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 March 31, 2019.

OR

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

For the transition period from                 to                 .

Commission file number 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)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

Trading Symbol

Name of each exchange on which registered

Class A Common Stock, $0.0001 par value per share

RMAX

New York Stock Exchange, LLC

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 April 30, 2019 was 17,807,948 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 March 31, 2019 and December 31, 2018

3

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2019 and March 31, 2018

4

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and March 31, 2018

5

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statement of Stockholders’ Equity for the Three Months Ended March 31, 2019 and March 31, 2018

6

 

 

 

RE/MAX Holdings, Inc. Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and March 31, 2018

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

26

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures About Market Risks

38

 

 

 

 

Item 4. 

 

Controls and Procedures

39

 

 

 

 

 

 

PART II. – OTHER INFORMATION

 

 

 

 

 

Item 1. 

 

Legal Proceedings

40

 

 

 

 

Item 1A. 

 

Risk Factors

40

 

 

 

 

Item 2. 

 

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

 

Item 3. 

 

Defaults Upon Senior Securities

42

 

 

 

 

Item 4. 

 

Mine Safety Disclosures

42

 

 

 

 

Item 5. 

 

Other Information

42

 

 

 

 

Item 6. 

 

Exhibits

43

 

 

 

 

 

 

SIGNATURES

44

 

 

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)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

2019

 

2018

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

64,771

 

$

59,974

Restricted cash

 

 

33,227

 

 

 —

Accounts and notes receivable, current portion, less allowances of $12,431 and $7,980, respectively

 

 

29,080

 

 

21,185

Income taxes receivable

 

 

1,188

 

 

533

Other current assets

 

 

7,471

 

 

5,855

Total current assets

 

 

135,737

 

 

87,547

Property and equipment, net of accumulated depreciation of $13,642 and $13,280 respectively

 

 

5,654

 

 

4,390

Operating lease right of use assets

 

 

54,429

 

 

 —

Franchise agreements, net

 

 

99,282

 

 

103,157

Other intangible assets, net

 

 

21,836

 

 

22,965

Goodwill

 

 

150,749

 

 

150,684

Deferred tax assets, net

 

 

52,494

 

 

53,698

Other assets, net of current portion

 

 

5,755

 

 

4,399

Total assets

 

$

525,936

 

$

426,840

Liabilities and stockholders' equity

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

3,027

 

$

1,890

Accrued liabilities

 

 

55,712

 

 

13,143

Income taxes payable

 

 

 —

 

 

208

Deferred revenue

 

 

25,228

 

 

25,489

Current portion of debt

 

 

2,629

 

 

2,622

Current portion of payable pursuant to tax receivable agreements

 

 

3,567

 

 

3,567

Operating lease liabilities

 

 

4,680

 

 

 —

Total current liabilities

 

 

94,843

 

 

46,919

Debt, net of current portion

 

 

224,632

 

 

225,165

Payable pursuant to tax receivable agreements, net of current portion

 

 

37,220

 

 

37,220

Deferred tax liabilities, net

 

 

294

 

 

400

Deferred revenue, net of current portion

 

 

19,716

 

 

20,224

Operating lease liabilities, net of current portion

 

 

59,849

 

 

 —

Other liabilities, net of current portion

 

 

5,756

 

 

17,637

Total liabilities

 

 

442,310

 

 

347,565

Commitments and contingencies (note 14)

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 17,807,948 shares issued and outstanding as of March 31, 2019; 17,754,416 shares issued and outstanding as of December 31, 2018

 

 

 2

 

 

 2

Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of March 31, 2019 and December 31, 2018

 

 

 —

 

 

 —

Additional paid-in capital

 

 

462,601

 

 

460,101

Retained earnings

 

 

21,765

 

 

21,138

Accumulated other comprehensive income, net of tax

 

 

364

 

 

328

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

 

 

484,732

 

 

481,569

Non-controlling interest

 

 

(401,106)

 

 

(402,294)

Total stockholders' equity

 

 

83,626

 

 

79,275

Total liabilities and stockholders' equity

 

$

525,936

 

$

426,840

 

See accompanying notes to unaudited condensed consolidated financial statements.

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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 March 31, 

 

 

2019

 

2018

Revenue:

 

 

 

 

 

 

Continuing franchise fees

 

$

24,956

 

$

25,240

Annual dues

 

 

8,854

 

 

8,696

Broker fees

 

 

8,588

 

 

9,188

Marketing Funds fees

 

 

18,772

 

 

 —

Franchise sales and other revenue

 

 

10,008

 

 

9,518

Total revenue

 

 

71,178

 

 

52,642

Operating expenses:

 

 

 

 

 

 

Selling, operating and administrative expenses

 

 

33,524

 

 

34,368

Marketing Funds expenses

 

 

18,772

 

 

 —

Depreciation and amortization

 

 

5,558

 

 

4,575

Loss (gain) on sale or disposition of assets, net

 

 

379

 

 

(18)

Total operating expenses

 

 

58,233

 

 

38,925

Operating income

 

 

12,945

 

 

13,717

Other expenses, net:

 

 

 

 

 

 

Interest expense

 

 

(3,155)

 

 

(2,724)

Interest income

 

 

320

 

 

119

Foreign currency transaction gains (losses)

 

 

55

 

 

(83)

Total other expenses, net

 

 

(2,780)

 

 

(2,688)

Income before provision for income taxes

 

 

10,165

 

 

11,029

Provision for income taxes

 

 

(1,908)

 

 

(1,862)

Net income

 

$

8,257

 

$

9,167

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

 

 

3,848

 

 

4,184

Net income attributable to RE/MAX Holdings, Inc.

 

$

4,409

 

$

4,983

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Basic

 

$

0.25

 

$

0.28

Diluted

 

$

0.25

 

$

0.28

Weighted average shares of Class A common stock outstanding

 

 

 

 

 

 

Basic

 

 

17,775,381

 

 

17,709,095

Diluted

 

 

17,817,620

 

 

17,762,133

Cash dividends declared per share of Class A common stock

 

$

0.21

 

$

0.20

 

See accompanying notes to unaudited condensed consolidated financial statements.

4


 

Table of Contents

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Comprehensive Income

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

 

2018

Net income

 

$

8,257

 

$

9,167

Change in cumulative translation adjustment

 

 

69

 

 

(82)

Other comprehensive income (loss), net of tax

 

 

69

 

 

(82)

Comprehensive income

 

 

8,326

 

 

9,085

Less: comprehensive income attributable to non-controlling interest

 

 

3,881

 

 

4,145

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

 

$

4,445

 

$

4,940

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

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Table of Contents

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

Balances, January 1, 2018

 

17,696,991

 

$

 2

 

 1

 

$

 —

 

$

451,199

 

$

8,400

 

$

459

 

$

(410,934)

 

$

49,126

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

4,983

 

 

 —

 

 

4,184

 

 

9,167

Distributions to non-controlling unitholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(4,212)

 

 

(4,212)

Equity-based compensation expense and related dividend equivalents

 

46,520

 

 

 —

 

 —

 

 

 —

 

 

1,268

 

 

(48)

 

 

 —

 

 

 —

 

 

1,220

Dividends to Class A common stockholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,547)

 

 

 —

 

 

 —

 

 

(3,547)

Change in accumulated other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(43)

 

 

(39)

 

 

(82)

Payroll taxes related to net settled restricted stock units

 

(10,209)

 

 

 —

 

 —

 

 

 —

 

 

(564)

 

 

 —

 

 

 —

 

 

 —

 

 

(564)

Balances, March 31, 2018

 

17,733,302

 

$

 2

 

 1

 

$

 —

 

$

451,903

 

$

9,788

 

$

416

 

$

(411,001)

 

$

51,108

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Balances, January 1, 2019

 

17,754,416

 

$

 2

 

 1

 

$

 —

 

$

460,101

 

$

21,138

 

$

328

 

$

(402,294)

 

$

79,275

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

4,409

 

 

 —

 

 

3,848

 

 

8,257

Distributions to non-controlling unitholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(2,693)

 

 

(2,693)

Equity-based compensation expense and related dividend equivalents

 

70,797

 

 

 —

 

 —

 

 

 —

 

 

3,213

 

 

(42)

 

 

 —

 

 

 —

 

 

3,171

Dividends to Class A common stockholders

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(3,740)

 

 

 —

 

 

 —

 

 

(3,740)

Change in accumulated other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

36

 

 

33

 

 

69

Payroll taxes related to net settled restricted stock units

 

(17,265)

 

 

 —

 

 —

 

 

 —

 

 

(713)

 

 

 —

 

 

 —

 

 

 —

 

 

(713)

Balances, March 31, 2019

 

17,807,948

 

$

 2

 

 1

 

$

 —

 

$

462,601

 

$

21,765

 

$

364

 

$

(401,106)

 

$

83,626

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

 

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Table of Contents

RE/MAX HOLDINGS, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

 

2018

Cash flows from operating activities:

 

 

 

 

 

 

Net income

 

$

8,257

 

$

9,167

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

 

 

 

 

 

 

Depreciation and amortization

 

 

5,558

 

 

4,575

Bad debt expense

 

 

1,439

 

 

464

Loss (gain) on sale or disposition of assets and sublease, net

 

 

379

 

 

(28)

Equity-based compensation expense

 

 

4,051

 

 

1,268

Deferred income tax expense

 

 

1,081

 

 

478

Fair value adjustments to contingent consideration

 

 

(70)

 

 

135

Other, net

 

 

272

 

 

127

Changes in operating assets and liabilities

 

 

1,474

 

 

(2,614)

Net cash provided by operating activities

 

 

22,441

 

 

13,572

Cash flows from investing activities:

 

 

 

 

 

 

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

 

 

(3,940)

 

 

(691)

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

 

 

 —

 

 

(26,250)

Restricted cash acquired with the Marketing Funds acquisition

 

 

28,495

 

 

 —

Other

 

 

(1,200)

 

 

 —

Net cash provided by (used in) investing activities

 

 

23,355

 

 

(26,941)

Cash flows from financing activities:

 

 

 

 

 

 

Payments on debt

 

 

(653)

 

 

(592)

Distributions paid to non-controlling unitholders

 

 

(2,693)

 

 

(2,521)

Dividends and dividend equivalents paid to Class A common stockholders

 

 

(3,782)

 

 

(3,595)

Payment of payroll taxes related to net settled restricted stock units

 

 

(713)

 

 

(564)

Payment of contingent consideration

 

 

 —

 

 

(50)

Net cash used in financing activities

 

 

(7,841)

 

 

(7,322)

Effect of exchange rate changes on cash

 

 

69

 

 

(13)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

38,024

 

 

(20,704)

Cash, cash equivalents and restricted cash, beginning of year

 

 

59,974

 

 

50,807

Cash, cash equivalents and restricted cash, end of period

 

$

97,998

 

$

30,103

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

Cash paid for interest

 

$

2,951

 

$

2,585

Net cash paid for income taxes

 

$

1,729

 

$

1,217

Schedule of non-cash investing activities:

 

 

 

 

 

 

Property, equipment, software and trademarks included in accounts payable and accrued liabilities

 

$

512

 

$

206

Schedule of non-cash financing activities:

 

 

 

 

 

 

Tax and other distributions payable to non-controlling unitholders

 

$

 —

 

$

1,691

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

7


 

Table of Contents

1. Business and Organization

RE/MAX Holdings, Inc. (“RE/MAX Holdings”) and its consolidated subsidiaries, including RMCO, LLC (“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 125,000 agents operating in over 8,000 offices and a presence in more than 110 countries and territories. Motto Mortgage (“Motto”), founded in 2016, is the first nationally franchised mortgage brokerage in the U.S.

2. Summary of Significant Accounting Policies

Basis of Presentation

 

The accompanying Condensed Consolidated Balance Sheet at December 31, 2018, 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 March 31, 2019 and the results of its operations and comprehensive income, cash flows and changes in its stockholder’s equity for the three months ended March 31, 2019 and 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, 2018 (“2018 Annual Report on Form 10-K”).

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 January 2019, the Company acquired all of the regional and pan-regional advertising fund entities previously owned by its founder and Chairman of the Board of Directors, David Liniger. All of these entities, except for the Western Canada region, were then merged into a new entity called RE/MAX Marketing Fund (with the Western Canada fund, collectively, the “Marketing Funds”). See Note 6, Acquisitions for more information. As a result of the acquisition of the Marketing Funds, the Company added the Marketing Funds as a reportable segment as of January 1, 2019.

The Company operates under the following reportable segments:

·

RE/MAX Franchising – 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.

·

Marketing Funds – comprises the operations of the Company’s marketing campaigns designed to build and maintain brand awareness and support certain agent marketing technology.

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·

Other – comprises the operations of Motto Franchising and booj, which, due to quantitative insignificance, do not meet the criteria of a reportable segment.

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.

Revenue Recognition

The Company generates most of its revenue from contracts with customers. 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 or Motto offices. The Company concluded that these benefits are highly related and 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, marketing funds 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, and legacy booj customers. The method used to measure progress is over the passage of time for most streams of revenue. The following is a description of principal activities from which the Company generates its revenue.

Continuing Franchise Fees

Revenue from continuing franchise fees consists of fixed contractual fees paid monthly by 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.

Marketing Funds Fees

Revenue from Marketing Funds 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 or the number of Motto offices. These revenues are obligated to be used for marketing campaigns to build brand awareness and to support agent marketing technology. Amounts received into the Marketing Funds are recognized as revenue 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 or number of Motto offices.

All assets of the Marketing Funds are contractually restricted for the benefit of franchisees, and the Company recognizes an equal and offsetting liability on the Company’s balance sheet. Additionally, this results in recording an equal and offsetting amount of expenses against all revenues such that there is no impact to overall profitability of the Company from these revenues.

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 RE/MAX agents.

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The activity in the Company’s deferred revenue for annual dues is included in “Deferred revenue” and “Deferred revenue, net of current portion” on the Condensed Consolidated Balance Sheets, and consists of the following in aggregate (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Balance at
beginning of period

    

New billings

    

Revenue recognized(a)

    

Balance at end
of period

Three months ended March 31, 2019

 

$

15,877

 

$

10,038

 

$

(8,854)

 

$

17,061


(a)Revenue recognized related to the beginning balance was $6.9 million for the three months ended March 31, 2019.

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 on home sale transactions. 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

Franchise sales comprises revenue from the sale or renewal of franchises. A fee is charged upon a franchise sale or renewal. Those fees are deemed to be a part of the license of symbolic intellectual property and are recognized as revenue over the contractual term of the franchise agreement, which is typically five years for RE/MAX and seven years for Motto franchise agreements. 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

Three months ended March 31, 2019

 

$

27,560

 

$

1,756

 

$

(2,449)

 

$

26,867


(a)Revenue recognized related to the beginning balance was $2.3 million for the three months ended March 31, 2019.

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

Three months ended March 31, 2019

 

$

3,748

 

$

(385)

 

$

369

 

$

3,732

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 and are recorded net as the Company does not control the good or service provided. 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 as booj continues to provide technology products and services, such as websites, mobile apps, reporting and site tools, to its existing customers at the date of acquisition.

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Disaggregated Revenue

In the following table, segment revenue is disaggregated by geographical area for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2019

    

2018

U.S.

 

$

41,735

 

$

43,352

Canada

 

 

5,349

 

 

5,763

Global

 

 

2,740

 

 

2,479

Total RE/MAX Franchising

 

 

49,824

 

 

51,594

U.S.

 

 

16,672

 

 

 —

Canada

 

 

1,885

 

 

 —

Global

 

 

215

 

 

 —

Total Marketing Funds

 

 

18,772

 

 

 —

Other

 

 

2,582

 

 

1,048

Total

 

$

71,178

 

$

52,642

In the following table, segment revenue is disaggregated by owned or independent regions in the U.S. and Canada for the RE/MAX Franchising segment for the three months ended March 31, 2019 and 2018 (in thousands). The split between owned or independent regions is not applicable to the Marketing Funds or Other segments:

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2019

    

2018

Company-owned Regions

 

$

30,018

 

$

31,363

Independent Regions

 

 

10,923

 

 

11,149

Global and Other

 

 

8,883

 

 

9,082

Total RE/MAX Franchising

 

 

49,824

 

 

51,594

Marketing Funds

 

 

18,772

 

 

 —

Other

 

 

2,582

 

 

1,048

Total

 

$

71,178

 

$

52,642

Transaction Price Allocated to the Remaining Performance Obligations

The following table includes estimated revenue by year expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Remaining 9
months of
2019

    

2020

    

2021

    

2022

    

2023

    

2024

    

Thereafter

    

Total

Annual dues

 

$

15,731

 

$

1,330

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

 —

 

$

17,061

Franchise sales

 

 

5,579

 

 

6,321

 

 

4,943

 

 

3,448

 

 

1,941

 

 

996

 

 

3,639

 

 

26,867

Total

 

$

21,310

 

$

7,651

 

$

4,943

 

$

3,448

 

$

1,941

 

$

996

 

$

3,639

 

$

43,928

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Cash, Cash Equivalents and Restricted Cash

All cash held by the Marketing Funds is contractually restricted. The following table reconciles the amounts presented for cash, both unrestricted and restricted, in the Condensed Consolidated Balance Sheets to the amounts presented in the Condensed Consolidated Statements of Cash Flows (in thousands):

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

    

2019

 

2018

Cash and cash equivalents

 

$

64,771

 

$

59,974

Restricted cash

 

 

33,227

 

 

 —

Total cash, cash equivalents and restricted cash

 

$

97,998

 

$

59,974

Services Provided to the Marketing Funds by RE/MAX Franchising

 

RE/MAX Franchising charges the Marketing Funds for various services it performs. These services are primarily comprised of (a) providing agent marketing technology, including customer relationship management tools, the www.remax.com website, agent and office websites, and mobile apps, (b) dedicated employees focused on marketing campaigns, and (c) various administrative services including accounting, tax and legal. Because these costs are ultimately paid by the Marketing Funds, they do not impact the net income of RE/MAX Holdings as the Marketing Funds have no reported net income.

Costs charged from RE/MAX Franchising to the Marketing Funds for the three months ended March 31, 2019 are as follows (in thousands):

 

 

 

 

Technology development - operating

 

$

965

Technology development - capital

 

 

935

Marketing staff and administrative services

 

 

1,025

Total

 

$

2,925

 

Costs charged to the Marketing Funds for the three months ended March 31, 2018 are disclosed in Note 15, Related-Party Transactions.

Recently Adopted Accounting Pronouncements

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 became effective for the Company on January 1, 2019. The standard is to be applied either in the period of adoption or retrospectively to each period affected 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 December 31, 2017. The amendments of ASU 2018-02 did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), with several subsequent amendments, which requires lessees to recognize the assets and liabilities that arise from operating and finance leases on the consolidated balance sheets, with a few exceptions. ASU 2016-02 became effective for the Company on January 1, 2019 and replaced the existing lease guidance in U.S. GAAP when it became effective. The Company did not retrospectively recast prior periods presented and instead adjusted assets and liabilities on January 1, 2019. In addition, the Company elected the package of practical expedients permitted under the transition guidance, which allowed the Company to forgo reassessing (a) whether a contract contains a lease, (b) lease classification, and (c) whether capitalized costs associated with a lease are initial direct costs. The practical expedient was applied consistently to all the Company’s leases, including those for which the Company acts as the lessor. In addition, the Company elected the practical expedient relating to the combination of lease and non-lease components as a single lease component. The Company chose not to apply the hindsight practical expedient. The new lease guidance has been applied to all the Company’s leases as of

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January 1, 2019, which impacted how operating lease assets and liabilities were recorded within the Condensed Consolidated Balance Sheet, resulting in the recording of approximately $65.8 million of lease liabilities and approximately $55.6 million of right-of-use (“ROU”) assets on the Condensed Consolidated Balance Sheet. Deferred rent and sublease loss balances as of January 1, 2019 of approximately $9.3 million and approximately $2.4 million, respectively, and intangible assets of approximately $1.5 million were subsumed into the ROU asset at transition. Adoption of the new standard did not materially affect the Company’s consolidated net earnings and had no impact on cash flows. See Note 3, Leases, 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 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.

3. Leases

The Company leases corporate offices, a distribution center, billboards and certain equipment. As all franchisees are independently owned and operated, there are no leases recognized for any offices used by the Company’s franchisees. The leases have remaining lease terms ranging from less than a year up to 15 years, some of which include one or more options to renew, with renewal terms that can extend the lease term from one to 20 years depending on the lease. Of these renewal options, the Company determined that none are reasonably certain to be exercised.

The Company has an 18-year lease for its corporate headquarters office building (the “Master Lease”). The Company may, at its option, extend the Master Lease for two renewal periods of 10 years. Under the terms of the Master Lease, the Company pays an annual base rent, which escalates 3% each year, including the first optional renewal period. The first year of the second optional renewal period is at a fair market rental value, and the rent escalates 3% each year until expiration. The Company pays for operating expenses in connection with the ownership, maintenance, operation, upkeep and repair of the leased space. The Company may assign or sublet an interest in the Master Lease only with the approval of the landlord. The Master Lease is the Company’s only significant lease as of March 31, 2019.

The Company acts as the lessor for four sublease agreements on its corporate headquarters, consisting solely of operating leases, each of which include a renewal option for the lessee to extend the length of the lease. Renewal options for two of the sublease agreements are contingent upon renewal of the corporate headquarters lease, which is not reasonably certain to be exercised in 2028. As such, the Company determined these sublease renewal options are not reasonably certain to be exercised. Renewal options for the remaining two sublease agreements have already been exercised and will expire before the end of the corporate headquarters lease in 2028. All the Company’s material leases are classified as operating leases.

The Company has made an accounting policy election not to recognize right-of-use assets and lease liabilities that arise from any of its short-term leases. All leases with a term of 12 months or less at commencement, for which the Company is not reasonably certain to exercise available renewal options that would extend the lease term past 12 months, will be recognized on a straight-line basis over the lease term. The short-term lease expense was not material as of March 31, 2019.

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The Company used its Senior Secured Credit Facility interest rate to extrapolate a rate for each of its leases to calculate the present value of the lease liability and right-of-use asset. A summary of the Company’s lease cost is as follows (in thousands, except for weighted-averages):

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

Lease Cost

 

 

 

 

Operating lease cost (a)

 

$

2,940

 

Sublease income

 

 

(360)

 

Total lease cost

 

$

2,580

 

Other information

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

Operating cash flows from operating leases

 

$

2,086

 

Weighted-average remaining lease term in years - operating leases

 

 

9.2

 

Weighted-average discount rate - operating leases

 

 

6.3

%


(a)

Includes approximately $0.6 million of variable lease cost.

Maturities under non-cancellable leases as of March 31, 2019 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Rent Payments

 

Sublease Receipts

 

Total Cash Outflows

Year ending December 31:

 

 

 

 

 

 

 

 

 

Remainder of 2019

    

$

6,417

 

$

(823)

 

$

5,594

2020

 

 

8,752

 

 

(888)

 

 

7,864

2021

 

 

9,006

 

 

(775)

 

 

8,231

2022

 

 

9,000

 

 

(804)

 

 

8,196

2023

 

 

9,173

 

 

(822)

 

 

8,351

Thereafter

 

 

43,713

 

 

(1,382)

 

 

42,331

Total lease payments

 

$

86,061

 

$

(5,494)

 

$

80,567

Less: imputed interest

 

 

21,532

 

 

 

 

 

 

Present value of lease liabilities

 

$

64,529

 

 

 

 

 

 

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting, maturities under non-cancellable leases as of December 31, 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Rent Payments

 

Sublease Receipts

 

Total Cash Outflows

Year ending December 31:

 

 

 

 

 

 

 

 

 

2019

    

$

9,402

 

$

(1,087)

 

$

8,315

2020

 

 

9,601

 

 

(873)

 

 

8,728

2021

 

 

9,341

 

 

(775)

 

 

8,566

2022

 

 

9,011

 

 

(804)

 

 

8,207

2023

 

 

9,169

 

 

(827)

 

 

8,342

Thereafter

 

 

43,556

 

 

(1,382)

 

 

42,174

Total lease payments

 

$

90,080

 

$

(5,748)

 

$

84,332

 

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4. Non-controlling Interest

RE/MAX Holdings is the sole managing member of RMCO and operates and controls all of the business affairs of RMCO. The ownership of the common units in RMCO is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2019

 

2018

 

 

    

Shares

    

Ownership %

    

Shares

    

Ownership %

 

Non-controlling interest ownership of common units in RMCO

 

12,559,600

 

41.36

%  

12,559,600

 

41.43

%

RE/MAX Holdings, Inc. outstanding Class A common stock (equal to RE/MAX Holdings, Inc. common units in RMCO)

 

17,807,948

 

58.64