eXp World (EXPI) 10-Q 2019 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

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)

Delaware	98-0681092
(State or other jurisdiction	(IRS Employer
of incorporation)	Identification No.)

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

Common Stock, par value $0.00001 per share	EXPI	NASDAQ
(Title of Each Class)	(Trading Symbol)	(Name of each exchange on which registered)

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 every Interactive Data File required to be submitted 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 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.

Large accelerated filer [   ]	Accelerated filer [X]	Non-accelerated filer [   ]	Smaller reporting company [X]
Emerging Growth Company [   ]

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   whether the registrant is a shell company (as defined in Rule 12b‑2 of the Act).

Yes [   ]No [X]

There were,  64,392,054 shares of the registrant’s Common Stock, $.00001 par value, outstanding as of October 30, 2019.

TABLE OF CONTENTS

		Page
	Forward Looking Statements	3
PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other information	37
Item 6.	Exhibits	38

2

FORWARD LOOKING STATEMENTS

Certain statements contained in this report on Form 10‑Q constitute 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, acquisitions and acquisition integrations, consulting, operational, tax, financial and capital projects and initiatives; 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 set forth in this report and as described in Part I, Item IA Risk Factors of our Annual Report on Form 10‑K for our prior fiscal year ended December 31,  2018 filed with the SEC on March 18, 2019.  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;

· earnings may decrease because of increases or decreases in interest rates;

· changes in foreign exchange rates 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 agents, could harm our business;

· we may pursue strategic opportunities which could result in operating difficulties or dilution;

· our inability to successfully develop or procure technology that supports our growth strategies;

· risks related to cybersecurity threats to our data and customer, employee and independent contractors to protect personal information;

· assertions of claims, lawsuits and proceedings against us could harm our business, results of operations and reputation;

3

· changes in the United States or other monetary or fiscal policies and regulations that impact the real estate market; and

· our potential inability to maintain the listing of 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 entirety 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.

4

PART I – FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (UNAUDITED)

eXp World Holdings, Inc.

For the Quarterly Period Ended September 30, 2019

	Page
Condensed Consolidated Balance Sheets	6
Condensed Consolidated Statements of Operations	7
Condensed Consolidated Statements of Comprehensive Income (Loss)	8
Condensed Consolidated Statements of Stockholders’ Equity	9
CondensedConsolidated Statements of Cash Flows	11
Notes to the Condensed Consolidated Financial Statements	12

5

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 30, 2019		December 31, 2018
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	34,736,287	$	20,538,057
Restricted cash		7,913,156		2,502,591
Accounts receivable, net of allowance of $697,702 and $484,441, respectively		36,039,325		17,428,091
Prepaids and other assets		2,603,315		1,857,988
TOTAL CURRENT ASSETS		81,292,083		42,326,727
Fixed Assets, net		4,704,994		2,739,525
Operating lease right-of-use assets		1,299,536		—
Intangible assets, net		2,646,678		2,531,669
Goodwill		8,248,107		8,248,107
TOTAL ASSETS	$	98,191,398	$	55,846,028
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$	1,221,971	$	1,758,377
Customer deposits		7,913,156		2,502,591
Accrued expenses		39,769,890		18,976,435
Current portion of long-term payable		992,067		974,659
Current portion of lease obligation - operating lease		167,420		—
TOTAL CURRENT LIABILITIES		50,064,504		24,212,062
Long-term payable, net of current portion		1,791,015		1,654,337
Long-term lease obligation - operating lease		1,132,305		—
TOTAL LIABILITIES		52,987,824		25,866,399
STOCKHOLDERS' EQUITY
Common Stock, $0.00001 par value 220,000,000 shares authorized; 66,476,020 issued and 64,690,075 outstanding at September 30, 2019, 60,609,102 issued and 60,609,102 outstanding at December 31, 2018		665		606
Additional paid-in capital		133,827,909		90,755,616
Treasury stock, at cost:  1,785,945 shares held at September 30, 2019		(17,649,014)		—
Accumulated deficit		(71,104,193)		(60,765,266)
Accumulated other comprehensive income (loss)		128,207		(11,327)
TOTAL STOCKHOLDERS' EQUITY		45,203,574		29,979,629
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	98,191,398	$	55,846,028

See Notes to the Condensed Consolidated Financial Statements

6

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenue	$	282,179,339	$	157,236,070	$	705,917,916	$	349,741,409
Expenses
Commissions and other agent-related costs		259,140,641		145,740,264		646,269,556		319,560,992
General and administrative		23,597,497		15,351,430		66,502,632		45,218,159
Sales and marketing		1,083,456		774,479		3,043,407		2,130,644
Total expenses		283,821,594		161,866,173		715,815,595		366,909,795
Operating income (loss)		(1,642,255)		(4,630,103)		(9,897,679)		(17,168,386)
Other income (expense)
Other income (expense), net		(256,511)		—		(374,699)		—
Interest income		83,636		9,387		176,836		9,387
Total other income (expense), net		(172,875)		9,387		(197,863)		9,387
Loss before income tax expense		(1,815,130)		(4,620,716)		(10,095,542)		(17,158,999)
Income tax benefit (expense)		(32,233)		(7,455)		(243,385)		(52,175)
Net loss	$	(1,847,363)	$	(4,628,171)	$	(10,338,927)	$	(17,211,174)
Net loss per share
Basic	$	(0.03)	$	(0.08)	$	(0.17)	$	(0.30)
Diluted	$	(0.03)	$	(0.08)	$	(0.17)	$	(0.30)
Weighted average shares outstanding
Basic		63,197,495		58,360,233		61,834,376		57,069,377
Diluted		63,197,495		58,360,233		61,834,376		57,069,377

See Notes to the Condensed Consolidated Financial Statements

7

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Net loss	$	(1,847,363)	$	(4,628,171)	$	(10,338,927)	$	(17,211,174)
Other comprehensive loss:
Foreign currency translation adjustments, net of tax		76,862		(10,721)		139,534		(2,201)
Comprehensive loss	$	(1,770,501)	$	(4,638,892)	$	(10,199,393)	$	(17,213,375)

See Notes to the Condensed Consolidated Financial Statements

8

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(UNAUDITED)

							Accumulated
	Common Stock		Treasury Stock		Additional	Accumulated	Other Comprehensive	Total
	Shares	Amount	Shares	Amount	Paid-In Capital	Deficit	Income (Loss)	Equity
Balance, December 31, 2017	54,962,535	$ 550	-	$ -	$ 36,848,041	$ (32,596,374)	$ 8,454	$ 4,260,671
Exercise of options	1,089,144	11	-	-	264,346	-	-	264,357
Agent growth incentive stock compensation expense	61,598	-	-	-	8,279,108	-	-	8,279,108
Stock option expense	-	-	-	-	1,301,702	-	-	1,301,702
Agent equity stock compensation expense	208,324	2	-	-	2,370,002	-	-	2,370,004
Foreign currency translation gain (loss)	-		-	-	-	-	(1,275)	(1,275)
Net loss	-	-	-	-	-	(10,696,345)	-	(10,696,345)
Balance, March 31, 2018	56,321,601	$ 563	-	$ -	$ 49,063,199	$ (43,292,719)	$ 7,179	$ 5,778,222
Exercise of options	710,447	7	-	-	608,895	-	-	608,902
Agent growth incentive stock compensation expense	69,401	1	-	-	3,989,602	-	-	3,989,603
Stock option expense	-	-	-	-	1,181,969	-	-	1,181,969
Agent equity stock compensation expense	373,573	4	-	-	5,277,342	-	-	5,277,346
Foreign currency translation gain (loss)	-	-	-	-	-	-	9,795	9,795
Net loss	-	-	-	-	-	(1,886,658)	-	(1,886,658)
Balance, June 30, 2018	57,475,022	$ 575	-	$ -	$ 60,121,007	$ (45,179,377)	$ 16,974	$ 14,959,179
Cumulative effect adjustment of the adoption of Accounting Standards Update 2018-07					5,738,536	(5,738,536)		-
Other					18,011	(11,458)		6,553
Exercise of options	474,696	5			876,632	-	-	876,637
Agent growth incentive stock compensation expense	611,843	5			4,238,662	-	-	4,238,667
Stock option expense	-	-			1,103,055	-	-	1,103,055
Agent equity stock compensation expense	407,201	4			7,099,348	-	-	7,099,352
Foreign currency translation gain (loss)	-				-	-	(10,721)	(10,721)
Net loss	-	-			-	(4,628,171)	-	(4,628,171)
Balance, September 30, 2018	58,968,762	$ 589	-	$ -	$ 79,195,251	$ (55,557,542)	$ 6,253	$ 23,644,551

9

	Common Stock		Treasury Stock		Additional	Accumulated	Other Comprehensive	Total
	Shares	Amount	Shares	Amount	Paid-In Capital	Deficit	Income (Loss)	Equity
Balance, December 31, 2018	60,609,102	$ 606	-	$ -	$ 90,755,616	$ (60,765,266)	$ (11,327)	$ 29,979,629
Exercise of options	134,260	1	-	-	215,725	-	-	215,726
Agent growth incentive stock compensation expense	136,194	1	-	-	3,669,320	-	-	3,669,321
Stock option expense	-	-	-	-	1,215,448	-	-	1,215,448
Agent equity stock compensation expense	620,287	4	-	-	6,210,289	-	-	6,210,293
Foreign currency translation gain (loss)	-	-	-	-	-	-	14,860	14,860
Repurchase of common stock	-	-	357,752	(3,647,076)	-	-	-	(3,647,076)
Net loss	-	-	-	-	-	(6,295,823)	-	(6,295,823)
Balance, March 31, 2019	61,499,843	$ 612	357,752	$ (3,647,076)	$ 102,066,398	$ (67,061,089)	$ 3,533	$ 31,362,378
Exercise of options	536,613	5	-	-	690,262	-	-	690,267
Agent growth incentive stock compensation expense	149,008	2	-	-	3,587,463	-	-	3,587,465
Stock option expense	-	-	-	-	1,830,508	-	-	1,830,508
Agent equity stock compensation expense	935,177	12	-	-	10,233,901	-	-	10,233,913
Foreign currency translation gain (loss)	-	-	-	-	-	-	47,812	47,812
Repurchase of common stock	-	-	460,093	(4,897,976)	-	-	-	(4,897,976)
Net loss	-	-	-	-	-	(2,195,741)	-	(2,195,741)
Balance, June 30, 2019	63,120,641	$ 631	817,845	$ (8,545,052)	$ 118,408,532	$ (69,256,830)	$ 51,345	$ 40,658,626
Exercise of options	1,224,756	12	-	-	646,152	-	-	646,164
Agent growth incentive stock compensation expense	878,083	9	-	-	2,602,692	-	-	2,602,701
Stock option expense	-	-	-	-	1,060,175	-	-	1,060,175
Agent equity stock compensation expense	1,252,540	13	-	-	11,110,358	-	-	11,110,371
Foreign currency translation gain (loss)	-	-	-	-	-	-	76,862	76,862
Repurchase of common stock	-	-	968,100	(9,103,962)	-	-	-	(9,103,962)
Net loss	-	-	-	-	-	(1,847,363)	-	(1,847,363)
Balance, September 30, 2019	66,476,020	$ 665	1,785,945	$ (17,649,014)	$ 133,827,909	$ (71,104,193)	$ 128,207	$ 45,203,574

See Notes to the Condensed Consolidated Financial Statements

10

EXP WORLD HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2019		2018
OPERATING ACTIVITIES
Net loss	$	(10,338,927)	$	(17,211,174)
Adjustments to reconcile net loss to cash provided by operating activities:
Depreciation expense		1,381,415		570,910
Amortization expense - intangible assets		234,805		—
Amortization expense - stock payable		154,086		—
Agent growth incentive stock compensation expense		10,760,022		16,507,378
Stock option expense		4,106,131		3,586,726
Agent equity stock compensation expense		27,554,577		14,746,702
Changes in operating assets and liabilities:
Accounts receivable		(18,608,607)		(14,273,358)
Prepaids and other assets		(745,278)		(122,271)
Customer deposits		5,384,436		1,793,994
Accounts payable		2,703		892,383
Accrued expenses		19,890,574		12,363,755
Other operating activities		189		—
NET CASH PROVIDED BY OPERATING ACTIVITIES		39,776,126		18,855,045
INVESTING ACTIVITIES
Fixed asset additions		(3,404,281)		(1,396,346)
Payment for a business acquisition		(500,000)		—
Intangible asset additions		(209,814)		—
NET CASH USED IN INVESTING ACTIVITIES		(4,114,095)		(1,396,346)
FINANCING ACTIVITIES
Repurchase of common stock		(17,649,014)		—
Proceeds from exercise of options		1,552,157		1,749,896
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		(16,096,857)		1,749,896
Effect of changes in exchange rates on cash, cash equivalents and restricted cash		43,621		7,075
Net change in cash, cash equivalents and restricted cash		19,608,795		19,215,670
Cash, cash equivalents and restricted cash, beginning of period		23,040,648		5,595,227
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD	$	42,649,443	$	24,810,897
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION:
Cash paid for income taxes	$	264,902	$	52,175
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Lease liabilities arising from obtaining right-of-use assets	$	1,453,539	$	—
Intangible assets in accounts payable	$	140,000	$
Fixed asset purchases in accounts payable	$	29,550	$	44,235

See Notes to the Condensed Consolidated Financial Statements

11

eXp World Holdings, Inc.

Notes to the Condensed Consolidated Financial Statements

September 30, 2019

(Unaudited)

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 primarily operates a cloud-based real estate brokerage operating throughout the United States and most of the Canadian provinces. The Company focuses on a number of cloud-based technologies 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.    We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation, specifically professional fees that are now included in general and administrative expenses.

These interim financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018,  filed with the SEC on March 18, 2019.

In our opinion, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. Operating results for the three-month and nine-month periods ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

2.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The accompanying unaudited 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.

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 the allowance 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.

12

Restricted Cash

Restricted cash totaled $7,913,156 and $2,717,187 at September 30, 2019 and September 30, 2018, respectively.

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the statement of financial position that sum to the total of the same amounts shown in the statement of cash flows.

	December 31, 2018		December 31, 2017
Cash and cash equivalents	$	20,538,057	$	4,672,034
Restricted cash		2,502,591		923,193
Total cash, cash equivalents, and restricted cash, beginning of period	$	23,040,648	$	5,595,227
	September 30, 2019		September 30, 2018
Cash and cash equivalents	$	34,736,287	$	22,093,710
Restricted cash		7,913,156		2,717,187
Total cash, cash equivalents, and restricted cash, end of period	$	42,649,443	$	24,810,897

Restricted cash consists of cash held in escrow by the Company’s brokers and agents on behalf of real estate buyers. The Company recognizes a corresponding customer deposit liability until the funds are released.

Goodwill

Goodwill represents the excess of the consideration paid over the estimated fair value of assets acquired and liabilities assumed in a business combination.  The Company evaluates goodwill for impairment annually in the fourth quarter.  In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. 

Intangible Assets

The Company’s intangible assets consist primarily of trade name, technology and customer contracts. Each intangible asset is amortized on a straight-line basis over its useful life.  The Company evaluates its intangible assets for impairment at least annually, or as events or changes in circumstances indicate the carrying value may be impaired.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, under which the consideration for the acquisition is allocated to the assets acquired and liabilities assumed.  The Company recognizes identifiable assets acquired and liabilities assumed at the acquisition date fair values as determined by management as of the acquisition date.  Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding significant changes or planned changes in the use of the assets, as well as industry and economic conditions. These assumptions and estimates include projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors. If current expectations of future growth rates are not met or market factors outside of our control change significantly, then our goodwill or intangible assets may become impaired. Additionally, as goodwill and intangible assets associated with recently acquired businesses are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to impairment risk if business operating results or macroeconomic conditions deteriorate.

Acquisition-related costs, such as due diligence, legal and accounting fees, are expensed as incurred and not considered in determining the fair value of the acquired assets.

13

Stock-based compensation

Our stock-based compensation is comprised of agent growth incentive programs, agent equity program, and stock option awards. Our stock-based compensation is more fully disclosed in Note 6 - Stockholders’ Equity, of the Notes to the Condensed Consolidated Financial Statements. The Company accounts for stock-based compensation granted to employees and non-employees using a fair value method. Stock-based compensation awards are measured at the grant date fair value and is recognized over the requisite service period of the awards, usually the vesting period, on a straight-line basis, net of forfeitures.

Recognition of compensation cost for an award with a performance condition is based on the probable outcome of that performance condition being met.

The Company reduces recorded stock-based compensation for forfeitures when they occur.

Revenue Recognition

The Company generates substantially all of its revenue from real estate brokerage services and generates a de minimis portion of its revenues from software subscription and professional services.

Real Estate Brokerage Services

The Company serves as a licensed broker in the areas in which it operates for the purpose of processing residential real estate transactions.  The Company is contractually obligated to provide services for the fulfillment of transfers of residential real estate between buyers and sellers.  The Company provides these services itself and controls the services necessary to legally transfer the residential real estate.  Correspondingly, the Company is defined as the Principal.  The Company, as Principal, satisfies its obligation upon the closing of a residential real estate transaction.  As Principal, and upon satisfaction of our obligation, the Company recognizes revenue in the gross amount of consideration to which we expect to be entitled to.

Revenue is derived from assisting home buyers and sellers in listing, marketing, selling and finding residential real estate.  Commissions earned on real estate transactions are recognized at the completion of a residential real estate transaction once we have satisfied our performance obligation. Agent related fees are currently recorded as a reduction to commissions and other agent related costs.  

Software Subscription and Professional Services

Subscription revenue is derived from fees from our customers to access the Company’s virtual reality software platform.  The terms of our subscriptions do not provide customers the right to take possession of the software.  Subscription revenue is generally recognized ratably over the contract term.

Professional services revenue is derived from implementation and consulting services.  Professional services revenue is typically recognized over time as the services are rendered, using an efforts-expended (labor hours) input method. 

Software subscription and professional services revenue accounts for less than 1% of all revenue for the three and nine months ended September 30, 2019.

Change in Accounting Principle and Recently Adopted Accounting Principles

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). ASU 2016-02 is intended to improve the financial reporting of leasing transactions by requiring organizations that lease assets to recognize assets and liabilities for the rights and obligations created by leases that extend more than twelve months on the balance sheet. This accounting update also requires additional disclosures surrounding the amount, timing, and uncertainty of cash flows arising from leases. In July 2018, the FASB issued ASU 2018-11 – Leases (Topic 842) – Targeted Improvements.  The

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amendments in ASU 2018-11 provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with U.S. GAAP (Topic 840, Leases). An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosure requirements in Topic 840 (for example, they do not create interim disclosure requirements that entities previously were not required to provide).

The Company adopted ASU 2016-02 effective January 1, 2019 using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated.  There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of this adoption.  This standard did not have a material impact on the Company’s balance sheets or cash flows from operations and did not have a significant impact on the Company’s operating results.  The most significant impact was the recognition of Right-of-Use (ROU) assets and lease obligations on the balance sheet upon adoption on January 1, 2019.

The Company elected to utilize the transition guidance accounting policy elections available including, not recording a  ROU lease asset and lease obligation for short term leases, to not separate lease and non-lease components, and apply a portfolio discount rate to all leases similar in nature and term.

With the adoption of ASU 2016-02, the Company determined if an arrangement is a lease at inception and performed a lease classification assessment. Based on this assessment, the Company concluded it only has operating leases. Leases are included in ROU lease assets, current portion of lease obligations, and long-term lease obligations on the Company’s balance sheet.  Certain arrangements previously considered leases under Topic 840 were determined to not be leases under Topic 842.  Lease expense for short-term leases is recorded in the Company’s Statements of Operations as incurred. 

ROU lease assets represent the Company’s right to use an underlying asset for the lease term and lease obligations represent the Company’s obligation to make lease payments arising from the lease.  ROU lease assets and obligations are recognized at the commencement date based on the present value of lease payments over the lease term. The Company has determined to not separate lease components from non-lease components in the lease payments for its office space leases, which are currently the only leases the Company has under Accounting Standards Codification (ASC) 842. The rate implicit in the lease was not readily determinable in the lease arrangements and as such, the Company used its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company calculated the rate utilizing rate information provided from our lenders based on a secured line of credit adjusted for the average lease term of 3 years.  The ROU lease asset also includes any lease payments made in advance and excludes lease incentives. The Company’s lease terms include options to extend the lease when it is reasonably certain that the Company will exercise its option. The Company evaluates renewal options quarterly for any changes in assumptions. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term.

In January 2017, the FASB issued ASU 2017-04 – Intangibles – Goodwill and Other (Topic 350).  ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Under ASU 2017-04, if a reporting unit’s carrying amount exceeds its fair value, the entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. Previously, if the fair value of a reporting unit was lower than its carrying amount (Step 1), an entity was required to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). Additionally, under ASU 2017-04, entities that have reporting units with zero or negative carrying amounts will no longer be required to perform the qualitative assessment to determine whether to perform Step 2 of the goodwill impairment test. As a result, reporting units with zero or negative carrying amounts will generally be expected to pass the simplified impairment test; however, additional disclosure will be required of those entities. This ASU is effective in fiscal years beginning after December 15, 2019. Early adoption is permitted

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for annual and interim goodwill impairment testing dates after January 1, 2017. The new guidance must be adopted on a prospective basis. The Company adopted ASU 2017-04 effective January 1, 2019.  The Company does not expect any significant adjustments to our financials or our disclosures under the new guidance.

Recently Issued Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,  which removes certain disclosure requirements related to the fair value hierarchy, such as removing the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements, such as disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurement. ASU 2018-13 is effective beginning January 1, 2020; early adoption is permitted. Certain changes are applied retrospectively to each period presented and others are to be applied either in the period of adoption or prospectively. The Company does not expect the amendments of ASU 2018-13 will have a significant impact on the Company’s consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326).  ASU 2016-13 modifies the measurement of expected credit losses of certain financial instruments, requiring entities to estimate an expected lifetime credit loss on financial assets.  ASU 2016-13 is effective for fiscal years and interim periods within those years beginning after December 15, 2019.  The Company does not expect the amendments of ASU 2016-13 to have a significant impact on the Company’s consolidated financial statements and related disclosures.

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3.           ACQUISITIONS

VirBELA 

On November 29, 2018, (the “Acquisition Date”), the Company and its newly formed subsidiary, eXp World Technologies, LLC (Purchaser) acquired substantially all the assets of VirBELA, LLC (VirBELA), a California limited liability company.  VirBELA provides a cloud-based environment focused on educational and innovative learning technologies to enhance global education experiences that empower individuals, teams, and organizations for clients in various industries.  Its model allows for a level of engagement and participation that can typically only be achieved with face-to-face instruction.  Its proprietary immersive 3D campus, which supports blended learning and big data assessment, is highly customizable to meet the branding and educational needs of clients.  VirBELA developed the Company’s current cloud campus called eXp World, which provides 24/7 access to collaborative tools, training and socialization for the Company’s real estate agents and employees.    The acquisition of VirBELA’s core group of products and services will allow eXp Realty to continue to accelerate its business in a sustainable and innovative way, which is consistent with eXp World Holdings’ vision to expand the product offering to agents, teams and others who could benefit from their own, always available environments for collaboration.    

The Company acquired the assets of VirBELA for a total purchase price of $10,607,800,  consisting of cash of $7,000,000 and shares of the Company’s common stock valued at $3,607,800.  A cash payment of $6,500,000 was paid at closing and 97,371 shares of the Company’s restricted common stock having a value of $1,000,000 was issued at closing.  On the acquisition date, the Company held $500,000 in accounts payable to secure the seller’s performance of certain post close obligations.  During the first quarter of 2019, the seller performed its post close obligations and the $500,000 was paid to the Seller.  The remaining shares of the Company’s common stock will be issued having a value of $1,000,000 on each of the first, second and third anniversaries of the Acquisition Date.  The fair value of future deliveries of eXp World Holdings, Inc. common stock was $2,607,800 as of the Acquisition Date and is remeasured at each reporting period since the Company issues a variable number of shares of common stock based on a fixed monetary amount. The discount of $392,200 will

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be amortized over the reporting periods using the effective interest method during fiscal years 2019, 2020 and 2021. For the period ended September 30, 2019, the discount amortization was $154,086.

The following table shows the allocation of the purchase price of VirBELA, LLC to the acquired identifiable assets and goodwill:

Accounts receivable	$	4,273
Inventory		968
Fixed assets		23,452
Intangible assets		2,331,000
Goodwill		8,248,107
Total purchase price	$	10,607,800

The Acquisition was accounted for in accordance with ASC 805, Business Combinations, using the acquisition method of accounting.  Under the acquisition method of accounting, the Company allocated the total purchase price to the tangible and identifiable intangible assets acquired based on their estimated fair values as of the acquisition date, as determined by management. The excess of the purchase price over the aggregate fair values of the identifiable assets was recorded as goodwill. Goodwill generated from the Acquisition was primarily attributable to an assembled workforce and planned expansion of VirBELA into new markets.

The purchase price allocation to identifiable intangible assets acquired in the VirBELA acquisition was:

Tradename	$	1,169,000
Existing Technology		297,000
Non-competition agreements		125,000
Customer contracts		740,000
Total intangible assets purchased	$	2,331,000

The allocation of the fair value of the acquired business was based on valuations of the estimated net fair value of the assets acquired.  The fair value estimates of the assets acquired are subject to adjustment during the measurement period (up to one year from the Acquisition Date). For tax purposes, goodwill is amortized over 15 years and is tax deductible. The fair values of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. During the measurement period, we will adjust valuations assigned to assets and liabilities if new information is obtained about facts and circumstances that existed as of the Acquisition Date, if any, that, if known, would have resulted in revised values for these items as of that date. The impact of all changes, if any, that do not qualify as measurement period adjustments will be included in current period earnings.

4.           FIXED ASSETS, NET

Fixed assets, net consisted of the following:

	As of		As of
	September 30, 2019		December 31, 2018
Computer hardware and software	$	6,895,633	$	3,925,129
Furniture, fixture and equipment		20,480		5,910
Total depreciable property and equipment		6,916,113		3,931,039
Less: accumulated depreciation and amortization		(2,701,518)		(1,320,103)
Depreciable property, net		4,214,595		2,610,936
Assets under development		490,399		128,589
Fixed assets, net	$	4,704,994	$	2,739,525

Depreciation expense for the three months ended September 30, 2019 and 2018 was $558,650 and $240,031, respectively.

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Depreciation expense for the nine months ended September 30, 2019 and 2018 was $1,381,415 and $570,910, respectively.  

5.           GOODWILL AND INTANGIBLE ASSETS

Goodwill was $8,248,107 as of September 30, 2019 and December 31, 2018.

Definite-lived intangible assets were as follows:

	As of September 30, 2019
	Gross		Accumulated		Net Carrying
	Amount		Amortization		Amount
Trade name	$	1,169,000	$	(97,417)	$	1,071,583
Existing technology (1)		436,814		(65,330)		371,484
Non-competition agreements		125,000		(34,722)		90,278
Customer contracts		740,000		(61,667)		678,333
Software		225,000		—		225,000
Licensing agreement		210,000		—		210,000
Total	$	2,905,814	$	(259,136)	$	2,646,678
(1) Includes capitalized software development costs.
	As of December 31, 2018
	Gross		Accumulated		Net Carrying
	Amount		Amortization		Amount
Trade name	$	1,169,000	$	(9,742)	$	1,159,258
Existing technology		297,000		(4,950)		292,050
Non-competition agreements		125,000		(3,472)		121,528
Customer contracts		740,000		(6,167)		733,833
Software		225,000		—		225,000
Total	$	2,556,000	$	(24,331)	$	2,531,669
				—

Amortization expense for definite-lived intangible assets for three and nine months ended September 30, 2019 was $83,439 and $234,805, respectively. Amortization expense for definite-lived intangible assets for three and nine months ended September 30, 2018 was zero.  

We estimate expected amortization related to definite-lived intangible assets at September 30, 2019 will be:

Expected amortization
Remaining 2019	$	82,762
2020		466,071
2021		528,807
2022		331,206
2023		298,180
2024 and thereafter		939,652
Total	$	2,646,678

6.           STOCKHOLDERS’ EQUITY

As of September 30, 2019, the Company had 66,476,020 shares of common stock issued and 64,690,075 shares outstanding.

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Our shareholder approved equity plans described below are administered under our 2013 Stock Option Plan and our 2015 Equity Incentive Plan. The purpose of the equity plans is to retain the services of valued employees, directors, officers, agents, and consultants and to encourage such persons with an increased initiative to make contributions to our company and motivate excellent performance.

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 common stock. The shares are issued at a 20% discount to market on the date of issuance. The issued shares have no future service requirement. We recognize this 20% discount as an additional commissions and other agent-related costs.

During the three months ended March 31, 2019 and 2018, the Company issued 620,287 and 208,324 shares of common stock, respectively, to agents and brokers for total consideration of $6,210,293 and $2,370,004, respectively, for the settlement of commissions payable.

During the three months ended June 30, 2019 and 2018, the Company issued 935,177 and 373,573 shares of common stock, respectively, to agent and brokers for total consideration of $10,233,913 and $5,277,346, respectively, for the settlement of commissions payable.

During the three months ended September 30, 2019 and 2018, the Company issued 1,252,540 and 407,201 shares of common stock, respectively, to agent and brokers for total consideration of $11,110,370 and $7,099,352, respectively, for the settlement of commissions payable.

Agent Growth Incentive Program

The Company administers an equity incentive program whereby agents and brokers become eligible to receive awards of the Company’s common stock through agent attraction and performance benchmarks. The incentive program encourages greater performance and awards agents with common stock based on achievement of performance milestones.  Awards generally vest after performance benchmarks are reached and three years of subsequent service is provided to the Company.

The fair value of stock awards is based on the closing price of our common stock on the applicable grant date. As of September 30, 2019, the Company had 1,790,622 unvested common stock awards and unrecognized compensation costs totaling $19,807,201. The cost is expected to be recognized over a weighted average period of 1.73 years. The stock compensation expense related to the agent growth incentive program is included in general and administrative expense on the Statement of Operations.

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The following table illustrates the Company’s stock issuance activity for our agent growth incentive programs, for the following periods:

			Weighted Average
			Grant Date
	Shares		Fair Value
Balance, December 31, 2017		3,059,065	$	7.60
Granted		2,380,100		11.59
Vested and issued		(889,769)		12.16
Forfeited		(676,519)		4.05
Balance, December 31, 2018		3,872,877	$	11.63
Granted		1,236,621		9.19
Vested and issued		(1,400,344)		11.20
Forfeited		(530,744)		3.13
Balance, September 30, 2019		3,178,410	$	11.26

Stock Option Awards

The fair value of the options issued was calculated using a Black-Scholes-Merton option-pricing model with the following assumptions:

	Nine Months Ended September 30, 2019
Expected term	6.25 years
Expected volatility	122.60% - 127.93%
Risk-free interest rate	1.65% - 2.70%
Dividend yield	- %

During the three months ended March 31, 2019, the Company granted 109,040 stock options to employees with an estimated grant date fair value of $1,039,427.    

During the three months ended June 30, 2019 the Company granted 103,632 stock options to employees with an estimated grant date fair value of $997,141. 

During the three months ended September 30, 2019, the Company granted 131,201 stock options to employees with an estimated grant date fair value of $1,092,044.  

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

							Weighted
							Average
			Weighted				Remaining
			Average				Contractual Term
	Options		Exercise Price		Intrinsic Value		(Years)
Balance, December 31, 2017		10,873,292	$	1.50	$	5.08		6.65
Granted		870,000		10.86		(3.78)		9.34
Exercised		(2,594,050)		0.78		11.90		—
Forfeited		(451,629)		3.03		9.59		—
Balance, December 31, 2018		8,697,613	$	2.08	$	5.00		6.07
Granted		343,873		10.21		(2.31)		9.73
Exercised		(1,895,629)		0.82		8.71		—
Forfeited		(343,552)		7.50		2.73		—
Balance, September 30, 2019		6,802,305	$	2.57	$	5.82		5.57
Exercisable at September 30, 2019		5,680,009		1.38		7.00		4.95
Vested at September 30, 2019		5,761,813	$	1.46	$	6.92		5.06

The grant date fair value of options to purchase common stock is recorded as stock-based compensation over the vesting period.  As of September 30, 2019, unrecognized compensation cost associated with options to purchase common stock was $8,747,985, that is expected to be recognized over a weighted-average period of 5  years.

Stock Repurchase Plan

On December 27, 2018 the Company announced that our board of directors approved a stock repurchase program authorizing us to purchase up to $25,000,000 of our common stock.  Purchases under the repurchase program may be made in the open market or through a 10b5-1 plan and are expected to comply with Rule 10b-18 under the Securities Exchange Act of 1934, as amended.   The timing and amount of shares repurchased will depend upon market conditions. The repurchase program does not require the Company to acquire a specific number of shares.  The cost of the shares that are repurchased will be funded from available working capital.

The repurchase program began on January 2, 2019 and was set to expire on June 28, 2019. On June 12, 2019 the Company under authorization from the Board of Directors, amended the plan. The amended plan extends the repurchase program through December 31, 2019.  The Company will cease purchasing stock on the earliest to occur of (i) the date on which either the broker-dealer administering our repurchase plan or the Company terminates the plan , (ii) the date on which our share repurchase broker receives notice of the commencement or impending commencement of any proceedings in respect of or triggered by bankruptcy or insolvency, (iii)  December 31, 2019 or (iv) the date that the aggregate price of all purchases reaches $25,000,000 (exclusive of  commissions and other expenses of purchases). 

For accounting purposes, common stock repurchased under our stock repurchase programs is recorded based upon the settlement date of the applicable trade. Such repurchased shares are held in treasury and are presented using the cost method. During the nine months ended as of September 30, 2019 the Company repurchased 1,785,945 shares of common stock that are held in treasury. These shares are considered issued but not outstanding. The total cost of the shares repurchased was $17,649,014.  

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7.           FAIR VALUE MEASUREMENTS

The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The fair value hierarchy prioritizes the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

Input Level	Definitions
Level 1	Inputs are quoted market prices in active markets for identical assets or liabilities (these are observable market inputs).
Level 2	Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability (includes quoted market prices for similar assets or identical or similar assets in markets in which there are few transactions, prices that are not current or prices that vary substantially).
Level 3	Inputs are unobservable inputs that reflect the entity's own assumptions in pricing the asset or liability (used when little or no market data is available).

The Company holds funds in a money market account. The Company values its money market funds at fair value on a recurring basis.  

The following table summarizes the Company’s fair value measurements:

	September 30, 2019
	Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	18,198,079	$	18,198,079	$	—	$	—
Total Assets	$	18,198,079	$	18,198,079	$	—	$	—
	December 31, 2018
	Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Money market funds	$	8,051,662	$	8,051,662	$	—	$	—
Total Assets	$	8,051,662	$	8,051,662	$	—	$	—

There have been no transfers between Level 1, Level 2 and Level 3 in the period presented.

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8.           DEBT

The Company cancelled its $1,000,000 line of credit in May 2019 that was scheduled to mature in August 2019, as the Company had not had any borrowings against the line of credit.

9.LEASES

The Company adopted ASU 2016-02 – Leases (Topic 842) effective January 1, 2019 using the modified retrospective approach whereby the cumulative effect of adoption was recognized on the adoption date and prior periods were not restated.  There was no net cumulative effect adjustment to retained earnings as of January 1, 2019 as a result of adoption.  ASU 2018-11 – Leases (Topic 842) – Targeted Improvements permits an entity to apply the new leases standard at the date of adoption.  Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with ASC 840 – Leases.

Operating Leases

The Company’s lease portfolio consists of office leases with lease terms ranging from less than 1 year to 7 years, with the weighted average lease term being 3 years.

Certain leases provide for increases in future lease payments once the term of the lease has expired, as defined in the lease agreements.  These leases generally also include real estate taxes.

Information as Lessee under ASC 842

The Company reassessed all of our leases to determine whether any expired or existing contracts were or contained a lease under ASC 842.  Expired or existing contracts previously considered leases under ASC 840 no longer meet the definition of a lease under ASC 842 and therefore, have been excluded from future lease payments.

The Company still maintains these agreements, along with other short-term leases that are not capitalized, and the expenses are recognized in the period incurred.

As of September 30, 2019, maturities of lease liabilities by fiscal year were as follows:

Remaining 2019	$	115,385
Year ending December 31,
2020		450,602
2021		354,463
2022		302,274
2023		176,869
2024		5,388
Thereafter		6,285
Total lease payments	$	1,411,266
Less: present value adjustment		(111,541)
Total operating lease liabilities, payments	$	1,299,725

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Included below is other information regarding leases for the three and nine month periods ended September 30, 2019.

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Other information
Short-term lease expense	$	6,030	$	20,822
Cash paid for operating leases	$	77,400	$	136,209
Weighted-average remaining lease term (years)– operating leases (1)		3		3
Weighted-average discount rate – operating leases		4.85%		4.85%

 (1) The Company’s lease terms include options to extend the lease when it is reasonably certain the Company will exercise its option.  Additionally, the Company considered any historical and economic factors in determining if a lease renewal or termination option would be exercised.

Information as Lessee under ASC 840

As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018, future minimum lease payments under ASC 840 for operating leases were as follows:

Year ending December 31,
2019	$	451,710
2020		420,518
2021		237,142
2022		42,532
2023 and thereafter		4,134
Total	$	1,156,036

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 included elsewhere within this report.  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” on page 3 of this Quarterly Report and “Item 1 A. – Risk Factors” in our Annual Report on Form 10- K for the fiscal year ended December 31, 2018, for a discussion of certain risks, uncertainties and assumptions associated with these statements.

OVERVIEW

We are a leading cloud-based international real estate brokerage company and focus our operations on the development and use of cloud-based technologies in order to grow our business without the burden of bricks and mortar.  We generate revenue primarily by serving as a licensed broker for the purpose of processing residential real estate transactions, from which we earn commissions.  The Company in turn pays a portion of the commissions earned to the real estate agents and brokers.

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Our strength is attracting real estate agent and broker professionals that have contributed to our growth.  As of September 30, 2019, we have grown our agent and broker base 66.2% to 23,034 agents and brokers compared to 13,859 as of the same period in the prior year and 47.9% compared to 15,570 agents and brokers as of December 31, 2018.

The following table sets forth the number of transactions, sales volume and commission revenue earned on real estate transactions:

Nine Months Ended September 30,			Nine Months Ended September 30,			Change
2019			2018
Number	Volume	Revenue	Number	Volume	Revenue	Number	Volume	Revenues
96,711	$ 27,175,325,190	$ 705,917,916	52,595	$ 13,834,440,204	$ 349,741,409	44,116	$ 13,340,884,986	$ 356,176,507

We continue to increase our presence in the United States and Canada through the execution of our growth strategies. 

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 the Sustainable Equity 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 may 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.  The agent equity program continues to be another element in creating a culture of agent-ownership. 

RECENT BUSINESS DEVELOPMENTS

Initiatives

Agent and Employee Experience

The Company has embarked on an initiative to better understand both its agents and employee experience. In doing so, we have adopted many of the principles of the Net Promoter Score® (NPS) across many aspects of our organization. NPS is a measure of customer satisfaction and is measured on a scale between -100 and 100.  A NPS above 50 is considered excellent.  Whether it be the overall question "How likely are you to recommend eXp to your colleagues, friends or family?" or more granular inquiries as to specific workflows or service offerings, we believe this will ensure we are delivering on the most important values to our agents and employees. In turn, this often leads to enthusiastic fans of eXp who will promote our Company and continue leading us through strong organic growth.

This also ties into one of our core values, transparency. While we strive for high satisfaction, a low or trending lower NPS is equally important to identify. The Company’s agent NPS is 61 in the third quarter.  As NPS scores are often leading indicators to agents and employees’ future actions, we are able to learn quickly what may be a ‘pain point’ or product that is not meeting its desired objective. We then take that information and translate it into action with an effort to remediate the specific root cause(s) driving the lower score. This fast and iterative approach has already led to improvements in such parts of our business such as agent onboarding, commission transaction processing, and employee benefits.

Open Platform Strategy

The Company continues to build out eXp Enterprise (Enterprise) which is our proprietary platform that manages all of eXp Realty’s critical processes and information, including onboarding new agents, transactions, commission payments and other back office processes. We recently decided to further embrace the concept of an open platform strategy as it relates to other key functionality and solutions which our agents and brokers utilize to run their businesses.

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Why are we taking this approach? -  First and foremost, we believe in the efficiency of choice and flexibility. We do not believe in a one size fits all when it comes to business solutions for every eXp agent and broker. This approach validates the previous investments made by our agents and brokers as it relates to the specific solutions to run their individual businesses.

What specifically does this mean? - We are building out Application Program Interfaces (APIs) which will allow for various third-party solutions to directly connect into Enterprise. Accordingly, this will allow our agents and brokers to choose which solution works best for them as it relates to their desired lead generation, customer relationship management, transaction management, and Internet Data Exchange (IDX) applications and websites, among others.

How will we deliver this concept? - In addition to building out the technological infrastructure we will also establish an eXp Partner Marketplace. This will allow for a validation process of potential third-party service providers as well as consistent utilization of APIs for seamless use of tools by our agents and brokers.

Equity

On December 27, 2018, the Company introduced its Sustainable Equity Plan for real estate agents and brokers at eXp Realty, which became effective in January of 2019.

Also, on December 27, 2018, the Company announced that its Board of Directors authorized a stock repurchase program to offset equity issuances for up to $25 million of company common stock. On June 12, 2019 the Company under authorization from the Board of Directors, amended the plan. The amended plan extends the repurchase program through December 31, 2019.  Our stock repurchase program and agent growth incentive program are more fully disclosed in Note 6 – Stockholders’ Equity, of the Notes to the Condensed Consolidated Financial Statements.

World Technologies

We continue developing the core VirBELA software platform and its underlying infrastructure to accommodate for the ever-increasing use and scale required to support our eXp Realty division. Also, we recently released a new product centered around the concept of an open campus whereby small and independent organizations may utilize sub spaces as part of a larger campus similar to co-working environments that currently exist in the physical brick and mortar world. Lastly, we continue to service existing and new business to business enterprise level contracts in the coming year. 

Agile at Scale

The Company continues to focus and refine its efforts on our engagement strategy to build a positive employee experience to advance creativity, productivity and service quality to retain top performing talent with the overall goal of growing and improving overall profitability. We have been and will continue to form more and more smaller functional teams across the entire organization. This allows for faster identification of challenges and opportunities, autonomy and decision making, and execution affecting our agents and employees. This is tied together by ensuring all teams are aligned and working towards outcomes consistent with our vision, goals, and key results.

Global Real Estate Cloud Brokerage

The Company announced its first international expansions outside of North America into Australia and the U.K. This is part of the Company’s initiative to operate as a Global Real Estate Cloud Brokerage. We look forward to our cloud campus being populated by real estate professionals from around the globe as they conduct business, collaborate with each other and develop meaningful personal and professional relationships across borders and cultures. In addition to these new countries, the Company continues to also focus on growth in the United States. We continue to expand in Canada, with recent openings in Saskatchewan, Newfoundland and Labrador, Quebec, and future openings planned in Novia Scotia throughout the rest of 2019.

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MARKET CONDITIONS AND INDUSTRY TRENDS

Home Sale Transactions

According to the National Association of Realtors (NAR), existing home sale transactions of single-family homes increased 3.9% for the twelve-month period for September 2019 (preliminary), compared to September 2018.  During this same period, the average home sales price increased 5.9%.    Mortgage rates at historically low levels and continued economic growth may have contributed to the increase in home sales transactions.  Low inventory levels continue to push up home sale prices. 

Inventory

The inventory of existing homes for sale in the U.S. decreased 2.7% for the twelve-month period ended September 2019 (preliminary) compared to September 2018.  The inventory represents a national average supply of 4.1 months as of September 2019, (preliminary) at the current home sales pace which is up from 3.7 months as of December 2018.

Housing Affordability Index

Also, according to the NAR, the composite housing affordability index  increased to  160.4 for  August 2019 (preliminary) from 147.4 for September 2018. However, the housing affordability index continues 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 favorable housing affordability index is due in part to favorable mortgage rate conditions and low overall unemployment. Mortgage rates decreased approximately 100 basis points as of September 2019 (forecast) compared to the prior period September 2018.  Mortgage rates continue to be at historically low levels.    

Mortgage Rates

According to the Federal Housing Finance Agency, mortgage rates on commitments for 30-year, conventional, fixed-rate first mortgages averaged 4.5% for 2018 and the rate decreased to 3.7% in September 2019  (forecast).  Mortgage rates are forecasted to increase to 4.0% for the remainder of 2019 and decrease  to 3.8% in 2020. 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. 

While increasing mortgage rates and higher home prices may negatively impact housing affordability, demand remains favorable by rising wages, availability of alternative mortgage arrangements and improving consumer confidence.

Factors that may negatively affect growth in the housing industry include prolonged periods of slow economic growth, increased prevalence of unemployment, increasing mortgage interest rates, increase in home sales prices, insufficient inventory levels, regulations imposed by local, state and federal government agencies, geopolitical instability, first time home buyers inability to save due to increasing rent prices, other debt including credit cards and student loans, and adverse shifts in consumer attitudes towards home ownership.

Existing Home Sales

NAR existing home sale transactions for month end September 2019 (preliminary)  increased  3.9% to 5.4 million, compared to the same period in 2018.  During this same period, eXp Realty home sales units increased 83.9% to 96,711 and home sales volume increased 99.6% to $27.2 billion compared to the same period in 2018.  Our home sale transactions growth was directly related to the growth of our agent base, which increased 66.2% compared to the same period in 2018.

As of their most recent releases, NAR is forecasting existing home sales to decrease 2.0%  for the remainder of 2019 and increase 1.2% in 2020.

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Existing Home Sales Price

Existing home sales average price for month end September (preliminary) increased  5.9%, compared to the same period in 2018.

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 and job growth, the increase in household formation, relatively high consumer confidence, mortgage rate levels and mortgage availability,, the inherent benefits of owning a home versus renting and the influence of local housing dynamics of supply versus demand. 

As of September 30, 2019, 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, the Company is positioned to adhere to its low-cost, high-engagement model, affording agents and brokers increased income and ownership opportunities while offering a scalable solution to brokerage owners looking to survive and thrive in a series of fluctuations in economic activity.

Results of Operations

Three Months Ended September 30, 2019 compared to the Three Months Ended September 30, 2018

	Three Months Ended September 30,		Percentage of			Three Months Ended September 30,		Percentage of			Change
	2019		Revenue			2018		Revenue			Dollar		Percentage
Statement of Operations Data:
Revenue	$	282,179,339		100.0	%	$	157,236,070		100.0	%	$	124,943,269		79.5	%
Expenses:
Commission and other agent-related costs		259,140,641		91.8			145,740,264		92.7			113,400,377		77.8
General and administrative		23,597,497		8.4			15,351,430		9.8			8,246,067		53.7
Sales and marketing		1,083,456		0.4			774,479		0.5			308,977		39.9
Total expenses		283,821,594		100.6			161,866,173		102.9			121,955,421		75.3
Operating income (loss)		(1,642,255)		(0.6)			(4,630,103)		(2.9)			2,987,848		64.5
Other income (expense)
Other income (expense), net		(256,511)		(0.1)			—		—			(256,511)		—
Interest income		83,636		0.0			9,387		—			74,249		—
Total other income (expense), net		(172,875)		(0.1)			9,387		—			(182,262)		—
Loss before income tax expense		(1,815,130)		(0.6)			(4,620,716)		(2.9)			2,805,586		60.7
Income tax benefit (expense)		(32,233)		(0.0)			(7,455)		(0.0)			(24,778)		(332.4)
Net loss	$	(1,847,363)		(0.7)	%	$	(4,628,171)		(2.9)	%	$	2,780,808		60.1	%
Adjusted EBITDA (1)	$	3,563,245		1.3	%	$	951,650		0.61	%	$	2,611,595		274.4	%
Net loss per share
Basic	$	(0.03)				$	(0.08)				$	0.05		62.5	%
Diluted	$	(0.03)				$	(0.08)				$	0.05		62.5	%
Weighted average shares outstanding
Basic		63,197,495					58,360,233
Diluted		63,197,495					58,360,233

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(1) Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP.  For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S. GAAP Financial Measure.”

Revenue

Our total revenues were $282.2 million for the three months ended September 30, 2019 compared to $157.2 million for the same period in 2018, an increase of $124.9 million, or 79.5%.  Total revenues increased primarily as a result of an increase in real estate brokerage commissions, which is directly related to our increase in agent count of 66.2% compared to the same period in 2018. 

Commission and Other Agent Related Costs

Commission and other agent-related costs were $259.1 million for the three months ended September 30, 2019 compared to $145.7 million for the same period in 2018, an increase of $113.4 million, or 77.8%.  Commission and other agent related costs increased primarily as a result of an increase in settled real estate transactions and agent base.

General and Administrative Expense

General and administrative expenses were $23.6 million for the three months ended September 30, 2019 compared to $15.4 million for the same period in 2018, an increase of $8.2 million or 53.7%. General and administrative expenses include costs related to wages, including stock compensation, and other general overhead expenses.  General and administrative expenses increased primarily as a result of an increase of $6.0 million in compensation expense as a result of the Company’s continued growth. 

Sales and Marketing

Sales and marketing expenses were $1.1  million for the three months ended September 30, 2019 compared to $0.8 million for the same period in 2018, an increase of $0.3  million, or 39.9%.    Sales and marketing expenses increased primarily as a result of an increase in lead capture costs of $0.2 million. 

Other Income (Expense)

Other income (expense) includes amortization expense of the present value adjustment to our stock payable and start-up costs.  Start-up costs increased $0.1 million for the three months ended September 30, 2019 compared to zero in the same period in 2018.

Interest Income (Expense)

We earn interest income on our money market funds.  There were no significant changes in interest income for the three months ended September 30, 2019 compared to the same period in 2018.

Income Tax Benefit (Expense)

There were no significant changes in income tax expenses for the three months ended September 30, 2019 compared to the same period in 2018.

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Nine Months Ended September 30, 2019 compared to the Nine Months Ended September 30, 2018

	Nine Months Ended September 30,		Percentage of			Nine Months Ended September 30,		Percentage of			Change
	2019		Revenue			2018		Revenue			Dollar		Percentage
Statement of Operations Data:
Revenue	$	705,917,916		100.0	%	$	349,741,409		100.0	%	$	356,176,507		101.8	%
Expenses:
Commission and other agent-related costs		646,269,556		91.6			319,560,992		91.4			326,708,564		102.2
General and administrative		66,502,632		9.4			45,218,159		12.9			21,284,473		47.1
Sales and marketing		3,043,407		0.4			2,130,644		0.6			912,763		42.8
Total expenses		715,815,595		101.4			366,909,795		104.9			348,905,800		95.1
Operating income (loss)		(9,897,679)		(1.4)			(17,168,386)		(4.9)			7,270,707		42.3
Other income (expense)
Other income (expense), net		(374,699)		(0.1)			—		—			(374,699)		—
Interest income		176,836		0.0			9,387		—			167,449		—
Total other income (expense), net		(197,863)		(0.0)			9,387		—			(207,250)		—
Loss before income tax expense		(10,095,542)		(1.4)			(17,158,999)		(4.9)			7,063,457		41.2
Income tax benefit (expense)		(243,385)		(0.0)			(52,175)		(0.0)			(191,210)		(366.5)
Net loss	$	(10,338,927)		(1.5)	%	$	(17,211,174)		(4.9)	%	$	6,872,247		39.9	%
Adjusted EBITDA (1)	$	6,584,694		0.9	%	$	3,496,628		1.00	%	$	3,088,066		88.3	%
Net loss per share
Basic	$	(0.17)				$	(0.30)				$	0.13		43.3	%
Diluted	$	(0.17)				$	(0.30)				$	0.13		43.3	%
Weighted average shares outstanding
Basic		61,834,376					57,069,377
Diluted		61,834,376					57,069,377

(1) Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP.  For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see “Non-U.S. GAAP Financial Measures.”

Revenue

Our total revenues were $705.9  million for the nine months ended September 30, 2019 compared to $349.7 million for the same period in 2018, an increase of $356.2 million, or 101.8%.  Total revenues increased primarily as a result of an increase in real estate brokerage commissions, which is directly related to our increase in agent count of 66% compared to the same period in 2018.

Commission and Other Agent Related Costs

Commission and other agent-related costs were $646.3 million for the nine months ended September 30, 2019 compared to $319.6 million for the same period in 2018, an increase of $326.7 million, or 102.2%.  Commission and other agent related costs increased primarily as a result of an increase in settled real estate transactions and agent base.

General and Administrative Expense

General and administrative expenses were $66.5 million for the nine months ended September 30, 2019 compared to $45.2 million for the same period in 2018, an increase of $21.3 million or 47.1%. General and administrative expenses include costs related to wages, including stock compensation, and other general overhead expenses. General and administrative expenses increased primarily as a result of an increase of $17.8 million in compensation related expense as a result of the Company’s continued growth. 

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Sales and Marketing

Sales and marketing expenses were $3.0  million for the nine months ended September 30, 2019 compared to $2.1 million for the same period in 2018, an increase of $0.9 million, or 42.8%.    Sales and marketing expenses increased primarily as a result of an increase in lead capture costs of $0.5 million. 

Other Income (Expense)

Other income (expense) includes amortization expense of the present value adjustment to our stock payable and start-up costs.   Start-up expenses increased $0.2 million for the nine months ended September 30, 2019 compared to zero in the same period in 2018.

Interest Income (Expense)

We earn interest income on our money market funds.  There were no significant changes in interest income for the nine months ended September 30, 2019 compared to the same period in 2018.

Income Tax Benefit (Expense)

There were no significant changes in income tax expenses for the nine months ended September 30, 2019 compared to the same period in 2018.

NON-U.S. GAAP FINANCIAL MEASURES

To supplement our condensed consolidated financial statements, which are prepared and presented in accordance with U.S. GAAP, we use Adjusted EBITDA, a non-U.S. GAAP financial measure, to understand and evaluate our core operating performance. This non-U.S. GAAP financial measure, which may be different than similarly titled measures used by other companies, is presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with U.S. GAAP.

We define the non-U.S. GAAP financial measure of Adjusted EBITDA to mean net income (loss), excluding other income (expense),  income tax expense, depreciation and amortization; stock-based compensation expense, and stock option expense.   

We believe that Adjusted EBITDA provides useful information about our financial performance, enhances the overall understanding of our past performance and future prospects, and allows for greater transparency with respect to a key metric used by our management for financial and operational decision-making. We believe that Adjusted EBITDA helps identify underlying trends in our business that otherwise could be masked by the effect of the expenses that we exclude in Adjusted EBITDA.  In particular, we believe the exclusion of stock and stock option expenses, provides a useful supplemental measure in evaluating the performance of our operations and provides better transparency into our results of operations.

We are presenting the non-U.S. GAAP measure of Adjusted EBITDA to assist investors in seeing our financial performance through the eyes of management, and because we believe this measure provides an additional tool for investors to use in comparing our core financial performance over multiple periods with other companies in our industry.

Adjusted EBITDA should not be considered in isolation from, or as a substitute for, financial information prepared in accordance with U.S. GAAP. There are a number of limitations related to the use of Adjusted EBITDA compared to Net Income (Loss), the closest comparable U.S. GAAP measure. Some of these limitations are that:

· Adjusted EBITDA excludes stock-based compensation expense not related to the agent equity program (and related payroll tax expense) and stock option expense, which have been, and will continue to be for

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the foreseeable future, significant recurring expenses in our business and an important part of our compensation strategy; and

· Adjusted EBITDA excludes certain recurring, non-cash charges such as depreciation of fixed assets and amortization of acquired intangible assets and, although these are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future.

The following tables present a reconciliation of Adjusted EBITDA to net loss, the most comparable U.S. GAAP financial measure, for each of the periods presented:

	For the Three Months Ended
	September 30, 2019		September 30, 2018
Net income / (loss)	$	(1,847,363)	$	(4,628,171)
Other (income) / expense		172,875		(9,387)
Taxes		32,233		7,455
Depreciation & Amortization		642,089		240,031
Agent growth incentive stock compensation expense		3,503,236		4,238,667
Stock option expense		1,060,175		1,103,055
Adjusted EBITDA	$	3,563,245	$	951,650

	For the Nine Months Ended
	September 30, 2019		September 30, 2018
Net income / (loss)	$	(10,338,927)	$	(17,211,174)
Other (income) / expense		197,863		(9,387)
Taxes		243,385		52,175
Depreciation & Amortization		1,616,220		570,910
Agent growth incentive stock compensation expense		10,760,022		16,507,378
Stock option expense		4,106,131		3,586,726
Adjusted EBITDA	$	6,584,694	$	3,496,628

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash and cash equivalents and cash flows from operations. 

At September 30, 2019, our cash and cash equivalents totaled $34.7 million.  Cash equivalents are comprised of financial instruments with an original maturity of 90 days or less from the date of purchase, primarily money market funds.  We hold no marketable securities.

Net Working Capital

The following table presents our net working capital for the nine months ended September 30, 2019:

	September 30, 2019		December 31, 2018		Change
Current assets	$	81,292,083	$	42,326,727	$	38,965,356
Current liabilities		(50,064,504)		(24,212,062)		(25,852,442)
Net working capital	$	31,227,579	$	18,114,665	$	13,112,914

For the nine months ended September 30, 2019, net working capital increased $13.1 million, to $31.2 million, primarily due to an  increase in cash of $14.2 million.

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Cash Flows

The following table presents our cash flows for the nine months ended September 30, 2019 and 2018:

	September 30,
	2019		2018		$ Change
Cash provided by operating activities	$	39,776,125	$	18,855,045	$	20,921,080
Cash used in investment activities		(4,114,095)		(1,396,346)		(2,717,749)
Cash provided by (used in) financing activities		(16,096,856)		1,749,896		(17,846,752)

Operating Activities

For the nine months ended September 30, 2019, cash provided by operating activities increased $21.0 million compared to the same period in 2018.  The change resulted primarily from the increased volume in our sales transactions and participation by our agents and brokers in our Agent Equity Program. See Note 6 – Stockholders’ Equity, of the Notes to the Condensed Consolidated Financial Statements, for further details related to this Program.

Investing Activities

For the nine months ended September 30, 2019, our investing activities primarily consisted of additional expenditures related to the on-going development of our internal use software. As we continue to develop and refine our cloud-based platforms and continue to accelerate our business in innovative ways, we expect to continue to use our existing cash resources on similar expenditures for the next twelve months. 

Financing Activities

For the nine months ended September 30, 2019, we utilized approximately $16.1 million in cash flows from financing activities primarily related to the repurchase of common stock in the amount of $17,649,014.   See Note 6 Stockholders’ Equity, of the Notes to the Condensed Consolidated Financial Statements, for further details related to our Share Repurchase Program.

We believe that our existing balances of cash and cash equivalents and cash flows expected to be generated from our operations will be sufficient to satisfy our operating requirements for at least the next twelve months.  Our future capital requirements will depend on many factors, including our level of investment in technology, our rate of growth into new markets and capital used to repurchase shares of the Company’s common stock.  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 to the manner in which we currently operate. In order to support and achieve our future growth plans, however, we may need or seek advantageously to obtain additional funding through equity or debt financing.

We currently have no bank debt. If we are unable to raise additional capital when desired, our business and results of operations would likely suffer.

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. 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.

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The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 2018, which provides a description of our critical accounting policies.

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 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

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2019 pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Based on the evaluation of our disclosure controls and procedures as of September 30, 2019, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of material weaknesses in our internal control over financial reporting and discussed below, our disclosure controls and procedures were not effective as of September 30, 2019.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2019. In making its evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). 

Based on this evaluation of the effectiveness of internal controls, management concluded there has not been any change in the Company’s internal control over financial reporting during the period covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

The Company’s internal control over financial reporting was not effective as of September 30, 2019 due to the material weaknesses identified in connection with the preparation and audit of our consolidated financial statements for the year ended December 31, 2018, described below.

Under standards established by the Public Company Accounting Oversight Board of the United States, a material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

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Material Weaknesses:

Control Environment and Monitoring

The Company did not properly design or maintain effective controls over the control environment and monitoring components which contributed to material weaknesses at the control activity level. As it relates to the control environment, the Company did not have sufficient oversight and competencies to address the Company’s overall financial reporting and information technology requirements. As it relates to monitoring, the Company did not perform timely and ongoing evaluations to ascertain whether the components of internal control are present and functioning. The failures within these COSO components contributed to the following material weaknesses at the control activity level:  

Control Activities

The Company did not have effective business processes and controls as well as resources with adequate training and support to conduct an effective review of manual reconciliations including the complex data feeds into the reconciliations of high-volume transactions.  This resulted in several errors mainly to revenue, accounts receivable, and commission expense during the period covered by this report and could have resulted in errors in other financial statement line items.

Remediation Actions on Material Weakness:

To address the above material weaknesses described above, our management is currently in the process of undertaking a re-design of the control workflows within our software and systems for processing high-volume transactions.  This will include further validations between the systems to ensure accuracy and completeness of the transactions.  Additionally, we will provide additional training of the appropriate personnel involved with these business processes and the related control activities and continue to hire qualified personnel to ensure components of internal control are present and functioning.

Inherent Limitations on Effectiveness of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

Other than the efforts noted above to remediate the previously reported material weaknesses, there have been no changes in our internal control over financial reporting during the period covered by this interim report on Form 10-Q that has 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 ordinary routine litigation incidental to the conduct of our business, including matters that may be certified as class or collective actions. 

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

Item 1A.          RISK FACTORS

An investment in our common stock involves a number of very significant risks. Investors should carefully consider the risk factors included in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended December 31, 2018, as filed with SEC on March 18, 2019, in addition to other information contained in the Annual Report and in this Quarterly Report on Form 10-Q, in evaluating the Company and our business before purchasing shares of our common stock. The Company’s business, operating results and financial condition could be adversely affected due to any of those risks.

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

Issuer Purchases of Equity Securities

The following table provides information about repurchases of our common stock through the quarter ended September 30, 2019:

	(a)		(b)	(c)		(d)
Period	Total number of shares purchased		Average price paid per share	Total number of shares purchased as part of publicly announced plans or programs (1)		Approximate dollar value of shares that may yet be purchased under the plans or programs
1/2/19 - 1/31/19	137,240	$	9.18	137,240	$	6,236,524
2/1/19 - 2/28/19	100,412		11.10	100,412		5,120,260
3/1/19 - 3/31/19	120,100		10.63	120,100		3,842,191
4/1/19 - 4/30/19	123,346		10.26	123,346		2,573,197
5/1/19 - 5/31/19	124,847		10.78	124,847		1,229,200
6/1/19 - 6/30/19	211,900		10.81	211,900		16,430,412
7/1/19 - 7/31/19	290,264		10.69	290,264		13,319,378
8/1/19 - 8/31/19	342,023		9.31	342,023		10,140,916
9/1/19 - 9/30/19	335,813		8.44	335,813		7,297,407
Total	1,785,945	$	9.88	1,785,945

(1) On December 27, 2018 the Company announced that our board of directors approved a stock repurchase program authorizing us to purchase up to $25 million of our common stock.  The repurchase program began on January 2, 2019. On June 12, 2019 the Company under authorization from the Board of Directors, amended the plan. The amended plan extends the repurchase program through December 31, 2019 and increased total value of shares repurchased to $25 million. The stock repurchase program is more fully disclosed in Note 6, Stockholders’ Equity, of the Notes to the Condensed Consolidated Financial Statements.  As of September 30, 2019, we repurchased an aggregate of  1,785,945 shares of our common stock in the open market pursuant to our share repurchase program.

Item 3.          DEFAULTS UPON SENIOR SECURITIES

None.

Item 4.          MINE SAFETY DISCLOSURES

Not applicable.

Item 5.          OTHER INFORMATION

Not applicable.

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Item 6.          EXHIBITS

Exhibit	Exhibit
Number	Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference from Appendix A to the Company’s Definitive Information Statement on Schedule 14C filed on October 9, 2018
3.2	Amended and Restated Bylaws (incorporated by reference from Appendix B to the Company’s Definitive Information Statement on Schedule 14C filed on October 9, 2018.
31.1	Certification of the Chief Executive pursuant to Rule 13a‑14(a) or Rule 15d‑14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of the Chief Financial Officer pursuant to Rule 13a‑14(a) or Rule 15d‑14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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.

	eXp World Holdings, Inc.
	(Registrant)
Date: November 6, 2019	/s/ Jeff Whiteside
	Jeff Whiteside
	Chief Financial Officer (Principal Financial Officer)

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