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VirBELA LLC

Financial Statements

Year s Ended December  31, 20 17 and 20 16

Contents

...........................................................................................................................................................


Independent Auditors’ Report	1
Financial Statements
Balance Sheets	2
Statements of Comprehensive Loss	3
Statements of Member’s Equity	4
Statements of Cash Flows	5
Notes to Financial Statements	6 -15





 

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INDEPENDENT AUDITOR’S REPORT



We have audited the accompanying financial statements of VirBELA LLC (the Company), which comprise the balance sheets as of December 31, 2017 and 2016, and the related statements of comprehensive loss, members’ equity, and cash flows for the years then ended, and the related notes to the financial statements.



M ana g ement’s R esponsibility f o r   the Financi a l Statements



Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.



A udit o rs’   R esp o nsibility



O ur respo n si b ility is to e x press an o p i n i o n on t h ese fi n a n cial stat e me n ts b ased o n our a ud it. We con du cted o ur au d it in accordance with auditing standards generally accepted   in the   United States of   America. Those standards requi r e t h at  w e   p lan a n d  p erf or m t h e   a ud it   to   o b tain reaso n a b le assurance about whether t h e financial statements are   free from m a terial misstat e ment.



An audit inv o l v es perf o rmi n g p r ocedures to obtain audit e v i d ence a b o u t the amounts a n d discl o s u res in t h e financial stat e ments.   The   procedures   selected d e p end  o n t h e   au d it o r’s   ju dg me n t,   i n clu d ing t h e   assessme n t  o f   t h e   ris k s   of material misst a t e me n t   o f t h e fi n a n cial   statements,   whether   due to fra u d or   err o r.   In   ma k i n g th o se  r isk assessme n ts, t h e   au d it o r   consi d ers   i n ter n al   c on tr o l rele v ant   to t h e   C o m p any ’ s pre p aration   and fair presentation of t h e financial stat e me n ts   in or d er   to  d esign   a ud it p rocedures   that   are   a p propriate   in   the   circumstances,   but not for   the purpose of exp r essing   an opinion   on   t h e effectiveness of   the   C o m p any’s   internal   contr o l.   Accordingly,   we express no s u ch opinio n .   An audit   also   i n cludes evaluating t h e appropriateness   of acco u nting   p o licies used and t h e reasona b leness of significant accounting est i mates made by management, as well as evaluating the overall presentation of the financial statements.



We   believe   t h a t   t h e   audit   evidence   we   have   obtain e d   is   s u fficient   and   appropriate   to p r o v ide   a   b a sis   for   o u r   a u dit op i n io n.



Opinion



In o u r o p i n io n , t h e fi n a n cial stat e me n ts referred to ab ov e prese n t fairly, in all material res p ects, t h e fi n a n cial po sition of the C o m p any as of December 31, 2017 a n d 2016, a n d t h e r e sults of its operations and its cash flows for the years then   ended   in   accorda n ce with   accounting principles generally   accepted   in   t h e United   States   of America.





Salt La k e City, U tah

O cto b er 9,   2 018

 

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VirBELA LLC

Balance Sheets




		December 31,		December 31,
		2017		2016

Assets
Current assets:
Cash and cash equivalents		$      26,665		$      22,382
Marketable securities		142,500		25,313
Accounts and other receivables, net of allowances		12,000		22,620
Inventory
Prepaids and other current assets		750		1,044
Total current assets		181,915		71,359

Property and equipment, net		76,096		50,562
Intangible assets, net		4,550		6,650
Total assets		$    262,561		$    128,571

Liabilities and Members' Equity
Current liabilities:
Accounts payable		$      19,126		$        3,263
Accrued liabilities		88,021		928
Current portion of deferred revenue		209,286		69,551
Total current liabilities		316,433		73,742

Deferred revenue, net of current portion		11,095		126,862
Related party notes payable		16,960		16,960
Other long term liabilities		8,000		8,000
Total liabilities		352,488		225,564
Commitments and contingencies
Members' equity (deficit):
Accumulated other comprehensive income (loss)		58,406		(4,313)
Members' equity (deficit)		(148,333)		(92,680)
Total members' equity (deficit)		(89,927)		(96,993)
Total liabilities and members' equity		$    262,561		$    128,571



See accompanying notes.

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VirBELA LLC

Statements of Compre hensive Loss




		Year ended December 31,
		2017		2016

Revenues		$      519,201		$      180,985
Costs and expenses:
Costs of revenues		396,392		207,893
Selling, General and administrative		354,040		88,104
Total costs and expenses		750,432		295,997
Income (loss) from operations		(231,231)		(115,012)
Other income (expense):
Interest expense		(3,334)		(164)
Net income (loss)		(234,565)		(115,176)

Other comprehensive income (loss)		62,719		(4,313)
Comprehensive income (loss)		(171,846)		(119,489)





See accompanying notes.

 

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VirBELA LLC

Statements of Members’ Deficit




	Members' Equity (Deficit)		Accumulated Other Comprehensive Income (Loss)		Total Members' Equity (Deficit)
Balance at December 31, 2015	$22,496		$                     -		$22,496
Unrealized loss on marketable securities	-		(4,313)		(4,313)
Net income ( loss )	(115,176)		-		(115,176)
Balance at December 31, 2016	$(92,680)		$(4,313)		$(96,993)
Distribution to members	(10,088)		-		(10,088)
Unrealized gain on marketable securities	-		62,719		62,719
Equity based compensation	189,000		-		189,000
Net income ( loss )	(234,565)		-		(234,565)
Balance at December 31, 2017	$(148,333)		$58,406		$(89,927)







See accompanying notes.

 

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VirBELA LLC

Statements of Cash Flows







		Year ended December 31,
		2017		2016

Cash flow from operating activities
Net income (loss)		$    (234,566)		$    (115,176)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization of property and equipment		30,268		17,316
Amortization of intangible assets		2,100		2,100
Equity-based compensation		189,000		–
Marketable securities received as revenue		(54,469)		(29,625)
Changes in operating assets and liabilities
Trade accounts receivable		10,620		33,380
Inventory
Prepaid expenses and other current assets		294		(1,044)
Accounts payable and accrued liabilities		102,956		8,478
Other liabilities
Deferred revenue		23,969		133,865
Net cash provided by operating activities		70,173		49,295
Cash flows from investing activities
Purchase of property and equipment		(55,801)		(24,609)
Net cash used in investing activities		(55,801)		(24,609)
Cash flows from financing activities
Distributions to members		(10,088)		–
Loans from members
Repayment of loans from member
Net cash used by financing activities		(10,088)		–
Net  ( decrease )   increase in cash and cash equivalents		4,283		24,686
Cash and cash equivalents at beginning of period		22,382		6,878
Cash and cash equivalents at end of period		$       26,665		$       31,564

Non Cash Items
Unrealized gain on securities recorded to other comprehensive income		$       62,719		$        (4,313)



See accompanying notes.

 

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1. Description of Business and Summary of Significant Accounting Policies

Organization

VirBELA LLC ’s (“VirBELA” or the “Company”) improve s the way people learn and collaborate together while geographically apart. To do so, the Company create s   a   software platform that fosters effective communication, deep relationships, and a safe environment to take risks. The software platform includes a proprietary 3D virtual reality platform that allows users to connect with avatars, voice and text chat, collaborative web-browsers, and embedded learning simulations and games. The 3D environments, whi ch are offered under a software-as-a- service model, are custom branded for clients and are privately hosted for their community of users. 

The Company was originally established in the state of California in July 201 2 under the name of Vnnovation LLC. The name of the Company was changed to VirBELA in 2015.

Basis of Presentation

The Company prepares its financial statements on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Key estimates , which the Company evaluates on an on-going basis, include allowances for doubtful accounts, useful lives for property and equipment and intangible assets and valuation of equity -based compensation.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and accounts receivable.   The Company deposits cash with high credit quality financial institutions, which at times ,   may exceed federally insured amounts.   The Company has not experienced any losses on its deposits.   The Company performs ongoing credit evaluations of its customers ’ financial condition and generally requires no colla teral from its customers.   The Company reviews the expected collectability of accounts receivable and records   an allowance for doubtful accounts receivable for amounts that it determines are not collectible.

For the year ended December  31, 2017 ,   one   customer accounted for approximately 78 % of total revenue. Two custo mers accounted for   100 % of net accounts receivable at December  31, 20 17 .  

For the year ended December  31, 2016 ,   one customer accounted for approximately   6 0 % of total revenue. T wo customers accounted for 100 % of net accounts receivable at December  31, 2016 .

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Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less at the time of acquisition to be cash equivalents.

A ccounts Receivable

The Company records its accounts receivable at sales value and establishes an allowance for estimated losses specific to those customer accounts identified with collection problems due to insolvency or other issues.   The Company ’ s accounts receivable are considered past due when payment has not been received within 30 days of the invoice date. The amounts of the specific allowances are estimated by management based on various assumptions including the customer ’ s financial position, age of the customer ’ s receivables, and changes in payment schedules and histories. Account balances are written off against the allowance for doubtful accounts receivable when the potential for recovery is remote.   Recoveries of receivables previously written off are recorded when payment is received . No allowance for doubtful accounts was recorded at December 31, 2017 and 2016.

Marketable Securities

Investment securities consist of equity securities and are classified as available-for-sale.   Available-for-sale securities are recorded at fair market value.   Unrealized holding gains and losses of available-for-sale securities, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income or loss until realized.   Realized gains and losses from the sale of available-for-sale securities are determined using the specific identification method.



Investment securities classified as available-for-sale are evaluated annually for other-than-temporary impairment.   Other-than-temporary impairment means that the security’s impairment is due to factors that could include its inability to pay interest or dividends, its potential for default, and/or other factors.   When an available-for-sale security is assessed for other-than-temporary impairment, the Company has to first consider (a) whether they intend to sell the security, and (b) whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis.   If one of these circumstances applies to the security, an other-than-temporary loss is recognized in the consolidated statements of comprehensive income equal to the full amount of the decline in fair value below amortized cost.   If neither of these circumstances applies to the security, but the Company does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors.   The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings, while the amount related to other factors is recognized in other comprehensive income.  

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There was no other-than-temporary impairment related to investment securities during the year s  e nded December 31, 2017 and 2016 .

Property and Equipment

Property and eq uipment are stated at cost less accumulated depreciation. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized .   Repairs and maintenance costs that do not extend the useful life or improve the related assets are expensed as incurred. Depreciation is computed using the straight- line method over the estimated useful lives of the assets or over the related lease terms (if shorter) .   The estimated useful life of each asset category is as follows:



Certain c osts incurred to develop software applications used in   the Company’s VirBELA software platform are capitalized and are included in software. Capitaliz able costs consist of (a) certain external direct costs of materials and services incurred in developing or obtaining internal-use computer software and (b) payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the project. These costs generally consist of internal labor during configuration, coding and testing activities. Research and development costs incurred during the preliminary project stage, or costs incurred for data conversion activities, training, maintenance and general and administrative or overhead costs, are expensed as incurred. Costs that cannot be separated between the maintenance of, and relatively minor upgrades and enhancements to, internal-use software are also expensed as incurred. Capitalization begins when (a) the preliminary project stage is complete, (b) management with the relevant authority authorizes and commits to the funding of the software project, (c) it is probable the project will be completed, (d) the software will be used to perform the functions intended, and (e) certain functional and quality standards have been met.

When there are indicators of potential impairment, the Company evaluates recoverability of the car rying values of property and equipment by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset.   If the carrying amount of the asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized based on the amount by which the carrying value of the asset exceeds the fair value of the asset.   The Company did not incur any impairment charges for the years ended December  31, 20 17 and 20 16 .

Revenue Recognition and Deferred Revenue

The Company generates its revenues primarily from two main sources: (1) subscription revenues, which are comprised of Software-as-a-Service (SaaS) fees from customers accessing the Company ’ s   VirBELA Platform and; (2) related professional services revenue, w hich are

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comprised of implementation services and other types of professional services.   The Company provides its applications as a service and r evenue is recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collection is reasonably assured, and delivery has occurred or services have been rendered.

Because the Company provides its applications as a service and customers do not to take possession of the software, these arrangements are accounted for as service contracts .   For arrangements with multiple deliverables, the Company follow s the guidance provided in Accounting Standards Codification (ASC) 605-25, Revenue Recognition for Multiple-Element Arrangement s .   In accordance with this guidance, d eliverables in multiple-deliverable arrangements are accounted for as separate units of accounting if the delivered items have standalone value. If the deliverables in a multiple-deliverable arrangement do not have standalone value, the revenue associated with the deliverables is recognized ratably as a single unit of accounting over the contracted term of the subscription agreement.

As s ubscription and support revenues are delivered over the entire length of the arrangement, they are recognized ratably over the contract term beginning on the commencement date of each contract , which is the date the Company ’ s service is made available to customers and all other revenue recognition criteria have been met .   Implementation services are not considered to have standalone value, so the Company defer s revenue for installation services in multiple element arrangements and recognize s   the revenue over the life of the c ontracts .   P rofessional services are sold with subscriptions and separately (i.e. not sold contemporaneously with the negotiation of a subscription contract) and the Company has determined it has standalone value. As a result, these services are recognized as revenue over the period th e related services are provided if all other revenue recognition criteria have been met.

Advertising Costs

A dvertising costs are expensed as incurred and are included in selling , general, and administrative expenses . Advertising expenses totaled approximately $ 37,000 and $ 4,000 for the years ended December  31, 2017 and 2016 , respectively .

Equity - Based Compensation

Equity -based compensation cost is measured at the grant date based on the fair value of the award granted and recognized as compensation expense using the accrual method over the period in which the award is expected to vest, which is generally the period from the grant date to the end of the vesting period.  

Research and Development

Research and development costs   are expensed as incurred .

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Risks and Uncertainties

The Company is subject to all of the risks inherent in an early stage business. These risks include, but are not limited to, a limited operating history, new and rapidly evolving markets, dependence on the development of new services, unfavorable economic and market conditions, changes in level of demand for the Company ’ s services, and the timing of new product introductions. Failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer or supplier requirements, or changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of services, would have a material adverse effect on the Company ’ s business and operating results.

Income Taxes

As a limited liability company, the payment and recognition of income taxes are the r esponsibility of the individual member. Accordingly, the Company has not recorded any provision for income taxes in the accompanying statements of operations.



The Company evaluates the tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will be sustained by the applicable tax authority. The Company has determined that there is no tax liability resulting from unrecognized tax benefits related to uncertain income tax positions taken or expected to be taken on the tax return for the period ended December 31, 2017.   There are no tax returns that are currently under examination. Tax years from 2014 and forward remain subject to examination .



Comprehensive Income

Comprehensive income consists of unrecognized gain/loss on available for sale securities. Comprehensive income is presented in the statements of comprehensive loss.

Early Adoption of Accounting Standard

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities . ASU 2016-01 eliminates the requirement for non-public business entities to disclose the fair values of certain financial instruments. The provisions of ASU 2016-01 are effective for the Company for annual period in fiscal years beginning after  December 15, 2018 , with early adoption of the disclosure requirement permitted. The remaining provisions are of the standard are effective for fiscal periods beginning after December 15, 2018 for non-public companies. The Company elected to early adopt the permissible provisions as of January 1, 2017. As a result of adopting the disclosure requirements of the standard, the Company does not provide a disclosure for the fair value estimate of the Company’s debt obligations in the notes to the consolidated financial statements.

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VirBELA LLC

Notes to Financial Statements (continued)

2 .   Property and Equipment

Property and equi pment consist of the following:




	December 31,
	2017		2016
Computer equipment	$       15,033		$         9,530
Computer software	109,883		59,585
	124,916		69,115
Less: accumulated depreciation and amortization	$       (48,820)		$       (18,553)
Total property and equipment, net	76,096		50,562





Accumulated amortization for internal use software was approximately $ 45,000 and $ 18,00 0 at   December  31, 2017 and 2016 , respectively. Amortization expense for internal use software for the years ended December  31, 2017 and 2016 was $ 2 7 ,000 and $ 17,00 0 , respectively.

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VirBELA LLC

Notes to Financial Statements (continued)

3 . Intangible Assets

Intangible assets consisted of the following :




December 31, 2017
Gross Assets		Accumulated Amortization		Intangible Assets, Net

$         10,500		$           5,950		$           4,550
$         10,500		$           5,950		$           4,550

December 31, 2017
Gross Assets		Accumulated Amortization		Intangible Assets, Net

$         10,500		$           5,950		$           4,550
$         10,500		$           5,950		$           4,550



Amortization expense for intangible assets was approximately   $ 2, 1 00 f or each of the years ended December  31, 2017 and 2016 , respectively .

Based on the recorded intangible assets at December  31, 2017 , estimated amortization expense is expected to be $ 2,100 in 2018, 2019 and $ 350 in   2 020 .

4 .   Accrued Liabilities

Accrued liabilities consisted of the following:





5 .   Related Party Notes Payable  

Four members of the Company paid for operating expenses on behalf of the Company during the year ended December 31, 2015 totaling   approximately $17,000 .  The amounts outstanding as of

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December 31, 2017 and 2016 was $17,000 . These amounts are reflected as Related Parties Notes Payable on the financial statements and currently have no repayment or interest payable terms.

6 . Equity -Based Compensation

In January 2017 , the Company issued   499 ,000 member units to employees and 101,000 member units to non-employees for services that vested immediately .   To determine the value of these units , the Company analyzed historical and forecasted financial statements and performed   a valuation study based on a number of assumptions, including industry, general economic, market and other conditions that could reasonably be evaluated at the time of the valuation. The valuation analysis resulted in a value of $0.31 for each of the units.

The Company recorded $189,000 of equity-based compensation during the year ended December 31, 2017, of which   $ 64,000 and $ 125,000   was included in costs of revenue and selling, general and administrative expenses , respectively .   No equity-based compensation expense was recorded during the year ended December 31, 201 6 .

7 . Fair Value of Financial Instruments

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:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market - based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

There were no transfers between Level 1 and Leve l 2 of the fair value measurement hierarchy during 2017 and 2016 .   Assets measured at fair value on a recurring basis , were as follows at December 31, 2017 and 2016 :  







The carrying amount of the Company ’ s   cash, receivables , and payables approximated fair value because of the short-term nature of these items .

8 . Commitments and Contingencies

Royalty Agreement

In January 2015, the Company entered into a license agreement with the University of California San Diego (“ UCSD ”) which allowed the Company to market its VirBELA software under UCSD’s trademark and intellectual property for a fee and a royalty .   The Company agreed to pay 5% of the revenues generated by the use of UCSD’s trademark and intellectual property as a royalty, which would be reduced upon reaching certain milestone. A fee totaling $10,500 would also be paid to UCSD upon achievement of these milestones. As of December 31, 2017, the royalty has been reduced to 4% and total milestone fees of $2,500 have been paid.

Operating Leases

At December  31, 2017 , future minimum lease payments under non-cancellable operating leases were   approximately $3,000. There are no other non-cancellable operating leases that extend beyond February 2018.

Rent expense under operating leases for the years ended December  31, 2017 and 2016 ,   was   $ 22 ,000 and $ 10 ,000 , respectively.

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9 . Related- Party Transactions

The Company paid the CEO approximately  $ 9 ,000 for home office rent   for each of the year s ended December  31, 2017 and 2016 .

See Note 5 for discussion of related party notes payable .  

10 . Subsequent Events

Subsequent events were reviewed through October  9 , 20 18 , the date these financial statements were available to be issued .



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Financial Statements



VirBELA LLC

Nine Months Ended September 30, 2018

With Independent Accountant’s Review Report

 

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VirBELA LLC

Condensed Financial Statements

Nine Months Ended September 30, 2018

Contents

.............................................................................................................................................................


Independent Accountant’s Review Report	1
Financial Statements
Condensed Balance Sheets	2
Condensed Statements of Comprehensive Income (Loss)	3
Condensed Statemen ts of Members’ Equity (Deficit)	4
Condensed Statement s of Cash Flows	5
Notes to Condensed Financial Statements	6 -1 5





 

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Independent A ccountant’s Review Report

To   the   Me m b ers

of   VirBELA,   LLC



We   have   re v iewed   the   a c c omp an y ing financial   sta tem ents   of   V i rBELA,   LLC   (the   C ompany ),   which c omp rise   the   balance   sheet   as   of   Se p te m ber 30,   201 8 ,   and   t h e   related   condensed state m ents   of c omp rehens iv e inco m e   (loss)   for   the   three   and   nine  m onths   then   ended, me mbers’   equity   (deficit)   and cash   flows   f o r   the   nine mo nths   then   ended,   and   the   related   notes   to   the   financial stat e ments.   A   review includes   primarily   appl yi ng   anal y tical   procedures   to   management’s   financial   data   and  m aking   i n quiries of   co mp any   manag e ment.   A   review   is s ubstantially   less   in s cope   than   an audit,   the   objective   of which  i s the   expression   of   an   opinion   regarding   the   financial   stat em ents  a s   a   whole.  A ccordingl y , we   do   not express   such   an   opinion.



Management’s   Respons i bility   for   the   Financial   S t atements



Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.



Accountant’s   Responsib i lity



Our responsibility is to conduct the review engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require us to perform procedures to obtain limited assurance as a basis for reporting whether we are aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. We believe that the results of our procedures provide a reasonable basis for our conclusion.



Accountant’s   Conclusion



Based   on   our   review,   we   are   not   aware   of   any   m at e rial   m odifications that   should   be   made   to   the acc o m p an y ing financial   s t atements   in   order   for   t h e m   to   be   in   accordance   w i th   accounting   principles generally   accepted   in   the   United   States   of   America.





WSRP,   LLC

Salt Lake   City,   Utah

January   7 ,   2 0 19

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1. Description of Business and Summary of Significant Accounting Policies

Organization

VirBELA LLC ’s (“VirBELA” or the “Company”) improve s the way people learn and collaborate together while geographically apart. To do so, the Company create s   a   software platform that fosters effective communication, deep relationships, and a safe environment to take risks. The software platform includes a proprietary 3D virtual reality platform that allows users to connect with avatars, voice and text chat, collaborative web-browsers, and embedded learning simulations and games. The 3D environments, whi ch are offered under a software-as-a- service model, are custom branded for clients and are privately hosted for their community of users. 

The Company was originally established in the state of California in July 201 2 under the name of Vnnovation LLC. The name of the Company was changed to VirBELA in 2015.

Basis of Presentation

The Company prepares its financial statements on the accrual basis of accounting in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)   for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements .

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Key estimates , which the Company evaluates on an on-going basis, include allowances for doubtful accounts, useful lives for property and equipment and intangible assets and valuation of equity -based compensation.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist principally of cash and accounts receivable.   The Company deposits cash with high credit quality financial institutions, which at times ,   may exceed federally insured amounts.   The Company has not experienced any losses on its deposits.   The Company performs ongoing credit evaluations of its customers ’ financial condition and generally requires no collateral from its customers. The Company reviews the expected collectability of accounts receivable and records   an allowance for doubtful accounts receivable for amounts that it determines are not collectible.

For the nine months ended September 30 , 201 8 ,   three customer s accounted for approximately 87 % of total revenue. Four custo mers accounted for   96 % of net accounts receivable at September 30 , 201 8 .  

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For the nine months ended   September 30, 201 7 ,   one customer accounted for approximately 75 % of total revenue. Two custo mers accounted for   100 % of net accounts receivable at December 31, 2017.

Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with a remaining maturity of three months or less at the time of acquisition to be cash equivalents.

Accounts Receivable

The Company records its accounts receivable at sales value and establishes an allowance for estimated losses specific to those customer accounts identified with collection problems due to insolvency or other issues.   The Company ’ s accounts receivable are considered past due when payment has not been received within 30 days of the invoice date. The amounts of the specific allowances are estimated by management based on various assumptions including the customer ’ s financial position, age of the customer ’ s receivables, and changes in payment schedules and   histori es. Account balances are written off against the allowance for doubtful accounts receivable when the potential for recovery is remote.   Recoveries o f receivables previously written off are recorded when payment is received . No allowance for doubtful accounts was recorded at September 30, 2018 and December 31, 2017.

Marketable Securities

Investment securities consist of equity securities and are classified as available-for-sale. Available-for-sale securities are recorded at fair market value. Unrealized holding gains and losses of available-for-sale securities, net of the related tax effect, are excluded from earnings and are reported as a separate component of accumulated other comprehensive income or loss until realized. Realized gains and losses from the sale of available-for-sale securities are determined using the specific identification method.

Investment securities classified as available-for-sale are evaluated annually for other-than-temporary impairment. Other-than-temporary impairment means that the security’s impairment is due to factors that could include its inability to pay interest or dividends, its potential for default, and/or other factors. When an available-for-sale security is assessed for other-than-temporary impairment, the Company has to first consider (a) whether they intend to sell the security, and (b) whether it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis. If one of these circumstances applies to the security, an other-than-temporary loss is recognized in the consolidated statements of comprehensive income equal to the full amount of the decline in fair value below amortized cost. If neither of these circumstances applies to the security, but the Company does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors.

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The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings, while the amount related to other factors is recognized in other comprehensive income. There was no other-than-temporary impairment related to investment securities during the nine months ended September 30, 201 8 and 2017.

Inventory

Inventory is recorded at the lower of cost or net realizable value, with cost determined on a first-in, first-out basis.  The Company periodically reviews the composition of its inventory to identify obsolete, slow-moving or otherwise unsaleable items. If any of these items is observed, the Company will record a write-down to net realizable value in the period it is recognized. There was no inventory write-down during the nine months ended September 30, 2018 or 2017.

The inventory at September 30, 2018 consisted of work in process totaling $14,000.

Property and Equipment

Property and eq uipment are stated at cost less accumulated depreciation. Expenditures that materially increase values or capacities or extend useful lives of property and equipment are capitalized .   Repairs and maintenance costs that do not extend the useful life or improve the related assets are expensed as incurred. Depreciation is computed using the straight- line method over the estimated useful lives of the assets or over the related lease terms (if shorter) .   The estimated useful life of each asset category is as follows:





Certain c osts incurred to develop software applications used in the Company’s VirBELA software platform are capitalized and are included in software. Capitaliz able costs consist of (a) certain external direct costs of materials and services incurred in developing or obtaining internal-use computer software and (b) payroll and payroll-related costs for employees who are directly associated with, and who devote time to, the project. These costs generally consist of internal labor during configuration, coding and testing activities. Research and development costs incurred during the preliminary project stage, or costs incurred for data conversion activities, training, maintenance and general and administrative or overhead costs, are expensed as incurred. Costs that cannot be separated between the maintenance of, and relatively minor upgrades and enhancements to, internal-use software are also expensed as incurred. Capitalization begins when (a) the preliminary project stage is complete, (b) management with the relevant authority authorizes and commits to the funding of the software project, (c) it is probable the project will be

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completed, (d) the software will be used to perform the functions intended, and (e) certain functional and quality standards have been met.

When there are indicators of potential impairment, the Company evaluates recoverability of the car rying values of property and equipment by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset.   If the carrying amount of the asset exceeds its estimated undiscounted future net cash flows, an impairment charge is recognized based on the amount by which the carrying value of the asset exceeds the fair value of the asset.   The Company did not incur any impairment charges for the nine months ended September 30, 2018 and 2017 .

Revenue Recognition and Deferred Revenue

The Company generates its revenues primarily from two main sources: (1) subscription revenues, which are comprised of Software-as-a-Service (SaaS) fees from customers accessing the Company’s VirBELA Platform and; (2) related professional services revenue, which are comprised of implementation services and other types of professional services.   The Company provides its applications as a service and r evenue is recognized when persuasive evidence of an arrangement exists, the fee is fixed or determinable, collection is reasonably assured, and delivery has occurred or services have been rendered.

Because the Company provides its applications as a service and customers do not to take possession of the software, these arrangements are accounted for as service contracts .   For arrangements with multiple deliverables, the Company follow s the guidance provided in Accounting Standards Codification (ASC) 605-25, Revenue Recognition for Multiple-Element Arrangement s .   In accordance with this guidance, d eliverables in multiple-deliverable arrangements are accounted for as separate units of accounting if the delivered items have standalone value. If the deliverables in a multiple-deliverable arrangement do not have standalone value, the revenue associated with the deliverables is recognized ratably as a single unit of accounting over the contracted term of the subscription agreement.

As s ubscription and support revenues are delivered over the entire length of the arrangement, they are recognized ratably over the contract term beginning on the commencement date of each contract , which is the date the Company’s service is made available to customers and all other revenue recognition criteria have been met. Implementation services are not considered to have standalone value, so the Company defer s revenue for installation services in multiple element arrangements and recognize s   the revenue over the life of the c ontracts. Professional services are sold with subscriptions and separately (i.e. not sold contemporaneously with the negotiation of a subscription contract) and the Company has determined it has standalone value. As a result, these services are recognized as revenue over the period th e related services are provided if all other revenue recognition criteria have been met.

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Advertising Costs

A dvertising costs are expensed as incurred and are included in selling, general, and administrative expenses . Advertising expenses totaled approximately $ 22 ,000 and $ 30 ,000 for the nine months ended September 30, 2018 and September 30 ,   2017, respectively .

Equity-Based Compensation

Equity -based compensation cost is measured at the grant date based on the fair value of the award granted and recognized as compensation expense using the accrual method over the period in which the award is expected to vest, which is generally the period from the grant date to the end of the vesting period.  

Research and Development

Research and development costs   are expensed as incurred .

Risks and Uncertainties

The Company is subject to all of the risks inherent in an early stage business. These risks include, but are not limited to, a limited operating history, new and rapidly evolving markets, dependence on the development of new services, unfavorable economic and market conditions, changes in level of demand for the Company ’ s services, and the timing of new product introductions . Failure by the Company to anticipate or to respond adequately to technological developments in its industry, changes in customer or supplier requirements, or changes in regulatory requirements or industry standards, or any significant delays in the development or introduction of services, would have a material adverse effect on the Company ’ s business and operating results.

Income Taxes

As a limited liability company, the payment and recognition of income taxes are the responsibility of the individual member. Accordingly, the Company has not recorded any provision for income taxes in the accompanying statements of operations.

The Company evaluates the tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions will be sustained by the applicable tax authority. The Company has determined that there is no tax liability resulting from unrecognized tax benefits related to uncertain income tax positions taken or expected to be taken on the tax return for the period ended September 30, 2018 .   There are no tax returns that are currently under examination. Tax years from 2014 and forward remain subject to examination .

Comprehensive Income

Comprehensive income consists of unrecognized gain/loss on available for sale securities. Comprehensive income is presented in the statements of comprehensive loss.

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Early Adoption of Accounting Standard

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 eliminates the requirement for non-public business entities to disclose the fair values of certain financial instruments. The provisions of ASU 2016-01 are effective for the Company for annual period in fiscal years beginning after December 15, 2018, with early adoption of the disclosure requirement permitted. The remaining provisions are of the standard are effective for fiscal periods beginning after December 15, 2018 for non-public companies. The Company elected to early adopt the permissible provisions as of January 1, 2017. As a result of adopting the disclosure requirements of the standard, the Company does not provide a disclosure for the fair value estimate of the   Company’s debt obligations in the notes to the consolidated financial statements.

2. Property and Equipment

Property and equipment consist of the following:







Accumulated amortization for internal use software was approximately $ 73 ,000 and $ 45 ,000 at   September 30 , 201 8 and December 31, 201 7 , respectively. Amortization expense for internal use software for the nine months ended September 30 , 201 8 and 201 7 was $27 ,000 and $1 9 ,000 , respectively.

3 . Intangible Assets

Intangible assets consisted of the following :







Amortization expense for intangible assets was approximately $ 1,575 for each of the nine months ended September 30, 2018 and 201 7 , respectively.

Based on the recorded intangible assets at September 30, 2018 , estimated amortization expense is expected to be $525 for the remainder of 2018 and $ 1, 450 in 201 9 .

4 .   Accrued Liabilities

Accrued liabilities consisted of the following:





5 .   Related Party Notes Payable  

Four members of the Company paid for operating expenses on behalf of the Company during the year ended December 31, 2015 totaling approximately $17,000 .  The amounts outstanding as of

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September 30, 2018 and December 31,2017 was $17,000 . These amounts are reflected as Related Parties Notes Payable on the financial statements and currently have no repayment or interest payable terms.

6. Equity -Based Compensation

In January 2017, the Company issued 499,000 member units to employees and 101,000 member units to non-employees for services that vested immediately .   To determine the value of these units, the Company analyzed historical and forecasted financial statements and performed a valuation study based on a number of assumptions, including industry, general economic, market and other conditions that could reasonably be evaluated at the time of the valuation. The valuation analysis resulted in a value of $0.31 for each of the units.

The Company recorded $189,000 of equity-based compensation during the nine months ended September 30 , 2017, of which $64,000 and $125,000 was included in costs of revenue and selling, general and administrative expenses , respectively . No equity-based compensation expense was recorded during the nine months ended September 30, 2018 .

7 . Fair Value of Financial Instruments

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:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market - based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

There were no transfers between Level 1 and Level 2 of the fair value measurement hierarchy during the nine months ended September 30, 2018 and the year ended December 31, 2017 . Assets measured at fair value on a recurring basis , were as follows at September 30, 2018 and December 31, 2017 :  



The carrying amount of the Company ’ s cash, receivables , and payables approximated fair value because of the short-term nature of these items .

8 . Commitments and Contingencies

Royalty Agreement

In January 2015, the Company entered into a license agreement with the University of California San Diego (“UCSD”) which allowed the Company to market its VirBELA software under UCSD’s trademark and intellectual property for a fee and a royalty. The Company agreed to pay 5% of the revenues generated by the use of UCSD’s trademark and intellectual property as a royalty, which would be reduced upon reaching certain milestone. A fee totaling $10,500 would also be paid to UCSD upon achievement of these milestones. As of September 30, 2018 , the royalty has been reduced to 4% and total milestone fees of $2,500 have been paid.

Operating Leases

At September 30, 2018 , future minimum lease payments under non-cancellable operating leases were approximately $ 10 ,000. There are no other non-cancellable operating leases that extend beyond February 201 9 .

Rent expense under operating leases for the nine months ended   September 30, 2018 and 201 7 , was $ 22 ,000 and $ 1 6 ,000, respectively.

9 . Related-Party Transactions

The Company paid the CEO approximately  $ 6,75 0   for home office rent for each of the nine months ended September 3 0 , 201 8 and 201 7 .  

See Note 5 for discussion of related party notes payable .  

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10 . Subsequent Events

On November 2 9 , 2018 the Company agreed to an A sset P urchase A greement (the “Purchase Agreement”) with eXp World Holdings, Inc (the “Purchaser”) . Pursuant to the Purchase Agreement, on the terms and subject to the conditions therein, eXp World Holdings, Inc. acquired and the Company sold substantially all of the assets owned and used by the Company for a purchase price of $11,000,000, of which $7,000,00 0 was paid in cash at closing (subject to a holdback of $500,000 to secure the Company’s performance of certain post-closing obligations), and the balance in shares of the Purchaser ’s common stock (the “Share Consideration”).  



The Share Consideration is issuable in four installments valued at $1,000,000 each. The number of shares issuable on each issuance date will be determined based on the closing price of the Purchaser ’s common stock on the last business day prior to the applicable issuance date. The first installment of 97,371 shares was issued on the closing date and the balance of the Share Consideration will be issued on the first, second and third anniversaries thereof.



Subsequent events were reviewed through January 8, 2019 , the date these financial statements were available to be issued.

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

On November 29, 2018, the Company and its newly formed subsidiary, eXp World Technologies, LLC acquired substantially all the assets of VirBELA, LLC (VirBELA) , a California limited liability company for approximately $11,000,000.  VirBELA is a training and education software company that specializes in 3D virtual reality software.  

The following unaudited pro forma condensed combined balance sheet and statement of operations are based upon the historical consol idated financial statements of eXp World Holdings, Inc. (“eXp” or “Company”) and historical financial statements of VirBELA . The pro forma financial statements have been prepared to illustrate the effect of the acquisition of VirBELA . The unaudited pro forma condensed combined balance sheet as of September 30, 2018 reflects the pro forma effect as if the VirBELA acquisition had been consummated on that date. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 201 7 and for the nine months ended September 30, 2018 presents the results of operations of eXp as if eXp’s acquisition of VirBELA had been consummated on January 1, 201 7 .

The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the acquisition and factually supportable. Our unaudited pro forma condensed combined statements of operations and explanatory notes present how our financial statements may have appeared had the businesses actually been combined as of January 1, 201 7 . The unaudited pro forma condensed combined balance sheet show s the impact of the acquisition as if the acquisition had occurred as of September 30, 2018 .

The unaudited pro forma condensed combined financial statements are based upon the estimates and assumptions set forth in the notes to such statements, which are preliminary and have been made solely for purposes of developing such pro forma information. The following unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not purport to reflect the historical results that would have been obtained had eXp and VirBELA been a combined company during the periods presented or the results the combined company may achieve in future periods.

The acquisition has been accounted for using the purchase method of accounting under Financial Accounting Standards Board ASC 805, Business Combinations. Under the purchase method of accounting, the total estimated purchase price has been allocated on a preliminary basis to tangible and intangible assets acquired and liabilities that existed as of purchase date , as described in Note 2 . The allocation of the purchase price is preliminary and based on valuations derived from estimated fair value assessments and assumptions used by management. The final purchase price allocation is pending the finalization of appraisal valuations, which may result in an adjustment to the preliminary purchase price allocation. While management believes that its preliminary estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill.

For the purposes of measuring the estimated fair market value of the assets acquired and liabilities assumed, eXp has applied the accounting guidance for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The unaudited pro forma condensed combined financial information is derived from and should be read in conjunction with the historical financial statements and related notes included elsewhere in this Form 8 -K and our historical filings, including,







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NOTE 1 – BASIS OF PRESENTATION

The unaudited pro forma condensed combined financial statements are based on eXp’s and VirBELA’s historical consolidated financial statements as adjusted to give effect to the acquisition of VirBELA.  The unaudited pro forma combined statements of operations for the nine months ended September 30, 2018 and twelve months ended December 31, 2017 give effect to the VirBELA acquisition as if it had occurred on January 1, 201 7 .  The unaudited pro forma combined balance sheet as of September 30, 2018 gives effect to the VirBELA acquisition as if it had occurred on September 30, 2018.

NOTE 2 – PRELIMINARY PURCHASE PRICE ALLOCATION

On November 29 , 2018, eXp and its newly formed subsidiary, eXp World Technologies, LLC acquired substantially all the assets of VirBELA ,   a California limited liability company , for an aggregated purchase price of $11,000,000, consisting of cash paid of $7,000,000 and shares of the Company’s common stock valued at $4,000,000.  A cash payment of $ 6,5 00,000 was paid at closing with $500,000 being held by the Company to secure the Seller’s performance of certain post-close obligations and 97,371 shares of the Company’s restricted common stock having a value of $1,000,000 was issued at closing.  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 Closing Date.  The present value of future deliveries of eXp World Holdings, Inc. stock, calculated using a discount rate of 10%, is $2,607,800.  Based on the discounting, the calculated total consideration for the VirBELA acquisition is $10,607,800.

The following table shows the preliminary allocation of the purchase price of VirBELA to the acquired identifiable assets, liabilities assumed and pro formal goodwill:





	September 30, 2018
Accounts receivable	$                          4,273
Inventory	968
Fixed assets	23,452
Tradename	1,169,000
Existing Technology	297,000
Non-competition agreements	125,000
Customer contracts	740,000
Goodwill	8,248,107
Total	$                 10,607,800



NOTE 3 – PRO FORMA ADJUSTMENTS

The pro forma adjustments are based on our preliminary estimates and assumptions that are subject to change.  The following adjustments have been reflected in the unaudited pro forma condensed combined financial information:

Adjustments to the pro forma condensed combined balance sheet

(a) Represents the cash paid to acquire VirBELA of $6,500,000.

(b) Reflects the preliminary estimate of intangibles acquired from VirBELA.  The assets include tradenames, existing technology, non-compete agreements and customer contracts with useful lives between 3 and 17 years. 

(c) Reflects the preliminary estimate of the excess of the purchase price paid over the fair value of VirBELA assets acquired and liabilities assumed.

(d) Represents the payable held by the Company to secure the seller’s performance of certain post-close obligations.

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(e) Reflects the present value of the current portion of eXp stock to be issued to the seller in the future.

(f) Reflects the present value of the long-term portion of eXp stock to be issued to the seller in the future.

(g) Reflects an increase in the par value of common stock as a result of the issuance of 97,371 shares of eXp restricted common stock at closing.

(h)  Reflects an increase in additional paid in capital as a result of the issuance of 97,371 shares of eXp restricted common stock valued at approximately $1.0 million

(i) Reflects the elimination of VirBELA ’ s accumulated deficit

Adjustments to the pro forma condensed statements of operations

(j) Reflects the elimination of VirBELA ’ s revenue earned from eXp for use of VirBELA’s virtual reality software , including revenue from the issuance of eXp common stock received for services .

(k)  Represents the increase in amortization expense associated with acquired intangible assets, based on the preliminary fair value of approximately $2.3 million. The intangibles have useful lives of 3 to 10 years and are amortized using the straight-line method.  Proforma amortization expense included in general and administrative was approximately $233,000 and $174,000 for the year ended December 31, 2017 and the nine months ending September 30, 2018, respectively.  Proforma amortization expense included in cost of revenues was approximately $59,400 and $44,550 for the year ended December 31, 2017 and the nine months ending September 30, 2018, respectively.

(l) Reflects the elimination of eXp expenses recognized for the use of VirBELA virtual reality software, including the compensation recognized by eXp for issuance of common stock to VirBELA for services.  The proforma expense eliminated was approximately $365,000 and $464,000 for the year ended December 31, 2017 and the nine months ending September 30, 2018, respectively.

(m) Represents the pro forma weighted average shares as if the shares issued as part of the acquisition were issued as of January 1, 2017 and eliminates the issuance of shares issued by eXp to VirBELA for services.





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