliance and changes in the regulatory environment; and future working capital, costs, revenues, business opportunities, debt levels, cash flows, margins, earnings and growth.

These statements are based on assumptions and assessments made by our management in light of their experience and their perception of historical and current trends, current conditions, possible future developments and other factors they believe to be appropriate. Forward-looking statements are not guarantees, representations or warranties and are subject to risks and uncertainties that could cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements. Some of those risks and uncertainties include the risk factors set forth in this report and our Annual Report on Form 10-K for our prior fiscal year ended December 31, 2016, and the following: current global economic and capital market uncertainties; potential dilution to our stockholders from our recapitalization and balance sheet restructuring activities; potential inability to continue to comply with government regulations; adoption of, or changes in legislation or regulations adversely affecting our businesses; permitting constraints or delays, business opportunities that may be presented to, or pursued by, us; changes in the United States or other monetary or fiscal policies or regulations; changes in generally accepted accounting principles; geopolitical events; potential inability to implement our business strategies; potential inability to grow revenues organically; potential inability to attract and retain key personnel; assertion of claims, lawsuits and proceedings against us; potential inability to maintain an effective system of internal controls over financial reporting; potential inability or failure to timely file periodic reports with the SEC; and potential inability to list our securities on any securities exchange or market. Occurrence of such events or circumstances could have a material adverse effect on our business, financial condition, results of operations or cash flows or the market price of our securities. All subsequent written and oral forward-looking statements by or attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors. We undertake no obligation to publicly update or revise any forward-looking statement.

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

eXp World Holdings, Inc.

(unaudited)

March 31, 2017

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

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

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

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

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

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

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

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

eXp World Holdings, Inc.

Notes to the Condensed Consolidated Financial Statements

March 31, 2017

(Expressed in U.S. dollars)

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 is a cloud-based real estate brokerage operating in most U.S. States. 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 interim unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of eXp World Holdings, Inc., and its subsidiaries; eXp Realty Holdings, Inc.; First Cloud Mortgage, Inc. (dormant as of December 31, 2016 and through March 31, 2017); eXp Realty Associates, LLC; eXp Realty, LLC; eXp Realty of California, Inc.; eXp Realty of Canada, Inc.; and eXp Realty of Connecticut, LLC. All inter-company accounts and transactions have been eliminated upon consolidation.

Use of Estimates

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

Recently Issued 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 treatments implemented did not have a material impact on the accompanying condensed consolidated financial statements as presented.

In May 2014, the FASB began issuing several accounting standards updates associated with accounting for revenue from contracts with customers. The objective of the updates, and subsequent clarifying and industry specific updates, are to 1) remove inconsistencies and weaknesses in revenue requirements, 2) provide a robust framework for addressing revenue recognition issues, 3) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets 4) provide more useful information to users of financial statements through improved disclosure requirements, and 5) simplify the preparation of financial statements. The updates are effective in annual reporting periods beginning after December 15, 2017 and the interim periods within that year. The Company is still evaluating the potential impacts that the implementation of these new revenue standards may have on its financial position, operational results, or cash flows.

Fixed assets, net consisted of the following:

Depreciation expense for the three months ended March 31, 2017 and 2016 was $13,265 and $12,626, respectively.

As of March 31, 2017, the Company had 52,611,239 shares of common stock issued and outstanding. The following provides a detailed description of the stock based transactions completed since January 1, 2017:

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

During the three months ended March 31, 2017, the Company issued 25,000 shares of restricted and unregistered shares of common stock for the exercise of stock options including cash consideration totaling $20,000.

During the three months ended March 31, 2017, the Company issued 269,560 shares of restricted and unregistered shares of common stock for services totaling $1,303,522.

2015 Agent Equity Program

The Company provides agents and brokers the opportunity to elect to receive 5% of commissions earned from each completed residential real estate transaction in the form of restricted and unregistered common stock. If agents and brokers elect to receive portions of their commissions in restricted and unregistered common stock, they are entitled to receive the equivalent number of shares of common stock, based on the fixed monetary value of the commission payable.

During the three months ended March 31, 2017 and 2016, the Company issued 221,829 and 213,429 shares, respectively, of restricted and unregistered shares of common stock to agents and brokers for total consideration of $654,719 and $137,309, respectively for the settlement of commissions payable.

Real Estate Agent Growth and Other Incentive Programs

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

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

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

As of March 31, 2017, unvested restricted stock awards of approximately 2,240,000 shares had total unrecognized compensation costs totaling approximately $5,400,000.

Pre 2013 Stock Options

As of March 31, 2017, the Company had 6,384,808 outstanding options accounted for in accordance with the intrinsic value method. The required re-measurement of the intrinsic value of the awards resulted in the recognition of a stock option benefit of $2,553,923 for the three months ended March 31, 2017; and an expense of $316,670 for the three months ended March 31, 2016; included in general and administrative expenses in accompanying consolidated statements of operations. As of March 31, 2017, the fully vested outstanding options subject to re-measurement in accordance with the intrinsic value method had a weighted average remaining contractual term of 5.67 years.

Post 2013 Stock Option Awards

During the three months ended March 31, 2017, the Company granted 1,660,000 stock options with an estimated grant date fair value of $6,227,915. The assumptions used to estimate the grant date fair value of the awards issued for the three months ended March 31, 2017 include: expected volatility, based on historical stock prices ranging from 152% to 157%; an average expected term of 6.25 years; risk free rates based on U.S. Treasury instruments for the expected term of approximately 2.5%; and no dividend payments.

In January, the Company modified certain terms of 500,000 previously outstanding stock option awards, including accelerating portions of the award to vest prior to the original terms and the forfeiture of 275,000 unvested options. As a result of this modification, the Company recognized approximately $368 thousand of additional stock option expense during the three months ended March 31, 2017.

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

For the three months ended March 31, 2017 and March 31, 2016, the Company recognized total stock based compensation of $102,158 and $682,255, respectively, associated with all equity and equity-linked awards, inclusive of intrinsic value re-measurement.

As of March 31, 2017, the total unrecognized compensation cost associated with options was approximately $11,914,000.

During the three months ended March 31, 2017, and as part of her agreement to join the Company’s Board of Directors, Ms. Laurie Hawkes was granted an option to purchase a total of 350,000 shares of common stock from a significant shareholder at an exercise price of $4.22 per share. The Company estimated the grant date fair value of these options using a Black-Scholes model with the assumptions described in Footnote 4. The aggregate grant date fair value of this award was $1,333,501 and the options vest monthly over a three-year period. During the three months ended March 31, 2017, the Company recognized compensation cost totaling $105,949 associated with this award. As of March 31, 2017, the Company had unrecognized compensation cost associated with this award totaling $1,227,551.

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

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

The following discussion should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this report. This discussion contains forward-looking statements based upon current expectations that involve numerous risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons. Those reasons include, without limitation, those described at the beginning of this report under “Statement regarding forward-looking statements,” as well as those that may be set forth elsewhere in this report. Except as otherwise required by law, we do not intend to update any information contained in these forward-looking statements. The following discussion also addresses matters we consider important for an understanding of our financial position as of March 31, 2017, and the results of operations for the three months ended March 31, 2017, which may not be indicative of our future results through the year ended December 31, 2017 or beyond.

OVERVIEW

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

Continued Accelerated Growth – During the three-month period ending March 31, 2017, we increased our net real estate brokerage agent and broker base by 29%, from approximately 2,400 as of December 31, 2016 to over 3,100. These increases were incurred in both new and existing geographical markets and contributed to net revenue increases of 22% and 208% as compared to the quarter ended December 31, 2016 and the quarter ended March 31, 2016, respectively.

RECENT BUSINESS DEVELOPMENTS

Building for the Present and the Future – During the period, the Company was focused on building its operating infrastructure with the hiring of new staff across all departments of the organization to support both the current growth velocity but also expected future growth. In addition to people, the Company is also investing in scalable technology as a necessary element of its growth initiative. To date, the Company has evolved through substantial dependence on independent third-party software and applications which, when taken together, constitute a patchwork that has sustained and supported the Company’s growth. As the Company continues to introduce and execute on a number of initiatives aimed at accelerating expansion, it finished building the first instance of an enterprise application in order to move away from the integrations of external systems which the Company hopes to launch in the second quarter.

Agent Experience – The Company has a very attractive economic model and is working to marry that with a world-class agent experience. From onboarding to technology and other support to transaction management, delivering high a level of service to its agents and brokers will be a critical element of the Company’s future success. To this end, the Company created a new department called Agent Experience and hired Kee Wah Chung as Vice President of Agent Experience. Prior to joining eXp, Mr. Chung was Director of the Real Estate Customer Success Program for DocuSign where he created and built the first real estate focused team to drive an end-to-end world class customer experience. Prior to DocuSign, Mr. Chung served as Sr. Director and other leadership positions for Comcast, Premera, Polycom and Microsoft.

Brokerage Operations – The Company relies on employed brokers in each of the states and provinces that it operates to supervise its affiliated real estate agents, review transactions and ensure compliance with applicable real estate license law. In order to better manage these brokers and create a greater consistency of operations, the Company formed a Brokerage Operations business unit and name Kathy Gordon as Vice President of Brokerage Operations. Ms. Gordon, who has nearly two decades of experience in the industry, will deliver value to eXp agents through the support of eXp’s state administrative brokers, the administration of eXp’s brokerage policies and procedures, and license law and regulatory compliance. She also will serve as liaison with eXp’s legal resources and risk management programs. Prior to joining eXp, Ms. Gordon was previously was Broker of Record at one of Keller Williams’ largest firms, with nearly 3000 agents.

The Company expects to continue adding staff as well as making strategic additions to its executive team in future quarters.

MARKET CONDITIONS AND TRENDS

According to the National Association of REALTORS (“NAR”), home sale transaction volume increased 11% in the first quarter of 2017 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 161 for February 2017 and 165 for 2016. The housing affordability index remains significantly higher than the average of 127 for the period from 1970 through 2016.

A part of this involves favorable mortgage rate conditions. Mortgage rates increased approximately 75 basis points from September 30, 2016 to March 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.

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. was 1.8 million and 2.0 million at the end of March 2017 and March 2016, respectively. The March 2017 inventory represents a national average supply of 3.8 months at the current home sales pace which is below the 6.1 month 25-year average.

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

Existing Home Sales

According to NAR, for the year ended December 31, 2016, existing home sale transactions increased to 5.5 million homes or up 4% compared to 2015. In the first quarter of 2017, NAR existing home sale transactions increased to 1.1 million homes, or up 5%, compared to the same period of 2016. During the same period, eXp Realty home sale transactions increased 233% compared to the same period in 2016. Our home sale transactions were impacted by the growth of our agent base which grew from approximately 2,400 at the end of 2016 to over 3,100 by the end of the first quarter of 2017.

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

Existing Home Sale Price

We believe primary drivers to the long-term demand for housing and the growth of our company to support that demand are housing affordability, the general economic health of the U.S. economy, demographic trends such as population growth, the increase in household formation, mortgage rate levels and mortgage availability, job growth, the inherent benefits of owning a home versus renting and the influence of local housing dynamics of supply versus demand. As of March 31, 2017, we believe that these factors are generally favorable. However, significant changes to one or more of these drivers could cause the demand for housing to slow, negatively affecting all real estate brokerage firms, including eXp Realty. Regardless of whether the housing market continues to grow or slows, eXp Realty expects to adhere to its low-cost, high-engagement model, affording a growing number of agents and brokers increased income and ownership opportunities while offering a scalable solution to brokerage owners looking to survive and thrive in a wide range of economic conditions.

Results of Operations

Revenues

During the three-months period ended March 31, 2017 net revenues increased $14.87 million to $22.01 million as compared to the three-month period ended March 31, 2016 when we generated $7.14 million. The increase as compared to the prior period is a direct result of the increases in sales agent base by over 183% to over 3,100.

Operating Expenses

Cost of revenues includes costs related to sales agent commissions and revenue sharing. These costs are highly correlated with recognized net revenues. As such, the increase of $13.17 million in the current three-months ended March 31, 2017 as compared to the three-months ended March 31, 2016 was driven by the higher amount of net revenues and agent commission rates.

General and administrative includes costs related to wages, stock compensation, dues, operating leases, utilities, travel, and other general overhead expenses. The increase of $0.684 million in general and administrative costs in the three-months ended March 31, 2017 as compared to the three-months ended March 31, 2016 was driven primarily from an increase in our non-broker and agent headcount required to support the approximate 208% growth in the number of agents and brokers.

Professional fees include costs related to legal, accounting, and other consultants. Costs increased $0.22 million during the three-months ended March 31, 2017 as compared to the three-months ended March 31, 2016. Professional fees fluctuate on a periodic basis in correlation to non-recurring transactions, specifically as it relates to performing diligence and contract review and preparation to support the growth of new agent and broker bases as well as entry to new geographical markets.

Sales and marketing include costs related to lead capture, digital and print media, and trade shows, in addition to other promotional materials. The cost increase of approximately $0.22 million was due to increased cost in lead capture and other internet marketing related to our growth in agent and broker headcount for the three-months ended March 31, 2017 as compared to the three-months ended March 31, 2016.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital remained relatively flat as of March 31, 2017 as compared to December 31, 2016. Our increased sales volumes, resulting in increased receivables and restricted cash were off-set by corresponding increases in accrued expenses related commissions payable.

The following table presents our cash flows:

Net cash provided by operating activities for the three months ended March 31, 2017 primarily resulted from the increased volume in our sales transactions. As a result of the increased sales volume, we incurred higher accrued expenses, specifically commission payable, as partially off-set by a net stock option benefit as a result of declines in the intrinsic value of some of our outstanding stock options totaling approximately $2.5 million offset by $1.4 million of stock option expense. If we are successful in our growth plans, resulting in further increases in sales volumes, we expect to generate positive operating cash flows for the next twelve months.

During the three months ended March 31, 2017, our investing activities consisted of additional expenditures related to the on-going development of our internal use software. As we continue develop and refine our cloud-based platforms, we expect to continue to use our existing cash resources on similar expenditures for the next twelve months.

We generated approximately $0.15 million in cash flows from financing activities primarily related to the completion of our December 31, 2016 private placement and the exercise of 25,000 stock options.

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

We currently have no bank debt or line of credit facilities. In the event that additional financing is required in the future, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business and results of operations will likely suffer.

CRITICAL ACCOUNTING ESTIMATES

There has been no change in our critical accounting estimates as previously disclosed in our Annual Report on Form 10-K for the period ended December 31, 2016.

Non-GAAP Measurements

We currently have approximately 6.4 million outstanding stock options exercisable into restricted shares of our common stock at a weighted average exercise price of $0.14 per share, measured using the intrinsic value method. In accordance with US GAAP and Rules and Regulations as promulgated by the Securities and Exchange Commission (“SEC”), we were unable to retroactively apply the fair value method to awards previously outstanding under the intrinsic value method. In accordance with the intrinsic value method, we are required to re-measure the intrinsic value at each reporting date through the date of exercise or other settlement, while recognizing the applicable changes in the intrinsic value as a component of operations in the accompanying consolidated statements of operations.

Upon becoming a public company, we value stock options at their grant date fair value, and recognize the associated compensation cost systematically over the requisite service or performance period, with no consideration given to market changes in the underlying equity instruments or other assumptions used for valuation purposes on the grant date. If we had the ability to reasonably estimate the fair value of options issued at our inception as a private company, all associated expenses would have been recognized in prior periods as the awards vested without giving effect to re-measurement through the date of exercise or expiration.

The SEC has adopted rules to regulate the use in filings with the SEC, and in public disclosures of financial measures, that are not in accordance with US GAAP, such as EBITDA, omission of non-recurring or infrequent items, and other omissions of non-cash items whether recurring or non-recurring. These measures are derived from methodologies other than in accordance with US GAAP.

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

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

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

OFF-BALANCE SHEET ARRANGEMENTS

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

Item 3.                   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Item 4.                   CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report we carried out an evaluation of the effectiveness of our disclosure controls and procedures with the participation of our Chief Executive Officer and Chief Financial Officer. In making this assessment, management used the criteria for effective internal control over financial reporting described in the “Internal Control-Integrated Framework” (2013) set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective to ensure that information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information was not accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

The determination that our disclosure controls and procedures were not effective was based on the following material weaknesses in our internal control over financial reporting, which were identified and described in detail in our Annual Report on Form 10-K for the year ended December 31, 2016, and summarized below:

During the first quarter of 2017, we continued our remediation activities related to the material weaknesses summarized above, including the following:

In January 2017, we appointed Laurie Hawkes to the Board as an additional independent director, resulting in a majority of independent directors for the first time on the Board.

In March 2017, a Compensation Committee comprised of three independent directors was formed. Each of our standing committees, including the Audit Committee, Governance Committee and Compensation Committee, has been specifically charged with certain oversight functions. During 2017 to date, our independent Board committees have been active.

CHANGES IN INTERNAL CONTROL

Outside of the remediation activities described above under Controls and Procedures – Evaluation of Disclosure Controls and Procedures, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act) during the period ended March 31, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

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

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

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

During the three months ended March 31, 2017, the Company issued 25,000 shares of restricted and unregistered shares of common stock for the exercise of stock options including cash consideration totaling $20,000.

During the three months ended March 31, 2017, the Company issued 269,560 shares of restricted and unregistered shares of common stock for services totaling $1,303,522.

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

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

Item 4. MINE SAFETY DISCLOSURES

Not applicable.

Item 5. OTHER INFORMATION

Not applicable.

Item 6. EXHIBITS

SIGNATURES

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