rmax_CurrentFolio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2018.

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 001-36101

 

RE/MAX Holdings, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Delaware

 

80-0937145

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

 

 

5075 South Syracuse Street
Denver, Colorado

 

80237

(Address of principal executive offices)

 

(Zip Code)

 

(303) 770-5531

(Registrant’s telephone number, including area code)

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  ☒    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 such files).    Yes  ☒    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 definition 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

 

Non-accelerated filer

 

☐ 

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of outstanding shares of the registrant’s Class A common stock, par value $0.0001 per share, and Class B common stock, par value $0.0001, as of October 31, 2018 was 17,746,184 and 1, respectively.

 

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

Page No.

 

 

PART I. – FINANCIAL INFORMATION

 

 

 

 

 

Item 1. 

 

Financial Statements

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2018 and September 30, 2017

4

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and September 30, 2017

5

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2018

6

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and September 30, 2017

7

 

 

 

RE/MAX Holdings, Inc. Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

29

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risks

45

 

 

 

 

Item 4. 

 

Controls and Procedures

46

 

 

 

 

 

 

PART II. – OTHER INFORMATION

 

 

 

 

 

Item 1. 

 

Legal Proceedings

48

 

 

 

 

Item 1A. 

 

Risk Factors

48

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

48

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

48

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

48

 

 

 

 

Item 5. 

 

Other Information

48

 

 

 

 

Item 6. 

 

Exhibits

48

 

 

 

 

 

 

SIGNATURES

50

 

 

2


 

Table of Contents

PART I. – FINANCIAL INFORMATION

Item 1. Financial Statements

RE/MAX HOLDINGS, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 

 

 

September 30, 

 

2017

 

    

2018

    

As adjusted*

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

51,263

 

$

50,807

Accounts and notes receivable, current portion, less allowances of $7,247 and $7,223, respectively

 

 

21,566

 

 

20,284

Income taxes receivable

 

 

760

 

 

963

Other current assets

 

 

5,265

 

 

7,974

Total current assets

 

 

78,854

 

 

80,028

Property and equipment, net of accumulated depreciation of $12,977 and $12,326, respectively

 

 

3,626

 

 

2,905

Franchise agreements, net

 

 

107,032

 

 

119,349

Other intangible assets, net

 

 

21,911

 

 

8,476

Goodwill

 

 

150,859

 

 

135,213

Deferred tax assets, net

 

 

59,449

 

 

62,841

Other assets, net of current portion

 

 

4,347

 

 

4,023

Total assets

 

$

426,078

 

$

412,835

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

783

 

$

517

Accrued liabilities

 

 

12,440

 

 

15,390

Income taxes payable

 

 

105

 

 

97

Deferred revenue

 

 

25,310

 

 

25,268

Current portion of debt

 

 

2,665

 

 

2,350

Current portion of payable pursuant to tax receivable agreements

 

 

4,479

 

 

6,252

Total current liabilities

 

 

45,782

 

 

49,874

Debt, net of current portion

 

 

225,770

 

 

226,636

Payable pursuant to tax receivable agreements, net of current portion

 

 

43,710

 

 

46,923

Deferred tax liabilities, net

 

 

112

 

 

151

Deferred revenue, net of current portion

 

 

19,939

 

 

20,228

Other liabilities, net of current portion

 

 

18,607

 

 

19,897

Total liabilities

 

 

353,920

 

 

363,709

Commitments and contingencies (note 14)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 17,746,184 shares issued and outstanding as of September 30, 2018; 17,696,991 shares issued and outstanding as of December 31, 2017

 

 

 2

 

 

 2

Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of September 30, 2018 and December 31, 2017

 

 

 —

 

 

 —

Additional paid-in capital

 

 

457,026

 

 

451,199

Retained earnings

 

 

18,412

 

 

8,400

Accumulated other comprehensive income, net of tax

 

 

419

 

 

459

Total stockholders' equity attributable to RE/MAX Holdings, Inc.

 

 

475,859

 

 

460,060

Non-controlling interest

 

 

(403,701)

 

 

(410,934)

Total stockholders' equity

 

 

72,158

 

 

49,126

Total liabilities and stockholders' equity

 

$

426,078

 

$

412,835

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

*See Note 3, Revenue for more information.

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Table of Contents

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Income

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

 

 

2017

 

 

 

2017

 

    

2018

    

As adjusted*

    

2018

    

As adjusted*

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Continuing franchise fees

 

$

25,495

 

$

23,049

 

$

75,946

 

$

69,298

Annual dues

 

 

9,106

 

 

8,592

 

 

26,775

 

 

25,148

Broker fees

 

 

13,488

 

 

12,125

 

 

36,669

 

 

32,914

Franchise sales and other revenue

 

 

6,777

 

 

5,305

 

 

22,395

 

 

17,844

Total revenue

 

 

54,866

 

 

49,071

 

 

161,785

 

 

145,204

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, operating and administrative expenses

 

 

27,461

 

 

31,843

 

 

90,136

 

 

79,167

Depreciation and amortization

 

 

5,608

 

 

4,286

 

 

15,252

 

 

15,678

(Gain) loss on sale or disposition of assets, net

 

 

(10)

 

 

451

 

 

(41)

 

 

426

Total operating expenses

 

 

33,059

 

 

36,580

 

 

105,347

 

 

95,271

Operating income

 

 

21,807

 

 

12,491

 

 

56,438

 

 

49,933

Other expenses, net:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(3,050)

 

 

(2,598)

 

 

(8,945)

 

 

(7,414)

Interest income

 

 

180

 

 

145

 

 

397

 

 

195

Foreign currency transaction gains (losses)

 

 

24

 

 

273

 

 

(162)

 

 

289

Total other expenses, net

 

 

(2,846)

 

 

(2,180)

 

 

(8,710)

 

 

(6,930)

Income before provision for income taxes

 

 

18,961

 

 

10,311

 

 

47,728

 

 

43,003

Provision for income taxes

 

 

(3,420)

 

 

(3,021)

 

 

(8,429)

 

 

(10,786)

Net income

 

$

15,541

 

$

7,290

 

$

39,299

 

$

32,217

Less: net income attributable to non-controlling interest (note 4)

 

 

7,402

 

 

3,573

 

 

18,529

 

 

16,502

Net income attributable to RE/MAX Holdings, Inc.

 

$

8,139

 

$

3,717

 

$

20,770

 

$

15,715

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.46

 

$

0.21

 

$

1.17

 

$

0.89

Diluted

 

$

0.46

 

$

0.21

 

$

1.17

 

$

0.89

Weighted average shares of Class A common stock outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

17,746,184

 

 

17,696,991

 

 

17,733,910

 

 

17,685,683

Diluted

 

 

17,771,212

 

 

17,737,786

 

 

17,767,638

 

 

17,726,447

Cash dividends declared per share of Class A common stock

 

$

0.20

 

$

0.18

 

$

0.60

 

$

0.54

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

*See Note 3, Revenue for more information.

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RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

 

 

 

 

2017

 

 

 

2017

 

    

2018

    

As adjusted*

    

2018

    

As adjusted*

Net income

 

$

15,541

 

$

7,290

 

$

39,299

 

$

32,217

Change in cumulative translation adjustment

 

 

90

 

 

507

 

 

(77)

 

 

947

Other comprehensive income (loss), net of tax

 

 

90

 

 

507

 

 

(77)

 

 

947

Comprehensive income

 

 

15,631

 

 

7,797

 

 

39,222

 

 

33,164

Less: comprehensive income attributable to non-controlling interest

 

 

7,435

 

 

3,859

 

 

18,492

 

 

17,035

Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax

 

$

8,196

 

$

3,938

 

$

20,730

 

$

16,129

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

*See Note 3, Revenue for more information.

 

 

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RE/MAX HOLDINGS, INC.

Condensed Consolidated Statement of Stockholders’ Equity

(In thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other

 

 

 

 

 

 

Class A

 

Class B

 

Additional

 

 

 

comprehensive

 

Non-

 

Total

 

 

common stock

 

common stock

 

paid-in

 

Retained

 

income (loss),

 

controlling

 

stockholders'

 

    

Shares

    

Amount

    

Shares

    

Amount

    

capital

    

earnings

    

net of tax

    

interest

    

equity

As adjusted* balances, January 1, 2018

 

17,696,991

 

$

 2

 

 1

 

$

 —

 

$

451,199

 

$

8,400

 

$

459

 

$

(410,934)

 

$

49,126

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

20,770

 

 

 —

 

 

18,529

 

 

39,299

Distributions to non-controlling unitholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(11,259)

 

 

(11,259)

Equity-based compensation and related dividend equivalents

 

64,878

 

 

 —

 

 —

 

 

 —

 

 

6,206

 

 

(113)

 

 

 —

 

 

 —

 

 

6,093

Dividends to Class A common stockholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(10,645)

 

 

 —

 

 

 —

 

 

(10,645)

Change in accumulated other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(40)

 

 

(37)

 

 

(77)

Payroll taxes related to net settled restricted stock units

 

(15,685)

 

 

 —

 

 —

 

 

 —

 

 

(895)

 

 

 —

 

 

 —

 

 

 —

 

 

(895)

Other

 

 —

 

 

 —

 

 —

 

 

 —

 

 

516

 

 

 —

 

 

 —

 

 

 —

 

 

516

Balances, September 30, 2018

 

17,746,184

 

$

 2

 

 1

 

$

 —

 

$

457,026

 

$

18,412

 

$

419

 

$

(403,701)

 

$

72,158

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

*See Note 3, Revenue for more information.

 

 

 

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RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

 

 

 

2017

 

    

2018

    

As adjusted*

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

39,299

 

$

32,217

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

 

15,252

 

 

15,678

Bad debt expense

 

 

1,257

 

 

836

(Gain) loss on sale or disposition of assets and sublease, net

 

 

(146)

 

 

3,859

Equity-based compensation expense

 

 

6,141

 

 

2,161

Deferred income tax expense

 

 

3,503

 

 

3,822

Fair value adjustments to contingent consideration

 

 

(860)

 

 

250

Payments pursuant to tax receivable agreements

 

 

(5,047)

 

 

(7,296)

Other, net

 

 

902

 

 

888

Changes in operating assets and liabilities

 

 

(3,279)

 

 

1,025

Net cash provided by operating activities

 

 

57,022

 

 

53,440

Cash flows from investing activities:

 

 

 

 

 

 

Purchases of property and equipment and capitalization of developed software and trademark costs

 

 

(5,316)

 

 

(1,781)

Acquisitions, net of cash acquired of $362 and $0, respectively

 

 

(25,888)

 

 

 —

Net cash used in investing activities

 

 

(31,204)

 

 

(1,781)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on debt

 

 

(2,382)

 

 

(1,772)

Distributions paid to non-controlling unitholders

 

 

(11,259)

 

 

(14,213)

Dividends and dividend equivalents paid to Class A common stockholders

 

 

(10,758)

 

 

(9,607)

Payment of payroll taxes related to net settled restricted stock units

 

 

(895)

 

 

(816)

Payment of contingent consideration

 

 

(50)

 

 

 —

Net cash used in financing activities

 

 

(25,344)

 

 

(26,408)

Effect of exchange rate changes on cash

 

 

(18)

 

 

1,076

Net increase in cash and cash equivalents

 

 

456

 

 

26,327

Cash and cash equivalents, beginning of year

 

 

50,807

 

 

57,609

Cash and cash equivalents, end of period

 

$

51,263

 

$

83,936

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

8,487

 

$

7,477

Net cash paid for income taxes

 

$

4,802

 

$

8,619

Schedule of non-cash investing and financing activities:

 

 

 

 

 

 

Increase in accounts payable for capitalization of trademark costs and purchases of property, equipment and software

 

$

522

 

$

310

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

*See Note 3, Revenue for more information.

 

 

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1. Business and Organization

RE/MAX Holdings, Inc. (“RE/MAX Holdings”) completed an initial public offering (the “IPO”) of its shares of Class A common stock on October 7, 2013. RE/MAX Holdings’ only business is to act as the sole manager of RMCO, LLC (“RMCO”). As of September 30, 2018, RE/MAX Holdings owns 58.56% of the common membership units in RMCO, while RIHI, Inc. (“RIHI”) owns the remaining 41.44% of common membership units in RMCO. RE/MAX Holdings and its consolidated subsidiaries, including RMCO, are referred to hereinafter as the “Company.” 

The Company is a franchisor in the real estate industry, franchising real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages within the United States (“U.S.”) under the Motto Mortgage brand. RE/MAX, founded in 1973, has over 120,000 agents operating in over 7,000 offices and a presence in more than 100 countries and territories. Motto Mortgage (“Motto”), founded in 2016, is the first nationally franchised mortgage brokerage in the U.S. During the first quarter of 2018, the Company acquired all membership interests in booj, LLC, formerly known as Active Website, LLC, (“booj”), a real estate technology company.

2. Summary of Significant Accounting Policies

Basis of Presentation

 

The accompanying Condensed Consolidated Balance Sheet at December 31, 2017, which was derived from the audited consolidated financial statements at that date, and the unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements are presented on a consolidated basis and include the accounts of RE/MAX Holdings and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of September 30, 2018 and the results of its operations and comprehensive income for the three and nine months ended September 30, 2018 and 2017, cash flows for the nine months ended September 30, 2018 and 2017 and changes in its stockholders’ equity for the nine months ended September 30, 2018. Interim results may not be indicative of full-year performance. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 (“2017 Annual Report on Form 10-K”).

Reclassifications

 

In addition to the change in accounting principle discussed in Note 3, Revenue, certain items in the accompanying condensed consolidated financial statements for the nine months ended September 30, 2017 have been reclassified to conform to the current year’s presentation. These reclassifications did not affect the Company’s consolidated results of operations or cash flows.

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

Segment Reporting

 

In February 2018, the Company both (a) acquired all membership interests in booj and (b) promoted Adam Contos to the role of sole Chief Executive Officer. Because of these changes and the continued growth of Motto, in the second quarter of 2018 the chief operating decision maker re-evaluated the information used to evaluate performance and make resource

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allocation decisions. As a result of the re-evaluation, the Company determined it was operating under the following three segments: RE/MAX Franchising, Motto Franchising and booj. Due to quantitative insignificance, the Motto Franchising and booj operating segments do not meet the criteria of a reportable segment, and RE/MAX Franchising is the only reportable segment. The RE/MAX Franchising reportable segment comprises the operations of the Company’s owned and independent global franchising operations under the RE/MAX brand name and corporate-wide shared services expenses. Other comprises Motto Franchising and booj. All prior segment information has been recasted to reflect the Company’s new segment structure. 

Principles of Consolidation

 

RE/MAX Holdings consolidates RMCO and records a non-controlling interest in the accompanying Condensed Consolidated Balance Sheets and records net income attributable to the non-controlling interest and comprehensive income attributable to the non-controlling interest in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income, respectively.

Recently Adopted Accounting Pronouncements

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies when transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 became effective prospectively for the Company on January 1, 2018. The Company concluded that the acquisition of booj meets the definition of a business. See Note 6, Acquisitions for additional information. The Company has also concluded that it expects future Independent Region acquisitions to be accounted for as an acquisition of a business.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies classification for certain cash receipts and cash payments on the Consolidated Statement of Cash Flows. ASU 2016-15 became effective for the Company on January 1, 2018 and required a retrospective transition method for each period presented.  Under the new guidance, the contingent consideration payments related to the purchase of Full House Mortgage Connection, Inc. (“Full House”), a franchisor of mortgage brokerages that created concepts used to develop Motto, are classified as financing outflows up to the $6.3 million acquisition date fair value and any cash payments paid in excess of the acquisition date fair value are classified as operating outflows. See Note 6, Acquisitions for additional information. The adoption of this standard had no other material impact on its financial statements and related disclosures. 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), with several subsequent amendments, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaced most existing revenue recognition guidance in U.S. GAAP when it became effective for the Company on January 1, 2018.  See Note 3, Revenue for more information.

New Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which eliminates certain disclosure requirements for fair value measurements and requires new or modified disclosures. ASU 2018-13 is effective for the Company beginning January 1, 2020. 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 believes the amendments of ASU 2018-13 will not have a significant impact on the Company’s consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220), which adjusts the classification of stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income to retained earnings. ASU 2018-02 is effective for the Company beginning January 1, 2019. The standard is to be applied either in the period of adoption or retrospectively to each period effected by the Tax Cuts and Jobs Act. The Company completed the majority of its accounting for the tax effects of the Tax Cuts and Jobs Act as of

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December 31, 2017. The Company believes the amendments of ASU 2018-02 will not have a significant impact on the Company’s consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test. ASU 2017-04 is effective for annual and interim impairment tests beginning January 1, 2020 for the Company and is required to be adopted using a prospective approach. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize the assets and liabilities that arise from all leases on the consolidated balance sheets. ASU 2016-02 is required to be adopted by the Company on January 1, 2019.  The Company plans to elect the transition method per ASU 2018-11 and apply the new lease standard at adoption and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and will not retrospectively recast prior periods presented.  The Company has several building leases and other smaller leases for which the Company is still assessing the application of this standard. The Company has not yet determined the exact effect of the standard on its consolidated financial statements and related disclosures but expects a material increase in both “Total assets” and “Total liabilities” on the Condensed Consolidated Balance Sheets upon implementation primarily related to building leases.

3. Revenue

Changes in Revenue Recognition Policies

The Company adopted the new revenue standard on January 1, 2018.  The Company applied the new revenue standard retrospectively and has recast the 2017 condensed consolidated financial statements as though the new revenue standard had been applied in all periods presented.  The adoption of the new guidance changed the timing of recognition of franchise sales and franchise renewal revenue and related commissions paid on franchise sales and renewals, as discussed below.  These changes resulted in net cumulative adjustments to “Retained earnings” of $4.9 million and “Non-controlling interest” of $11.6 million which were recorded to the opening balance sheet as of January 1, 2016. 

The Company’s franchise agreements offer the following benefits to the franchisee: common use and promotion of RE/MAX and Motto trademarks; distinctive sales and promotional materials; access to technology; standardized supplies and other materials used in RE/MAX and Motto offices; and recommended procedures for operation of RE/MAX and Motto offices. The Company concluded that these benefits are all a part of one performance obligation, a license of symbolic intellectual property that is billed through a variety of fees including franchise sales, continuing franchise fees, broker fees, and annual dues, described below. The Company has other performance obligations associated with contracts with customers in other revenue for training, marketing and events.

Franchise sales is comprised of revenue from the sale or renewal of franchises. The Company previously recognized revenue at the time of sale. Under the new revenue standard, the franchise sale initial fees are considered to be a part of the license of symbolic intellectual property, which is now recognized over the contractual term of the franchise agreement, which is typically 5 years for RE/MAX and 7 years for Motto franchise agreements. Correspondingly, the commissions related to franchise sales are recorded as an asset (the current portion in “Other current assets” and long-term portion in “Other assets, net of current portion”) and are recognized over the contractual term of the franchise agreement in “Selling, operating and administrative expenses”.  Previously, such commissions were expensed as incurred.

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The following tables summarize the impacts of the new revenue standard adoption on the Company’s condensed consolidated financial statements (in thousands, except per share information):

Condensed Consolidated Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Changes in Accounting Policies

 

 

As of December 31, 2017

 

    

As previously
reported

    

Adjustments

    

As adjusted

Accounts and notes receivable, current portion, net

 

$

21,304

 

$

(1,020)

 

$

20,284

Income taxes receivable

 

 

870

 

 

93

 

 

963

Other current assets

 

 

6,924

 

 

1,050

 

 

7,974

Deferred tax assets, net

 

 

59,151

 

 

3,690

 

 

62,841

Other assets, net of current portion

 

 

1,563

 

 

2,460

 

 

4,023

Income taxes payable

 

 

133

 

 

(36)

 

 

97

Deferred revenue

 

 

18,918

 

 

6,350

 

 

25,268

Deferred revenue, net of current

 

 

 —

 

 

20,228

 

 

20,228

Retained earnings

 

 

16,027

 

 

(7,627)

 

 

8,400

Accumulated other comprehensive income, net of tax

 

 

515

 

 

(56)

 

 

459

Non-controlling interest

 

 

398,348

 

 

12,586

 

 

410,934

Condensed Consolidated Statement of Income

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Changes in Accounting Policies

 

 

Three Months Ended September 30, 2017

 

    

As previously
reported

    

Adjustments

    

As adjusted

Franchise sales and other revenue

 

$

5,611

 

$

(306)

 

$

5,305

Selling, operating and administrative expenses

 

 

31,832

 

 

11

 

 

31,843

Provision for income taxes

 

 

3,091

 

 

(70)

 

 

3,021

Net income

 

 

7,537

 

 

(247)

 

 

7,290

Net income attributable to non-controlling interest

 

 

3,702

 

 

(129)

 

 

3,573

Net income attributable to RE/MAX Holdings, Inc.

 

 

3,835

 

 

(118)

 

 

3,717

Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock:

 

 

 

 

 

 

 

 

 

Basic

 

 

0.22

 

 

(0.01)

 

 

0.21

Diluted

 

 

0.22

 

 

(0.01)

 

 

0.21

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Changes in Accounting Policies

 

 

Nine Months Ended September 30, 2017

 

    

As previously
reported

    

Adjustments

    

As adjusted

Franchise sales and other revenue

 

$

19,065

 

$

(1,221)

 

$

17,844

Selling, operating and administrative expenses

 

 

79,263

 

 

(96)

 

 

79,167

Provision for income taxes

 

 

10,883

 

 

(97)

 

 

10,786

Net income

 

 

33,245

 

 

(1,028)

 

 

32,217

Net income attributable to non-controlling interest

 

 

16,968

 

 

(466)

 

 

16,502

Net income attributable to RE/MAX Holdings, Inc.

 

 

16,277

 

 

(562)

 

 

15,715

Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock:

 

 

 

 

 

 

 

 

 

Basic

 

 

0.92

 

 

(0.03)

 

 

0.89

Diluted

 

 

0.92

 

 

(0.03)

 

 

0.89

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Condensed Consolidated Statement of Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Changes in Accounting Policies

 

 

Three Months Ended September 30, 2017

 

    

As previously
reported

    

Adjustments

    

As adjusted

Net income

 

$

7,537

 

$

(247)

 

$

7,290

Change in cumulative translation adjustment

 

 

536

 

 

(29)

 

 

507

Comprehensive income

 

 

8,073

 

 

(276)

 

 

7,797

Comprehensive income attributable to non-controlling interest

 

 

3,987

 

 

(128)

 

 

3,859

Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax

 

 

4,086

 

 

(148)

 

 

3,938

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Changes in Accounting Policies

 

 

Nine Months Ended September 30, 2017

 

    

As previously
reported

    

Adjustments

    

As adjusted

Net income

 

$

33,245

 

$

(1,028)

 

$

32,217

Change in cumulative translation adjustment

 

 

999

 

 

(52)

 

 

947

Comprehensive income

 

 

34,244

 

 

(1,080)

 

 

33,164

Comprehensive income attributable to non-controlling interest

 

 

17,500

 

 

(465)

 

 

17,035

Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax

 

 

16,744

 

 

(615)

 

 

16,129

Condensed Consolidated Statement of Cash Flows

 

 

 

 

 

 

 

 

 

 

 

 

Impact of Changes in Accounting Policies

 

 

Nine Months Ended September 30, 2017

 

    

As previously
reported

    

Adjustments

    

As adjusted

Net income

 

$

33,245

 

$

(1,028)

 

$

32,217

Deferred income tax expense

 

 

3,919

 

 

(97)

 

 

3,822

Changes in operating assets and liabilities

 

 

(100)

 

 

1,125

 

 

1,025

Revenue Recognition Under the New Revenue Standard

The Company generates all of its revenue from contracts with customers. The following is a description of principal activities from which the Company generates its revenue. The franchise agreements provide the franchisees the right to access intellectual property throughout the license period. The method used to measure progress is over the passage of time for most streams of revenue.

Continuing Franchise Fees

Revenue from continuing franchise fees consists of fixed contractual fees paid monthly by franchise owners and franchisees based on the number of RE/MAX agents in the respective franchised region or office and the number of Motto offices. This revenue is recognized in the month for which the fee is billed.  This revenue is a usage-based royalty as it is dependent on the number of RE/MAX agents and number of Motto offices.

Annual Dues

Annual dues revenue consists of fixed contractual fees paid annually based on the number of RE/MAX agents. The Company defers the annual dues revenue when billed and recognizes the revenue ratably over the 12-month period to which it relates.  Annual dues revenue is a usage-based royalty as it is dependent on the number of agents.

The activity in the Company’s deferred revenue is included in “Deferred revenue” and “Deferred revenue, net of current portion” on the Condensed Consolidated Balance Sheets.

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The activity in the Company’s annual dues deferred revenue consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at
beginning of period

    

New billings

    

Revenue recognized(a)

    

Balance at end
of period

Nine months ended September 30, 2018

 

$

15,297

 

$

28,249

 

$

(26,775)

 

$

16,771


(a)Revenue recognized related to the beginning balance was $2.4 million and $13.4 million for the three and nine months ended September 30, 2018, respectively.

 

Broker Fees

Revenue from broker fees represents fees received from the Company’s RE/MAX franchised regions or franchise offices that are based on a percentage of RE/MAX agents’ gross commission income. Revenue from broker fees is recognized as a sales-based royalty and recognized in the month when a home sale transaction occurs. Motto franchisees do not pay any fees based on the number or dollar value of loans brokered.

Franchise Sales

The activity in the Company’s franchise sales deferred revenue accounts consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at
beginning of period

    

New billings

    

Revenue recognized(a)

    

Balance at end
of period

Nine months ended September 30, 2018

 

$

27,943

 

$

6,083

 

$

(6,896)

 

$

27,130


(a)Revenue recognized related to the beginning balance was $1.9 million and $5.7 million for the three and nine months ended September 30, 2018.

 

Commissions Related to Franchise Sales

Commissions paid on franchise sales are recognized as an asset and amortized over the contract life of the franchise agreement. The activity in the Company’s capitalized contract costs for commissions (which are included in “other current assets” and “other assets, net of current portion” on the Condensed Consolidated Balance Sheets) consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

 

 

Additions to contract

 

Balance at end

 

    

beginning of period

    

Expense recognized

    

cost for new activity

    

of period

Nine months ended September 30, 2018

 

$

3,532

 

$

(956)

 

$

1,146

 

$

3,722

Other Revenue

Other revenue is primarily revenue from preferred marketing arrangements and event-based revenue from training and other programs. Revenue from preferred marketing arrangements involves both flat fees paid in advance as well as revenue sharing, both of which are generally recognized over the period of the arrangement.  Event-based revenue is recognized when the event occurs and until then is included in “Deferred revenue”. Other revenue also includes revenue from booj’s operations for its external customers.

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Disaggregated Revenue

In the following table, segment revenue is disaggregated by geographical area for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

 

 

2017

 

 

 

 

2017

 

    

2018

    

As adjusted*

    

2018

    

As adjusted*

U.S.

 

$

40,872

 

$

36,615

 

$

118,794

 

$

109,054

Canada

 

 

6,170

 

 

6,599

 

 

18,146

 

 

17,573

Global and Other

 

 

5,408

 

 

5,694

 

 

19,214

 

 

18,332

Total RE/MAX Franchising

 

 

52,450

 

 

48,908

 

 

156,154

 

 

144,959

Other

 

 

2,416

 

 

163

 

 

5,631

 

 

245

Total

 

$

54,866

 

$

49,071

 

$

161,785

 

$

145,204


*See above within Note 3, Revenue for more information

In the following table, segment revenue is disaggregated by owned or independent regions in the U.S. and Canada for the three and nine months ended September 30, 2018 and 2017 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

 

 

 

2017

 

 

 

 

2017

 

    

2018

    

As adjusted*

    

2018

    

As adjusted*

Owned Regions

 

$

35,138