eXp Realty International, Inc.
CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of these statements.

eXp Realty International, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these statements.

eXp Realty International, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

The accompanying notes are an integral part of these statements.

eXp Realty International, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these statements.

eXp Realty International, Inc.
Notes to Consolidated Financial Statements

Note 1 – The Company and Summary of Significant Accounting Policies

Nature of operations

eXp Realty International, Inc. (the “Company”) was incorporated in Washington in October 2012. The Company provides an online marketing and sales system for residential real estate professionals. The Company’s owned-and-operated brokerages offer residential real estate brokerage, property management, and lead generation services through its network of agents in twenty nine states.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of eXp Realty International, Inc. and its subsidiaries eXp Realty, LLC; eXp Realty Washington, Inc.; eXp Realty of Canada, Inc.; and eXp Realty of Connecticut, LLC. All inter-company accounts and transactions have been eliminated upon consolidation.

Use of estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Net income (loss) per share

Basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock outstanding plus, if dilutive, potential common shares outstanding during the period. Potential common shares are composed of incremental shares of common stock issuable upon the exercise of potentially dilutive stock options.

Revenue recognition

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

Commission Revenue

The Company derives the majority of its revenue from commissions earned as agents in residential real estate transactions. Commission revenue is recognized upon closing of a transaction, net of any rebate or commission discount or transaction fee adjustment. Other commission revenue is generated from company leads, referrals, and other related fees.

Non-Commission Revenue

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

Cost of revenues

Cost of revenues consists of agent and broker commissions and related costs. The Company pays its agent and broker commissions using an independent contractor model. In this model, cost of revenues consist of commissions.

Cash and cash equivalents

The Company considers all highly liquid investments with remaining maturities at the date of purchase of three months or less to be cash equivalents. The Company did not have any cash equivalents during the periods presented.

Fair value of financial instruments

The carrying amounts of the Company’s financial instruments, which include cash, accounts receivable, restricted cash, accounts payable, accrued expenses and other current liabilities, approximate their fair values due to their short maturities.

Concentration of credit risk, significant customers and significant suppliers

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, accounts receivable and restricted cash.

The Company deposits its cash with financial institutions that management believes to be of high credit quality, and these deposits may, on occasion, exceed federally insured limits.

The Company’s accounts receivable are derived from non-commission based technology fees. These accounts receivable are typically unsecured. Allowances for doubtful accounts are estimated based on historically collection experience and periodically reviewed by management. For the periods presented we did not experience any material bad debts.

The Company derived 26% and 34% of its net transaction revenues during the years ended December 31, 2012 and 2011, respectively, in the State of Arizona. No customer accounted for more than 10% of net revenues in 2012 or 2011.

Property and equipment

Property and equipment are stated at cost. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the property and equipment as follows:

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

Impairment of long-lived assets

In accordance with the accounting guidance for the impairment or disposal of long-lived assets, the Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced for the cost of disposal. Through December 31, 2012, the Company has not recorded any charges for impairment of long-lived assets.

Stock-based compensation

The Company follows the accounting guidance for share-based payments which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, consultants and directors, including employee stock options and employee stock purchases, based on estimated fair values. Since the Company has not had recent transactions in its own stock or instruments convertible to its stock with independent third parties a reasonable grant-date fair value is not estimable. In accordance with the applicable GAAP, the Company accounts for stock based compensation based on its intrinsic value.

The Company re-measures the intrinsic value at each reporting date through the date of exercise or other settlement. The final measure of compensation cost is recognized at the intrinsic value of the instrument at the date it is settled. Compensation cost for each period until settlement is based on the change in the intrinsic value of the instrument in each reporting period.

Advertising costs

Advertising costs are expensed as incurred and included in sales and marketing expense in the accompanying consolidated statements of operations.

Income taxes

Deferred tax assets and liabilities arise from the differences between the tax basis of an asset or liability and its reported amount in the financial statements as well as from net operating loss and tax credit carry forwards. The measurement of current and deferred tax assets and liabilities is based on provisions of enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense or benefit is the tax payable or refundable, respectively, for the period adjusted for the change during the period in deferred tax assets and liabilities. For U.S. income tax returns, the open taxation years range from 2009 to 2012. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period.

Recent accounting pronouncements

There are no recently issued accounting pronouncements that the Company expects will have a material effect on its financial position, results of operations, or cash flows.

Note 2 – Restricted Cash

The Company’s restricted cash balance of $61,687 and $26,759 at December 31, 2012 and 2011, respectively consists of cash held by our brokers and agents on behalf real estate buyers that are in escrow. Since the Company does not have rights to the cash a corresponding customer deposit liability in the same amounts are recognized the consolidated balance sheet. When a sales transaction closes the restricted cash transfers to the sellers and the corresponding deposit liability is reduced.

Note 3 – Property and Equipment

Property and equipment, net consisted of the following:

Depreciation and amortization expense for the years ended December 31, 2012 and 2011 was $6,710 and $5,472, respectively.

Note 4 – Prepaid and Other Current Assets

Prepaid and other current assets consisted of the following:

Note 5 – Notes Payable

Notes payable consisted of the following:

During the years ended December 31, 2012 and 2011 the Company recognized interest expense of $1,895 and $2,108, respectively.

Note 6 – Stockholders’ Equity

Effective December 31, 2012 the Company converted its capital structure from a limited liability corporation with outstanding membership units to a corporation authorized to issue common stock. The Company converted each of the previously outstanding ownership into 2,275.52 shares of common stock. This conversion has been retroactively applied to all of the periods presented in the accompanying financial statements.

The Company is authorized to issue 50,000,000 shares of no par value common stock. At December 31, 2012 and 2011 the Company had 4,941,123 and 4,998,011, respectively.

In February 2011, the Company issued 15,929 shares of common stock at $0.44 per share for cash totaling $7,000.

In March 2011, the Company issued 22,755 shares of common stock at $0.44 per share for cash totaling $10,000.

In April 2011, the Company issued 874 shares of common stock at $1.00 per share for services totaling $874. The Company subsequently repurchased and cancelled the shares issued for $874.

In May 2011, the Company issued 22,755 shares of common stock at $0.66 per share for cash totaling $15,000.

In July 2011, the Company issued 15,178 shares of common stock at $0.66 per share for cash totaling $10,000.

In August 2012, the Company repurchased 56,888 shares of common stock at $0.44 per share for consideration totaling $25,000. The Company cancelled the shares upon re-purchase.

Note 7 – Stock-Based Compensation

During the year ended December 31, 2012 the Company approved the issuance stock options to certain employees, officers, directors, and service provider at the sole discretion of the Board of Directors.

The Company accounts for stock based compensation based on the intrinsic value of the awards and re-measures the intrinsic value at each reporting date through the date of exercise or other settlement. The final measure of compensation cost is recognized at the intrinsic value of the instrument at the date it is settled. Compensation cost for each period until settlement is based on the change in the intrinsic value of the instrument in each reporting period.

The Company’s currently issued stock options vest over periods ranging from 0 to 4 years and are exercisable for a period of 10 years.

The Company’s stock option activity is as follows:

The following table summarizes information about stock options outstanding at December 31, 2012:

During the year ended December 31, 2012 the Company’s stock options did not have any intrinsic value and no compensation cost was recognized.

Note 8 – Operating Lease

The Company entered into a lease agreement for its corporate office space on December 1, 2012. The non-cancelable lease expires on November 30, 2013 and calls for base monthly payments of $650. At December 31, 2012 the remaining obligation under this arrangement due in 2013 is $7,150.

Note 9 – Income Taxes

No provisions have been made for federal, state and local income taxes for the periods presented. Prior to the fiscal year ended December 31, 2012 the Company was primarily operating as a limited liability company, and as such was not liable for federal or state income taxes (with the exception of statutory state taxes generated in one of its subsidiaries in the amounts of $2,147 and $2,033 for the years ended December 31, 2012 and 2011, respectively). All taxable income and losses were passed through to its members in accordance with each partner’s ownership interest and taxed individually and not at the partnership level.

Upon conversion to a corporation, the Company uses an asset and liability approach in accounting for income taxes. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect currently. For the periods presented, the Company incurred immaterial permanent differences related to incurred meals and entertainment expenses, and no temporary differences.

Using this approach requires the reduction of deferred tax assets by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In management’s opinion, it is uncertain the Company will generate sufficient taxable income in the future to fully utilize the net deferred tax asset. Accordingly, a valuation allowance equal to the deferred tax asset has been recorded.

Note 10 – Subsequent Events

On April 8, 2013, the Company entered into a non-binding letter of intent with Desert Canadians Ltd. (the “DSET”), a public Company controlled by Glenn Sanford, the Company’s Chief Executive Officer and President. The proposed transaction would involve DSET acquiring all of the outstanding securities of the Company in exchange for 38,380,215 shares of common stock of DSET.

Stock options outstanding in the Company will be exchanged for stock options in DSET on the basis of 7.5 Desert Canadian options for each Company option, with expiry date remaining the same and the exercise price being reduced by a factor of 7.5 times, so that the total paid by each option holder upon exercise of all his/her options will remain the same.

Closing of the transaction is subject to both parties executing a merger agreement and obtaining shareholder approval.