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 |
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017.2021.
OR
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file numbernumber: 001-36101
RE/MAX Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | | 80-0937145 |
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(State or other jurisdiction of | | (I.R.S. Employer |
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5075 South Syracuse Street | | 80237 |
(Address of principal executive offices) | | (Zip Code) |
(303) (303) 770-5531
(Registrant’s telephone number, including area code)
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 |
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ 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 definitiondefinitions of “large accelerated filer”,filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ |
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Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
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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 ofOn October 31, 2021, there were 18,891,871 outstanding shares of the registrant’s Class A common stock (including unvested restricted stock), $0.0001 par value $0.0001 per share, and 1 outstanding share of Class B common stock, $0.0001 par value $0.0001, as of February 28, 2018 was 17,696,991 and 1, respectively.per share.
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| | Condensed Consolidated Statements of Comprehensive Income (Loss) | 5 |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations | 26 | |
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2
PART I. – FINANCIAL INFORMATION
RE/MAX HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
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| September 30, |
| December 31, | ||
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| 2017 |
| 2016 | ||
Assets |
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Current assets: |
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Cash and cash equivalents |
| $ | 83,936 |
| $ | 57,609 |
Accounts and notes receivable, current portion, less allowances of $6,247 and $5,535, respectively |
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| 19,002 |
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| 19,419 |
Income taxes receivable |
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| 1,747 |
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| — |
Other current assets |
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| 5,357 |
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| 4,186 |
Total current assets |
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| 110,042 |
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| 81,214 |
Property and equipment, net of accumulated depreciation of $12,865 and $12,196, respectively |
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| 2,993 |
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| 2,691 |
Franchise agreements, net |
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| 99,634 |
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| 109,140 |
Other intangible assets, net |
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| 9,207 |
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| 9,811 |
Goodwill |
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| 123,013 |
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| 126,633 |
Deferred tax assets, net |
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| 101,649 |
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| 105,770 |
Other assets, net of current portion |
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| 1,548 |
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| 1,894 |
Total assets |
| $ | 448,086 |
| $ | 437,153 |
Liabilities and stockholders' equity |
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Current liabilities: |
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Accounts payable |
| $ | 449 |
| $ | 855 |
Accounts payable to affiliates |
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| 83 |
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| 145 |
Accrued liabilities |
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| 15,302 |
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| 13,268 |
Income taxes payable |
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| 401 |
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| 379 |
Deferred revenue and deposits |
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| 17,470 |
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| 16,306 |
Current portion of debt |
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| 2,350 |
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| 2,350 |
Current portion of payable pursuant to tax receivable agreements |
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| 6,135 |
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| 13,235 |
Total current liabilities |
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| 42,190 |
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| 46,538 |
Debt, net of current portion |
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| 227,094 |
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| 228,470 |
Payable pursuant to tax receivable agreements, net of current portion |
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| 85,850 |
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| 85,574 |
Deferred tax liabilities, net |
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| 151 |
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| 133 |
Other liabilities, net of current portion |
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| 20,064 |
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| 15,729 |
Total liabilities |
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| 375,349 |
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| 376,444 |
Commitments and contingencies (note 13) |
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Stockholders' equity: |
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Class A common stock, par value $0.0001 per share, 180,000,000 shares authorized; 17,696,991 shares issued and outstanding as of September 30, 2017; 17,652,548 shares issued and outstanding as of December 31, 2016 |
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Class B common stock, par value $0.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of September 30, 2017 and December 31, 2016 |
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| — |
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| — |
Additional paid-in capital |
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| 450,317 |
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| 448,713 |
Retained earnings |
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| 22,675 |
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| 16,005 |
Accumulated other comprehensive income (loss), net of tax |
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| 439 |
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| (28) |
Total stockholders' equity attributable to RE/MAX Holdings, Inc. |
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| 473,433 |
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| 464,692 |
Non-controlling interest |
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| (400,696) |
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| (403,983) |
Total stockholders' equity |
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| 72,737 |
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| 60,709 |
Total liabilities and stockholders' equity |
| $ | 448,086 |
| $ | 437,153 |
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| | | | | | |
| | September 30, | | December 31, | ||
| | 2021 | | 2020 | ||
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 119,446 | | $ | 101,355 |
Restricted cash | | | 25,150 | | | 19,872 |
Accounts and notes receivable, current portion, less allowances of $10,581 and $11,724, respectively | | | 35,295 | | | 29,985 |
Income taxes receivable | | | 2,459 | | | 1,222 |
Other current assets | | | 19,248 | | | 13,938 |
Total current assets | | | 201,598 | | | 166,372 |
Property and equipment, net of accumulated depreciation of $16,017 and $14,731, respectively | | | 12,455 | | | 7,872 |
Operating lease right of use assets | | | 36,555 | | | 38,878 |
Franchise agreements, net | | | 153,666 | | | 69,802 |
Other intangible assets, net | | | 33,719 | | | 29,969 |
Goodwill | | | 268,390 | | | 165,358 |
Deferred tax assets, net | | | 52,714 | | | 50,702 |
Income taxes receivable, net of current portion | | | 1,980 | | | 1,980 |
Other assets, net of current portion | | | 18,102 | | | 15,435 |
Total assets | | $ | 779,179 | | $ | 546,368 |
Liabilities and stockholders' equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 4,895 | | $ | 2,108 |
Accrued liabilities | | | 91,193 | | | 68,571 |
Income taxes payable | | | 5,581 | | | 9,579 |
Deferred revenue | | | 25,196 | | | 25,282 |
Current portion of debt | | | 4,600 | | | 2,428 |
Current portion of payable pursuant to tax receivable agreements | | | 3,590 | | | 3,590 |
Operating lease liabilities | | | 6,045 | | | 5,687 |
Total current liabilities | | | 141,100 | | | 117,245 |
Debt, net of current portion | | | 448,390 | | | 221,137 |
Payable pursuant to tax receivable agreements, net of current portion | | | 29,974 | | | 29,974 |
Deferred tax liabilities, net | | | 20,619 | | | 490 |
Deferred revenue, net of current portion | | | 18,356 | | | 19,864 |
Operating lease liabilities, net of current portion | | | 46,614 | | | 50,279 |
Other liabilities, net of current portion | | | 7,945 | | | 5,722 |
Total liabilities | | | 712,998 | | | 444,711 |
Commitments and contingencies | | | | | | |
Stockholders' equity: | | | | | | |
Class A common stock, par value $.0001 per share, 180,000,000 shares authorized; 18,806,194 and 18,390,691 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | | | 2 | | | 2 |
Class B common stock, par value $.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of September 30, 2021 and December 31, 2020, respectively | | | — | | | — |
Additional paid-in capital | | | 510,424 | | | 491,422 |
Retained earnings (accumulated deficit) | | | (6,585) | | | 25,628 |
Accumulated other comprehensive income, net of tax | | | 639 | | | 612 |
Total stockholders' equity attributable to RE/MAX Holdings, Inc. | | | 504,480 | | | 517,664 |
Non-controlling interest | | | (438,299) | | | (416,007) |
Total stockholders' equity | | | 66,181 | | | 101,657 |
Total liabilities and stockholders' equity | | $ | 779,179 | | $ | 546,368 |
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See accompanying notes to unaudited condensed consolidated financial statements.
3
RE/MAX HOLDINGS, INC.
Condensed Consolidated Statements of Income (Loss)
(In thousands, except share and per share amounts)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
Revenue: |
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Continuing franchise fees |
| $ | 23,049 |
| $ | 20,938 |
| $ | 69,298 |
| $ | 59,691 |
Annual dues |
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| 8,592 |
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| 8,321 |
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| 25,148 |
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| 24,271 |
Broker fees |
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| 12,125 |
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| 10,517 |
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| 32,914 |
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| 28,102 |
Franchise sales and other franchise revenue |
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| 5,611 |
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| 5,783 |
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| 19,065 |
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| 19,704 |
Brokerage revenue |
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| — |
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| — |
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| — |
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| 112 |
Total revenue |
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| 49,377 |
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| 45,559 |
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| 146,425 |
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| 131,880 |
Operating expenses: |
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Selling, operating and administrative expenses |
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| 31,832 |
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| 20,539 |
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| 79,263 |
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| 62,866 |
Depreciation and amortization |
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| 4,286 |
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| 3,889 |
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| 15,678 |
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| 11,482 |
Loss (gain) on sale or disposition of assets, net |
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| 451 |
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| (11) |
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| 426 |
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| 85 |
Total operating expenses |
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| 36,569 |
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| 24,417 |
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| 95,367 |
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| 74,433 |
Operating income |
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| 12,808 |
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| 21,142 |
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| 51,058 |
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| 57,447 |
Other expenses, net: |
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Interest expense |
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| (2,598) |
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| (2,121) |
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| (7,414) |
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| (6,493) |
Interest income |
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| 145 |
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| 32 |
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| 195 |
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| 118 |
Foreign currency transaction gains (losses) |
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| 273 |
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| (115) |
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| 289 |
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| 69 |
Loss on early extinguishment of debt |
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| — |
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| — |
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| — |
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| (136) |
Total other expenses, net |
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| (2,180) |
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| (2,204) |
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| (6,930) |
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| (6,442) |
Income before provision for income taxes |
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| 10,628 |
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| 18,938 |
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| 44,128 |
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| 51,005 |
Provision for income taxes |
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| (3,091) |
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| (4,632) |
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| (10,883) |
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| (12,176) |
Net income |
| $ | 7,537 |
| $ | 14,306 |
| $ | 33,245 |
| $ | 38,829 |
Less: net income attributable to non-controlling interest (note 3) |
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| 3,702 |
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| 7,520 |
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| 16,968 |
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| 20,290 |
Net income attributable to RE/MAX Holdings, Inc. |
| $ | 3,835 |
| $ | 6,786 |
| $ | 16,277 |
| $ | 18,539 |
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Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock |
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Basic |
| $ | 0.22 |
| $ | 0.38 |
| $ | 0.92 |
| $ | 1.05 |
Diluted |
| $ | 0.22 |
| $ | 0.38 |
| $ | 0.92 |
| $ | 1.05 |
Weighted average shares of Class A common stock outstanding |
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Basic |
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| 17,696,991 |
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| 17,645,696 |
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| 17,685,683 |
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| 17,622,298 |
Diluted |
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| 17,737,786 |
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| 17,691,641 |
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| 17,726,447 |
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| 17,666,740 |
Cash dividends declared per share of Class A common stock |
| $ | 0.18 |
| $ | 0.15 |
| $ | 0.54 |
| $ | 0.45 |
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| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Revenue: | | | | | | | | | | | | |
Continuing franchise fees | | $ | 32,464 | | $ | 24,339 | | $ | 84,793 | | $ | 65,220 |
Annual dues | | | 8,967 | | | 8,638 | | | 26,508 | | | 26,304 |
Broker fees | | | 19,245 | | | 15,457 | | | 48,651 | | | 35,327 |
Marketing Funds fees | | | 23,269 | | | 17,290 | | | 59,456 | | | 46,577 |
Franchise sales and other revenue | | | 7,052 | | | 5,349 | | | 21,130 | | | 20,124 |
Total revenue | | | 90,997 | | | 71,073 | | | 240,538 | | | 193,552 |
Operating expenses: | | | | | | | | | | | | |
Selling, operating and administrative expenses | | | 51,099 | | | 28,216 | | | 133,591 | | | 88,241 |
Marketing Funds expenses | | | 23,269 | | | 17,290 | | | 59,456 | | | 46,577 |
Depreciation and amortization | | | 8,582 | | | 6,730 | | | 22,236 | | | 19,154 |
Settlement and impairment charges | | | 45,623 | | | 7,902 | | | 45,623 | | | 7,902 |
Total operating expenses | | | 128,573 | | | 60,138 | | | 260,906 | | | 161,874 |
Operating income (loss) | | | (37,576) | | | 10,935 | | | (20,368) | | | 31,678 |
Other expenses, net: | | | | | | | | | | | | |
Interest expense | | | (3,315) | | | (2,159) | | | (7,537) | | | (7,028) |
Interest income | | | 19 | | | 25 | | | 201 | | | 328 |
Foreign currency transaction gains (losses) | | | (435) | | | 94 | | | (818) | | | (75) |
Loss on early extinguishment of debt | | | (264) | | | — | | | (264) | | | — |
Total other expenses, net | | | (3,995) | | | (2,040) | | | (8,418) | | | (6,775) |
Income (loss) before provision for income taxes | | | (41,571) | | | 8,895 | | | (28,786) | | | 24,903 |
Provision for income taxes | | | (792) | | | (2,057) | | | (1,454) | | | (6,584) |
Net income (loss) | | $ | (42,363) | | $ | 6,838 | | $ | (30,240) | | $ | 18,319 |
Less: net income (loss) attributable to non-controlling interest | | | (17,214) | | | 3,221 | | | (11,515) | | | 8,436 |
Net income (loss) attributable to RE/MAX Holdings, Inc. | | $ | (25,149) | | $ | 3,617 | | $ | (18,725) | | $ | 9,883 |
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Net income (loss) attributable to RE/MAX Holdings, Inc. per share | | | | | | | | | | | | |
Basic | | $ | (1.34) | | $ | 0.20 | | $ | (1.00) | | $ | 0.55 |
Diluted | | $ | (1.34) | | $ | 0.20 | | $ | (1.00) | | $ | 0.54 |
Weighted average shares of Class A common stock outstanding | | | | | | | | | | | | |
Basic | | | 18,739,564 | | | 18,196,454 | | | 18,651,858 | | | 18,098,227 |
Diluted | | | 18,739,564 | | | 18,368,051 | | | 18,651,858 | | | 18,182,856 |
Cash dividends declared per share of Class A common stock | | $ | 0.23 | | $ | 0.22 | | $ | 0.69 | | $ | 0.66 |
See accompanying notes to unaudited condensed consolidated financial statements.
4
RE/MAX HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income
(In thousands)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
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| September 30, |
| September 30, |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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Net income |
| $ | 7,537 |
| $ | 14,306 |
| $ | 33,245 |
| $ | 38,829 |
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Change in cumulative translation adjustment |
|
| 536 |
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| (147) |
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| 999 |
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| 417 |
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Other comprehensive income (loss), net of tax |
|
| 536 |
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| (147) |
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| 999 |
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| 417 |
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Comprehensive income |
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| 8,073 |
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| 14,159 |
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| 34,244 |
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| 39,246 |
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Less: comprehensive income attributable to non-controlling interest |
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| 3,987 |
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| 7,442 |
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| 17,500 |
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| 20,513 |
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Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax |
| $ | 4,086 |
| $ | 6,717 |
| $ | 16,744 |
| $ | 18,733 |
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| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Net income (loss) | | $ | (42,363) | | $ | 6,838 | | $ | (30,240) | | $ | 18,319 |
Change in cumulative translation adjustment | | | (256) | | | 70 | | | 30 | | | (43) |
Other comprehensive income (loss), net of tax | | | (256) | | | 70 | | | 30 | | | (43) |
Comprehensive income (loss) | | | (42,619) | | | 6,908 | | | (30,210) | | | 18,276 |
Less: comprehensive income (loss) attributable to non-controlling interest | | | (17,346) | | | 3,255 | | | (11,512) | | | 8,331 |
Comprehensive income (loss) attributable to RE/MAX Holdings, Inc., net of tax | | $ | (25,273) | | $ | 3,653 | | $ | (18,698) | | $ | 9,945 |
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See accompanying notes to unaudited condensed consolidated financial statements.
5
RE/MAX HOLDINGS, INC.
Condensed Consolidated StatementStatements of Stockholders’ Equity
(In thousands, except share amounts)
(Unaudited)
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| Accumulated other |
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| Class A |
| Class B |
| Additional |
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| comprehensive |
| Non- |
| Total | |||||||||||
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| common stock |
| common stock |
| paid-in |
| Retained |
| income (loss), |
| controlling |
| stockholders' | |||||||||||
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| Shares |
| Amount |
| Shares |
| Amount |
| capital |
| earnings |
| net of tax |
| interest |
| equity | |||||||
Balances, January 1, 2017 |
| 17,652,548 |
| $ | 2 |
| 1 |
| $ | — |
| $ | 448,713 |
| $ | 16,005 |
| $ | (28) |
| $ | (403,983) |
| $ | 60,709 |
Net income |
| — |
|
| — |
| — |
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| — |
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| — |
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| 16,277 |
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| — |
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| 16,968 |
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| 33,245 |
Distributions to non-controlling unitholders |
| — |
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| — |
| — |
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| — |
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| — |
|
| — |
|
| — |
|
| (14,213) |
|
| (14,213) |
Equity-based compensation expense and related dividend equivalents |
| 58,426 |
|
| — |
| — |
|
| — |
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| 2,161 |
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| (53) |
|
| — |
|
| — |
|
| 2,108 |
Dividends to Class A common stockholders |
| — |
|
| — |
| — |
|
| — |
|
| — |
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| (9,554) |
|
| — |
|
| — |
|
| (9,554) |
Change in accumulated other comprehensive income |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
| 467 |
|
| 532 |
|
| 999 |
Payroll taxes related to net settled restricted stock units |
| (13,983) |
|
| — |
| — |
|
| — |
|
| (816) |
|
| — |
|
| — |
|
| — |
|
| (816) |
Other |
| — |
|
| — |
| — |
|
| — |
|
| 259 |
|
| — |
|
| — |
|
| — |
|
| 259 |
Balances, September 30, 2017 |
| 17,696,991 |
| $ | 2 |
| 1 |
| $ | — |
| $ | 450,317 |
| $ | 22,675 |
| $ | 439 |
| $ | (400,696) |
| $ | 72,737 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Retained | | Accumulated other | | | | | | | ||
| | Class A | | Class B | | Additional | | earnings | | comprehensive | | Non- | | Total | |||||||||||
| | common stock | | common stock | | paid-in | | (accumulated | | income (loss), | | controlling | | stockholders' | |||||||||||
| | Shares |
| Amount |
| Shares |
| Amount |
| capital |
| deficit) |
| net of tax |
| interest |
| equity | |||||||
Balances, January 1, 2021 | | 18,390,691 | | $ | 2 | | 1 | | $ | — | | $ | 491,422 | | $ | 25,628 | | $ | 612 | | $ | (416,007) | | $ | 101,657 |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | 1,163 | | | — | | | 600 | | | 1,763 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (2,889) | | | (2,889) |
Equity-based compensation expense and dividend equivalents | | 459,330 | | | — | | — | | | — | | | 12,679 | | | (472) | | | — | | | — | | | 12,207 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (4,326) | | | — | | | — | | | (4,326) |
Change in accumulated other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | 41 | | | 38 | | | 79 |
Payroll taxes related to net settled restricted stock units | | (130,773) | | | — | | — | | | — | | | (5,291) | | | — | | | — | | | — | | | (5,291) |
Balances, March 31, 2021 | | 18,719,248 | | | 2 | | 1 | | | — | | | 498,810 | | | 21,993 | | | 653 | | | (418,258) | | | 103,200 |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | 5,261 | | | — | | | 5,099 | | | 10,360 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (4,110) | | | (4,110) |
Equity-based compensation expense and dividend equivalents | | 640 | | | — | | — | | | — | | | 4,615 | | | — | | | — | | | — | | | 4,615 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (4,345) | | | — | | | — | | | (4,345) |
Change in accumulated other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | 110 | | | 97 | | | 207 |
Payroll taxes related to net settled restricted stock units | | (223) | | | — | | — | | | — | | | (7) | | | — | | | — | | | — | | | (7) |
Other | | — | | | — | | — | | | — | | | 12 | | | — | | | — | | | — | | | 12 |
Balances, June 30, 2021 | | 18,719,665 | | $ | 2 | | 1 | | $ | — | | $ | 503,430 | | $ | 22,909 | | $ | 763 | | $ | (417,172) | | $ | 109,932 |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | (25,149) | | | — | | | (17,214) | | | (42,363) |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (3,781) | | | (3,781) |
Equity-based compensation expense and dividend equivalents | | 87,428 | | | — | | — | | | — | | | 7,004 | | | — | | | — | | | — | | | 7,004 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (4,345) | | | — | | | — | | | (4,345) |
Change in accumulated other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | (124) | | | (132) | | | (256) |
Payroll taxes related to net settled restricted stock units | | (899) | | | — | | — | | | — | | | (31) | | | — | | | — | | | — | | | (31) |
Other | | — | | | — | | — | | | — | | | 21 | | | — | | | — | | | — | | | 21 |
Balances, September 30, 2021 | | 18,806,194 | | | 2 | | 1 | | | — | | | 510,424 | | | (6,585) | | | 639 | | | (438,299) | | | 66,181 |
6
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Retained | | Accumulated other | | | | | | | ||
| | Class A | | Class B | | Additional | | earnings | | comprehensive | | Non- | | Total | |||||||||||
| | common stock | | common stock | | paid-in | | (accumulated | | income (loss), | | controlling | | stockholders' | |||||||||||
| | Shares |
| Amount |
| Shares |
| Amount |
| capital |
| deficit) |
| net of tax |
| interest |
| equity | |||||||
Balances, January 1, 2020 | | 17,838,233 | | $ | 2 | | 1 | | $ | — | | $ | 466,945 | | $ | 30,732 | | $ | 414 | | $ | (411,267) | | $ | 86,826 |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | 2,714 | | | — | | | 2,724 | | | 5,438 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (2,777) | | | (2,777) |
Equity-based compensation expense and dividend equivalents | | 368,375 | | | — | | — | | | — | | | 5,962 | | | (289) | | | — | | | — | | | 5,673 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (3,986) | | | — | | | — | | | (3,986) |
Change in accumulated other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | (36) | | | (194) | | | (230) |
Payroll taxes related to net settled restricted stock units | | (82,645) | | | — | | — | | | — | | | (2,268) | | | — | | | — | | | — | | | (2,268) |
Balances, March 31, 2020 | | 18,123,963 | | | 2 | | 1 | | | — | | | 470,639 | | | 29,171 | | | 378 | | | (411,514) | | | 88,676 |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | 3,552 | | | — | | | 2,491 | | | 6,043 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (2,789) | | | (2,789) |
Equity-based compensation expense and dividend equivalents | | — | | | — | | — | | | — | | | 2,812 | | | — | | | — | | | — | | | 2,812 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (3,987) | | | — | | | — | | | (3,987) |
Change in accumulated other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | 62 | | | 55 | | | 117 |
Other | | — | | | — | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 |
Balances, June 30, 2020 | | 18,123,963 | | $ | 2 | | 1 | | $ | — | | $ | 473,451 | | $ | 28,738 | | $ | 440 | | $ | (411,757) | | $ | 90,874 |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | 3,617 | | | — | | | 3,221 | | | 6,838 |
Distributions to non-controlling unitholders | | — | | | — | | — | | | — | | | — | | | — | | | — | | | (5,000) | | | (5,000) |
Equity-based compensation expense and dividend equivalents | | — | | | — | | — | | | — | | | 3,413 | | | — | | | — | | | — | | | 3,413 |
Dividends to Class A common stockholders | | — | | | — | | — | | | — | | | — | | | (3,988) | | | — | | | — | | | (3,988) |
Change in accumulated other comprehensive income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | 36 | | | 34 | | | 70 |
Acquisitions | | 248,171 | | | — | | — | | | — | | | 8,800 | | | — | | | — | | | — | | | 8,800 |
Other | | — | | | — | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 |
Balances, September 30, 2020 | | 18,372,134 | | | 2 | | 1 | | | — | | | 485,664 | | | 28,368 | | | 476 | | | (413,502) | | | 101,008 |
See accompanying notes to unaudited condensed consolidated financial statements.
67
RE/MAX HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||
|
| September 30, | ||||
|
| 2017 |
| 2016 | ||
Cash flows from operating activities: |
|
|
|
|
|
|
Net income |
| $ | 33,245 |
| $ | 38,829 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
|
| 15,678 |
|
| 11,482 |
Bad debt expense |
|
| 836 |
|
| 1,177 |
Loss on sale or disposition of assets and sublease, net |
|
| 3,859 |
|
| 85 |
Loss on early extinguishment of debt |
|
| — |
|
| 136 |
Equity-based compensation expense |
|
| 2,161 |
|
| 1,812 |
Deferred income tax expense |
|
| 3,919 |
|
| 3,244 |
Fair value adjustments to contingent consideration |
|
| 250 |
|
| — |
Payments pursuant to tax receivable agreements |
|
| (7,296) |
|
| (1,344) |
Other |
|
| 888 |
|
| 802 |
Changes in operating assets and liabilities |
|
| (100) |
|
| (7,183) |
Net cash provided by operating activities |
|
| 53,440 |
|
| 49,040 |
Cash flows from investing activities: |
|
|
|
|
|
|
Purchases of property, equipment and software |
|
| (1,733) |
|
| (3,229) |
Proceeds from sale of property and equipment |
|
| — |
|
| 12 |
Capitalization of trademark costs |
|
| (48) |
|
| (35) |
Acquisitions, net of cash acquired of $0 and $131, respectively |
|
| — |
|
| (17,869) |
Other investing activity, net |
|
| — |
|
| 54 |
Net cash used in investing activities |
|
| (1,781) |
|
| (21,067) |
Cash flows from financing activities: |
|
|
|
|
|
|
Payments on debt |
|
| (1,763) |
|
| (14,220) |
Distributions paid to non-controlling unitholders |
|
| (14,213) |
|
| (14,094) |
Dividends and dividend equivalents paid to Class A common stockholders |
|
| (9,607) |
|
| (7,932) |
Payments on capital lease obligations |
|
| (9) |
|
| (72) |
Proceeds from exercise of stock options |
|
| — |
|
| 101 |
Payment of payroll taxes related to net settled restricted stock units |
|
| (816) |
|
| (360) |
Net cash used in financing activities |
|
| (26,408) |
|
| (36,577) |
Effect of exchange rate changes on cash |
|
| 1,076 |
|
| 373 |
Net increase (decrease) in cash and cash equivalents |
|
| 26,327 |
|
| (8,231) |
Cash and cash equivalents, beginning of year |
|
| 57,609 |
|
| 110,212 |
Cash and cash equivalents, end of period |
| $ | 83,936 |
| $ | 101,981 |
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
Cash paid for interest |
| $ | 7,477 |
| $ | 6,195 |
Net cash paid for income taxes |
| $ | 8,619 |
| $ | 9,492 |
Schedule of non-cash investing and financing activities: |
|
|
|
|
|
|
Note receivable received as consideration for sale of brokerage operations assets |
| $ | — |
| $ | 150 |
Capital lease for property and equipment |
| $ | — |
| $ | 33 |
Increase in accounts payable for capitalization of trademark costs and purchases of property, equipment and software |
| $ | 310 |
| $ | 89 |
Contingent consideration issued in a business acquisition |
| $ | — |
| $ | 6,300 |
| | | | | | |
| | Nine Months Ended | ||||
| | September 30, | ||||
| | 2021 | | 2020 | ||
Cash flows from operating activities: | | | | | | |
Net income (loss) | | $ | (30,240) | | $ | 18,319 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | | 22,236 | | | 19,154 |
Impairment charge - leased assets | | | — | | | 7,902 |
Impairment charge - goodwill | | | 5,123 | | | — |
Bad debt expense | | | (208) | | | 4,024 |
Loss on early extinguishment of debt | | | 264 | | | — |
Equity-based compensation expense | | | 27,315 | | | 8,347 |
Deferred income tax expense (benefit) | | | (1,869) | | | 1,889 |
Fair value adjustments to contingent consideration | | | 330 | | | (105) |
Non-cash lease expense (benefit) | | | (984) | | | — |
Other, net | | | 453 | | | 209 |
Changes in operating assets and liabilities | | | (5,776) | | | (16,268) |
Net cash provided by operating activities | | | 16,644 | | | 43,471 |
Cash flows from investing activities: | | | | | | |
Purchases of property, equipment and capitalization of software | | | (12,069) | | | (4,575) |
Acquisitions, net of cash, cash equivalents and restricted cash acquired of $14.1 million and $0.9 million, respectively | | | (180,402) | | | (10,627) |
Net cash used in investing activities | | | (192,471) | | | (15,202) |
Cash flows from financing activities: | | | | | | |
Proceeds from the issuance of debt | | | 458,850 | | | — |
Payments on debt | | | (226,240) | | | (1,986) |
Capitalized debt amendment costs | | | (3,871) | | | — |
Distributions paid to non-controlling unitholders | | | (10,780) | | | (10,566) |
Dividends and dividend equivalents paid to Class A common stockholders | | | (13,488) | | | (12,250) |
Payments related to tax withholding for share-based compensation | | | (5,329) | | | (2,268) |
Net cash provided by (used in) financing activities | | | 199,142 | | | (27,070) |
Effect of exchange rate changes on cash | | | 54 | | | (30) |
Net increase in cash, cash equivalents and restricted cash | | | 23,369 | | | 1,169 |
Cash, cash equivalents and restricted cash, beginning of period | | | 121,227 | | | 103,601 |
Cash, cash equivalents and restricted cash, end of period | | $ | 144,596 | | $ | 104,770 |
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid for interest | | $ | 3,962 | | $ | 6,638 |
Net cash paid for income taxes | | $ | 11,452 | | $ | 3,963 |
Schedule of non-cash investing activities: | | | | | | |
Class A shares issued as consideration for acquisitions | | $ | — | | $ | 8,800 |
See accompanying notes to unaudited condensed consolidated financial statements.
78
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
RE/MAX Holdings, Inc. (“RE/MAX Holdings”) was formed as a Delaware corporation on June 25, 2013. On October 7, 2013, RE/MAX Holdings completed an initial public offering (the “IPO”) of its shares of Class A common stock. RE/MAX Holdings’ only business is to act as the sole manager of RMCO, LLC (“RMCO”). As of September 30, 2017, RE/MAX Holdings owns 58.49% of the common membership units in RMCO, while RIHI, Inc. (“RIHI”) owns the remaining 41.51% of common membership units in RMCO. 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.brand (“Motto”). RE/MAX, founded in 1973, has over 115,000nearly 140,000 agents operating in over 7,0008,000 offices and a presence in more than 100110 countries and territories. Motto, Mortgage (“Motto”), founded in 2016, is the first nationally franchised mortgage brokerage in the U.S. The Company sold certain operating assets and liabilities of its owned brokerage offices during 2015 and the first quarter of 2016 to existing RE/MAX franchisees (See Note 5, Acquisitions and Dispositions). Since then, the Company is 100% franchised, no longer operates any real estate brokerage offices and no longer recognizes brokerage revenue (which consisted of fees assessed by the Company’s owned brokerages for services provided to their affiliated real estate agents). While the Company operates through both RE/MAX and Motto due to the immateriality of revenue earned by Motto, are 100% franchised—the Company discloses only one reportable segment.does not own any of the brokerages that operate under these brands. On July 21, 2021, the Company acquired the operating companies of the North America regions of RE/MAX INTEGRA (“INTEGRA NA” or “INTEGRA”) converting INTEGRA’s formerly Independent Regions into Company-Owned Regions.
The Company’s revenue is derived as follows:
|
|
|
|
|
|
|
|
|
|
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated balance sheetCondensed Consolidated Balance Sheet at December 31, 2016,2020, which was derived from the audited consolidated financial statements at that date, and the unaudited interim condensed consolidated financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X. In compliance with those instructions, certain. 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, 20172021 and December 31, 2016, the results of its operations and comprehensive income for the three and
8
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
nine months ended September 30, 2017 and 2016,(loss), cash flows for the nine months ended September 30, 2017 and 2016, and changes in its stockholders’ equity for the three and nine months ended September 30, 2017.2021 and 2020. Interim results may not be indicative of full yearfull-year performance.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements within the Company’s Amendment No. 1 to Annual Report on Form 10-K10-K/A for the year ended December 31, 2016.2020 (“2020 Amendment No. 1 to Annual Report on Form 10-K/A”), filed with the Securities and Exchange Commission (“SEC”) on December 21, 2021. Please refer to that document for a fuller discussion of all significant accounting policies.
During 2016, the Company completed the acquisitions of six independent regions. Their results of operations, cash flows and financial positions are included in the consolidated financial statements from their respective dates of acquisition. See Note 5, Acquisitions and Dispositions for additional information.
Reclassifications
Certain items in the accompanying condensed consolidated financial statements as of December 31, 2016 have been reclassified to conform to the current year’s presentation. These reclassifications did not affect the Company’s consolidated results of operations.
Use of Estimates
The preparation of the accompanying 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.
PrinciplesSegment Reporting
The Company operates under the following 4 operating segments: Real Estate, Mortgage, Marketing Funds and booj. Due to quantitative insignificance, the booj operating segment does not meet the criteria of Consolidationa reportable segment and is included in “Other”.
Revenue Recognition
The Company generates most of its revenue from contracts with customers. The Company’s major streams of revenue are:
● | Continuing franchise fees, which are fixed contractual fees paid monthly by RE/MAX or Motto franchisees or Independent Region sub-franchisors based on the number of RE/MAX agents or Motto franchisees based on the number of offices. |
● | Annual dues, which are fees charged directly to RE/MAX agents. |
9
● | Broker fees, which are fees on real estate commissions when a RE/MAX agent assists a consumer to buy or sell a home. |
● | Marketing Funds fees, which are fixed contractual fees paid monthly by franchisees based on the number of RE/MAX agents or Motto franchisees based on the number of offices. |
● | Franchise sales and other revenue, which consist of fees from initial sales of RE/MAX and Motto franchises, renewals of RE/MAX franchises and master franchise fees, as well as technology and data services subscription revenue, loan processing revenue, preferred marketing arrangements, approved supplier programs and event-based revenue from training and other programs. |
Annual Dues
The activity in the Company’s deferred revenue for annual dues consists of the following (in thousands):
| | | | | | | | | | | | |
| | Balance at | | New billings | | Revenue recognized (a) | | Balance at end | ||||
Nine Months Ended September 30, 2021 | | $ | 14,539 | | $ | 27,246 | | $ | (26,508) | | $ | 15,277 |
(a) | Revenue recognized related to the beginning balance was $12.9 million for the nine months ended September 30, 2021, respectively. |
Franchise Sales
The activity in the Company’s franchise sales deferred revenue accounts consists of the following (in thousands):
| | | | | | | | | | | | |
| | Balance at | | New billings | | Revenue recognized (a) | | Balance at end | ||||
Nine Months Ended September 30, 2021 | | $ | 25,069 | | $ | 6,933 | | $ | (6,651) | | $ | 25,351 |
(a) | Revenue recognized related to the beginning balance was $6.0 million for the nine months ended September 30, 2021, respectively. |
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 | | Expense | | Additions to contract | | Balance at end | ||||
Nine Months Ended September 30, 2021 | | $ | 3,690 | | $ | (1,013) | | $ | 1,135 | | $ | 3,812 |
10
Disaggregated Revenue
In the following table, segment revenue is disaggregated by Company-Owned or Independent Regions, where applicable, and by geographical area (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
U.S. Company-Owned Regions (a) | | $ | 42,922 | | $ | 35,286 | | $ | 113,081 | | $ | 91,375 |
U.S. Independent Regions (a) | | | 2,592 | | | 3,604 | | | 9,610 | | | 9,767 |
Canada Company-Owned Regions (a) | | | 8,889 | | | 3,579 | | | 17,243 | | | 9,119 |
Canada Independent Regions (a) | | | 1,258 | | | 2,090 | | | 5,827 | | | 6,162 |
Global | | | 2,967 | | | 2,335 | | | 8,462 | | | 6,679 |
Fee revenue (b) | | | 58,628 | | | 46,894 | | | 154,223 | | | 123,102 |
Franchise sales and other revenue (c) | | | 5,995 | | | 4,058 | | | 17,845 | | | 16,126 |
Total Real Estate | | | 64,623 | | | 50,952 | | | 172,068 | | | 139,228 |
U.S. | | | 18,471 | | | 15,701 | | | 51,012 | | | 41,948 |
Canada | | | 4,541 | | | 1,405 | | | 7,702 | | | 4,075 |
Global | | | 257 | | | 184 | | | 742 | | | 554 |
Total Marketing Funds | | | 23,269 | | | 17,290 | | | 59,456 | | | 46,577 |
Mortgage (d) | | | 2,620 | | | 1,906 | | | 7,353 | | | 4,434 |
Other (d) | | | 485 | | | 925 | | | 1,661 | | | 3,313 |
Total | | $ | 90,997 | | $ | 71,073 | | $ | 240,538 | | $ | 193,552 |
(a) | On July 21, 2021, the Company acquired the operating companies of the North America regions of RE/MAX INTEGRA. Fee revenue from these regions were previously recognized in the U.S. and Canada Independent Regions. See Note 5, Acquisitions, for information related to this transaction. |
(b) | Fee revenue includes Continuing franchise fees, Annual dues and Broker fees. |
(c) | Franchise sales and other revenue is derived primarily within the U.S. |
(d) | Revenue from Mortgage and Other are derived exclusively within the U.S. |
Transaction Price Allocated to the Remaining Performance Obligations
The following table includes estimated revenue by year, excluding certain other immaterial items, 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):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Remainder of 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter | | Total | ||||||||
Annual dues | | $ | 7,146 | | $ | 8,131 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 15,277 |
Franchise sales | | | 1,850 | | | 6,646 | | | 5,295 | | | 4,078 | | | 2,812 | | | 1,509 | | | 3,161 | | | 25,351 |
Total | | $ | 8,996 | | $ | 14,777 | | $ | 5,295 | | $ | 4,078 | | $ | 2,812 | | $ | 1,509 | | $ | 3,161 | | $ | 40,628 |
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):
| | | | | | |
| | September 30, | | December 31, | ||
| | 2021 | | 2020 | ||
Cash and cash equivalents | | $ | 119,446 | | $ | 101,355 |
Restricted cash | | | 25,150 | | | 19,872 |
Total cash, cash equivalents and restricted cash | | $ | 144,596 | | $ | 121,227 |
11
Services Provided to the Marketing Funds by Real Estate
Real Estate charges the Marketing Funds for various services it performs. These services primarily comprise (a) building and maintaining agent marketing technology, including customer relationship management tools, the www.remax.com website, agent, office and team websites, and mobile apps, (b) dedicated employees focused on marketing campaigns, and (c) various administrative services including customer support of technology, accounting and legal. Because these costs are ultimately paid by the Marketing Funds, they do not impact the net income (loss) of Holdings as the Marketing Funds have no reported net income (loss).
Costs charged from Real Estate to the Marketing Funds are as follows (in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Technology - operating | | $ | 3,213 | | $ | 2,721 | | $ | 10,046 | | $ | 9,414 |
Technology - capital | | | 243 | | | 104 | | | 647 | | | 864 |
Marketing staff and administrative services | | | 1,725 | | | 988 | | | 4,032 | | | 3,199 |
Total | | $ | 5,181 | | $ | 3,813 | | $ | 14,725 | | $ | 13,477 |
Leases
The Company leases corporate offices, a distribution center, billboards and certain equipment. As all franchisees are independently owned and operated, there are 0 leases recognized for any offices used by the Company’s franchisees. All the Company’s material leases are classified as operating leases.
The Company acts as the lessor for sublease agreements on its corporate headquarters, consisting solely of 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, are recognized on a straight-line basis over the lease term.
During the third quarter of 2020, the Company began executing on a plan to both refresh its corporate headquarters and sublease space made available through the refresh. As a result, the Company changed its asset grouping for its headquarters ROU asset to separate the portion that it intends to sublease from the portion it will continue to occupy and performed an impairment test on the portion it intends to sublease. Based on a comparison of undiscounted cash flows to the ROU asset, the Company determined that the asset was impaired, driven largely by the difference between the existing lease rate on the Company’s corporate headquarters and expected sublease rates available in the market. This resulted in an impairment charge of $7.9 million, which reflects the excess of the ROU asset over its fair value.
Foreign Currency Derivatives
The Company is exposed to foreign currency transaction gains and losses related to certain foreign currency denominated asset and liability positions, with the Canadian dollar representing the most significant exposure primarily from an intercompany Canadian loan between RMCO and the new Canadian entity for INTEGRA. The Company uses short duration foreign currency forward contracts, generally with maturities ranging from a few days to a few months, to minimize its exposures related to foreign currency exchange rate fluctuations. None of these contracts are designated as accounting hedges as the underlying currency positions are revalued through Foreign currency transaction gains (losses) along with the related derivative contracts.
As of September 30, 2017, RE/MAX Holdings owns 58.49%2021, the Company had an aggregate U.S. dollar equivalent of the common membership units in RMCO and, as its managing member, RE/MAX Holdings controls RMCO’s operations, management and activities. As a result, RE/MAX Holdings consolidates RMCO and records a non-controlling interest in the accompanying Condensed Consolidated Balance Sheets and records net income attributable$58.5 million notional amount of Canadian dollar forward contracts to the non-controlling interest and comprehensive income attributable to the non-controlling interest in the accompanying Condensed Consolidated Statementshedge these exposures.
12
Table of Income and Condensed Consolidated Statements of Comprehensive Income, respectively.Contents
Recently Adopted Accounting Pronouncements
None.
New Accounting Pronouncements Not Yet Adopted
In February 2018,March 2020, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) 2018-02, Income Statement – Reporting Comprehensive IncomeASU 2020-04, Reference Rate Reform (Topic 220)848), which adjustscontains temporary optional expedients and exceptions to the classification of stranded tax effects resultingguidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the Tax Cuts and Jobs Act from accumulated other comprehensive incomeLondon Interbank Offered Rate (“LIBOR”) to retained earnings. ASU 2018-02alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The new guidance is effective for fiscal years,upon issuance and interim periods within those years, beginningmay be adopted on any date on or after December 15, 2018.March 12, 2020. The standardrelief is to be applied either in the period of adoption or retrospectively to each period effected by the Tax Cutstemporary and Jobs Act. The Company plans to adopt this ASU on January 1, 2019. As ofonly available until December 31, 2017,2022, when the Company completed the majority of its accounting for the tax effects of the Tax Cuts and Jobs Act.reference rate replacement activity is expected to have completed. The Company believes the amendments of ASU 2018-022020-04 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 fordisclosures as the Company and is requireddoes not currently engage in interest rate hedging of its LIBOR based debt, nor does it believe it has any material contracts tied to be adopted using a prospective approach. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017.LIBOR other than its Senior Secured Credit Facility, as discussed in Note 8, Debt. The Company does not expect the adoption of this ASU to have aany material impact on its consolidated financial statements and related disclosures.
9
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Also in January 2017, the FASB issued 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 is effective for fiscal years, and interim reporting periods within those years, beginning January 1, 2018 for the Company and is required to be adopted using a prospective approach. Early adoption is permitted for transactions not previously reported in issued financial statements. The Company has not yet determined the effect of the standard on its consolidated financial statements and related disclosures.
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 flow. ASU 2016-15 is effective for fiscal years, and interim reporting periods within those years, beginning January 1, 2018 for the Company. The standard requires 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”) will be classified as financing outflows up to the $6,300,000 acquisition date fair value and any cash payments paid in excess of the acquisition date fair value will be classified as operating outflows. (See Note 5, Acquisitions and Dispositions). The Company expects no other material impact on its financial statements and related disclosures upon the adoption of this standard.
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. Early adoption is permitted in any interim or annual reporting period. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company has not yet determined the effect of the standard on its consolidated 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 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The Company adopted this standard on January 1, 2018. The Company will use the modified retrospective transition method, which will result in restating each prior reporting period presented, fiscal years 2016 and 2017, in the year of adoption. Additionally, a cumulative effect adjustment will be recorded to the opening balance sheet as of the first day of fiscal year 2016, the earliest period presented. The adoption of the new guidance will change the timing of recognition of franchise sales and franchise renewal revenue. Currently, the Company recognizes revenue upon completion of a sale or renewal. Under the new guidance, franchise sales and renewal revenue, which are included in “Franchise Sales and Other Franchise Revenue” in the Consolidated Statements of Income, will be recognized over the contractual term of the franchise agreement. The impact to both “Franchise Sales and Other Franchise Revenue” and “Operating Income” in the Consolidated Statements of Income for 2017adverse consequences from this change will be a decrease of less than $2,000,000. However, the Consolidated Balance Sheet as of December 31, 2017 will be adjusted in the first quarter of 2018 to reflect an increase in “Deferred revenue and deposits” of approximately $26,000,000. The commissions related to franchise sales will be recorded as a contract asset and be recognized over the contractual term of the franchise agreement. Currently, the Company expenses the commissions upon franchise sale completion. The impact from this change to “Selling, operating and administrative expenses” and “Operating Income” in the Consolidated Statements of Income for 2017 is immaterial and the Consolidated Balance Sheet as of December 31, 2017 will be adjusted in the first quarter of 2018 to reflect an increase in “Total assets” of approximately $4,000,000. The Company does not expect the adoption of the standard to have a material impact on other revenue streams. transition.
10
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
3. 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:
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| September 30, |
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| December 31, |
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| 2017 |
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| 2016 |
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| Shares |
| Ownership % |
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| Shares |
| Ownership % |
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Non-controlling unitholders ownership of common units in RMCO |
| 12,559,600 |
| 41.51 | % |
| 12,559,600 |
| 41.57 | % | |||||||
RE/MAX Holdings, Inc. outstanding Class A common stock (equal to RE/MAX Holdings, Inc. common units in RMCO) |
| 17,696,991 |
| 58.49 | % |
| 17,652,548 |
| 58.43 | % | |||||||
Total common units in RMCO |
| 30,256,591 |
| 100.00 | % |
| 30,212,148 |
| 100.00 | % |
| | | | | | | | | |
| | September 30, 2021 | | December 31, 2020 | | ||||
| | Shares | | Ownership % | | Shares | | Ownership % | |
Non-controlling interest ownership of common units in RMCO | | 12,559,600 | | 40.0 | % | 12,559,600 | | 40.6 | % |
Holdings outstanding Class A common stock (equal to Holdings common units in RMCO) | | 18,806,194 | | 60.0 | % | 18,390,691 | | 59.4 | % |
Total common units in RMCO | | 31,365,794 | | 100.0 | % | 30,950,291 | | 100.0 | % |
The weighted average ownership percentages for the applicable reporting periods are used to calculate the net“Net income (loss) attributable to RE/MAX Holdings.Holdings, Inc.” A reconciliation of “Income (loss) before provision for income taxes” to “Net Incomeincome (loss) attributable to RE/MAX Holdings, Inc.” and “Net Income (loss) attributable to non-controlling interest” in the accompanying Condensed Consolidated Statements of Income (Loss) for the periods indicated is detailed as follows (in thousands, except for percentages):
| | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | ||||||||||||||||
| 2021 | | 2020 (d) | ||||||||||||||
| RE/MAX |
| Non-controlling |
| Total |
| RE/MAX |
| Non-controlling |
| Total | ||||||
Weighted average ownership percentage of RMCO(a) | | 59.8 | % | | 40.2 | % | | 100.0 | % | | 59.2 | % | | 40.8 | % | | 100.0 |
Income (loss) before provision for income taxes(a) | $ | (24,836) | | $ | (16,735) | | $ | (41,571) | | $ | 5,212 | | $ | 3,683 | | $ | 8,895 |
(Provision) / benefit for income taxes(b)(c) | | (313) | | | (479) | | | (792) | | | (1,595) | | | (462) | | | (2,057) |
Net income (loss) | $ | (25,149) | | $ | (17,214) | | $ | (42,363) | | $ | 3,617 | | $ | 3,221 | | $ | 6,838 |
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, | ||||||||||||||||
| 2021 | | 2020 (d) | ||||||||||||||
| RE/MAX |
| Non-controlling |
| Total |
| RE/MAX |
| Non-controlling |
| Total | ||||||
Weighted average ownership percentage of RMCO(a) | | 59.8 | % | | 40.2 | % | | 100.0 | % | | 59.0 | % | | 41.0 | % | | 100.0 |
Income (loss) before provision for income taxes(a) | $ | (17,208) | | $ | (11,578) | | $ | (28,786) | | $ | 14,836 | | $ | 10,067 | | $ | 24,903 |
(Provision) / benefit for income taxes(b)(c) | | (1,517) | | | 63 | | | (1,454) | | | (4,953) | | | (1,631) | | | (6,584) |
Net income (loss) | $ | (18,725) | | $ | (11,515) | | $ | (30,240) | | $ | 9,883 | | $ | 8,436 | | $ | 18,319 |
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| Three Months Ended September 30, |
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| 2017 |
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| 2016 |
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| RE/MAX Holdings, Inc. |
| Non-controlling interest |
| Total |
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| RE/MAX Holdings, Inc. |
| Non-controlling interest |
| Total |
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Weighted average ownership percentage of RMCO (a) |
| 58.49 | % |
| 41.51 | % |
| 100.00 | % |
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| 58.42 | % |
| 41.58 | % |
| 100.00 | % |
Income before provision for income taxes | $ | 6,180 |
| $ | 4,448 |
| $ | 10,628 |
|
| $ | 11,025 |
| $ | 7,913 |
| $ | 18,938 |
|
Provision for income taxes (b)(c) |
| (2,345) |
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| (746) |
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| (3,091) |
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| (4,239) |
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| (393) |
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| (4,632) |
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Net income | $ | 3,835 |
| $ | 3,702 |
| $ | 7,537 |
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| $ | 6,786 |
| $ | 7,520 |
| $ | 14,306 |
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| Nine Months Ended September 30, |
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| 2017 |
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| 2016 |
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| RE/MAX Holdings, Inc. |
| Non-controlling interest |
| Total |
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| RE/MAX Holdings, Inc. |
| Non-controlling interest |
| Total |
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Weighted average ownership percentage of RMCO (a) |
| 58.47 | % |
| 41.53 | % |
| 100.00 | % |
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| 58.39 | % |
| 41.61 | % |
| 100.00 | % |
Income before provision for income taxes | $ | 25,763 |
| $ | 18,365 |
| $ | 44,128 |
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| $ | 29,742 |
| $ | 21,263 |
| $ | 51,005 |
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Provision for income taxes (b)(c) |
| (9,486) |
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| (1,397) |
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| (10,883) |
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| (11,203) |
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| (973) |
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| (12,176) |
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Net income | $ | 16,277 |
| $ | 16,968 |
| $ | 33,245 |
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| $ | 18,539 |
| $ | 20,290 |
| $ | 38,829 |
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(a) |
| The weighted average ownership percentage of RMCO differs |
(b) |
| The provision for income taxes attributable to |
13
(c) |
| The provision for income taxes attributable to the non-controlling interest represents its share of taxes |
(d) | Prior year amounts have been adjusted to reflect the immaterial correction of amortization for certain |
11
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Distributions and Other Payments to Non-controlling Unitholders
Under the terms of RMCO’s fourth amended and restated limited liability company operating agreement, (the “New RMCO, LLC Agreement”), RMCO makes cash distributions to non-controlling unitholders.unitholders on a pro-rata basis. The distributions paid or payable to or on behalf of non-controlling unitholders are summarized as follows (in thousands):
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| September 30, | |||||||||
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| 2016 | |||||||
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| Nine Months Ended | ||||||||||
| September 30, | ||||||||||
| 2021 | | 2020 | ||||||||
Tax and other distributions |
| $ | 7,430 |
| $ | 8,442 | $ | 2,113 | | $ | 2,277 |
Dividend distributions |
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| 6,783 |
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| 5,652 | | 8,667 | | | 8,289 |
Total distributions to non-controlling unitholders |
| $ | 14,213 |
| $ | 14,094 | $ | 10,780 | | $ | 10,566 |
On November 1, 2017, the Company declared a distribution to non-controlling unitholders of $2,261,000, which was paid on November 29, 2017. On February 21, 2018, the Company declared a distribution to non-controlling unitholders of $2,512,000, which is payable on March 21, 2018.
Payments Pursuant to the Tax Receivable Agreements
As of September 30, 2017, the Company reflected a total liability of $91,985,000 representing the payments due to RIHI and Oberndorf Investments LLC (“Oberndorf”) under the terms of the tax receivable agreements (the “TRAs”) (see current and non-current portion of “Payable pursuant to tax receivable agreements” in the accompanying Condensed Consolidated Balance Sheets).
As of September 30, 2017, the Company estimates that amounts payable pursuant to the TRAs within the next 12-month period will be approximately $6,135,000, which is related to RE/MAX Holdings’ 2016 federal and state tax returns. To determine the current amount of the payments due to RIHI and Oberndorf, the Company estimated the amount of taxable income that RE/MAX Holdings generated as well as the amount of the specified deductions subject to the TRAs which were realized by RE/MAX Holdings in its federal and state tax returns. This amount was then used as a basis for determining the Company’s increase in estimated tax cash savings as a result of such deductions on which 85% is owed as a current TRA obligation (i.e. payable within 12 months of the Company’s year-end). These calculations are performed pursuant to the terms of the TRAs. The Company paid $7,296,000 and $1,344,000 pursuant to the terms of the TRAs during the nine months ended September 30, 2017 and 2016, respectively.
On December 22, 2017, the Tax Cuts and Jobs Act was signed into law. Given this date of enactment, the financial statements for the period ended September 30, 2017 do not reflect the impact of this legislation. The law includes significant changes to the U.S. corporate tax system, including a federal corporate rate reduction from 35% to 21%. During the fourth quarter of 2017, the period in which the Tax Cuts and Jobs Act was enacted, the deferred tax asset was reduced for the impact of the lower rate, resulting in a charge to “Provision for income taxes” of $40,900,000. Correspondingly, the TRA liability was also reduced for the rate change, resulting in a benefit to operating income of $32,700,000. The net effect on net income was $8,200,000, with the entirety of this impact allocated to RE/MAX Holdings as U.S. federal and most state income taxes do not apply to the non-controlling interest.
12
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
4. Earnings (Loss) Per Share and Dividends
Earnings (Loss) Per Share
Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The treasury stock method is used to determine the dilutive potential of stock options and restricted stock units.
The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except shareshares and per share information):
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| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 (b) | | 2021 | | 2020 (b) | ||||
Numerator | | | | | | | | | | | | |
Net income (loss) attributable to RE/MAX Holdings, Inc. | | $ | (25,149) | | $ | 3,617 | | $ | (18,725) | | $ | 9,883 |
Denominator for basic net income (loss) per share of | | | | | | | | | | | | |
Weighted average shares of Class A common stock outstanding | | | 18,739,564 | | | 18,196,454 | | | 18,651,858 | | | 18,098,227 |
Denominator for diluted net income (loss) per share of | | | | | | | | | | | | |
Weighted average shares of Class A common stock outstanding | | | 18,739,564 | | | 18,196,454 | | | 18,651,858 | | | 18,098,227 |
Add dilutive effect of the following: | | | | | | | | | | | | |
Restricted stock (a) | | | — | | | 171,597 | | | — | | | 84,629 |
Weighted average shares of Class A common stock outstanding, diluted | | | 18,739,564 | | | 18,368,051 | | | 18,651,858 | | | 18,182,856 |
Earnings per share of Class A common stock | | | | | | | | | | | | |
Net income (loss) attributable to RE/MAX Holdings, Inc. per share of Class A common stock, basic | | $ | (1.34) | | $ | 0.20 | | $ | (1.00) | | $ | 0.55 |
Net income (loss) attributable to RE/MAX Holdings, Inc. per share of Class A common stock, diluted | | $ | (1.34) | | $ | 0.20 | | $ | (1.00) | | $ | 0.54 |
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| Nine Months Ended | ||||||||
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| September 30, |
| September 30, | ||||||||
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| 2016 |
| 2017 |
| 2016 | ||||
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Net income attributable to RE/MAX Holdings, Inc. |
| $ | 3,835 |
| $ | 6,786 |
| $ | 16,277 |
| $ | 18,539 |
Denominator for basic net income per share of Class A common stock |
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Weighted average shares of Class A common stock outstanding |
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| 17,696,991 |
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| 17,645,696 |
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| 17,685,683 |
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| 17,622,298 |
Denominator for diluted net income per share of Class A common stock |
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Weighted average shares of Class A common stock outstanding |
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| 17,696,991 |
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| 17,645,696 |
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| 17,685,683 |
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| 17,622,298 |
Add dilutive effect of the following: |
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Stock options |
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| — |
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| — |
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| — |
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| 6,714 |
Restricted stock units |
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| 40,795 |
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| 45,945 |
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| 40,764 |
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| 37,728 |
Weighted average shares of Class A common stock outstanding, diluted |
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| 17,737,786 |
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| 17,691,641 |
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| 17,726,447 |
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| 17,666,740 |
Earnings per share of Class A common stock |
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Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock, basic |
| $ | 0.22 |
| $ | 0.38 |
| $ | 0.92 |
| $ | 1.05 |
Net income attributable to RE/MAX Holdings, Inc. per share of Class A common stock, diluted |
| $ | 0.22 |
| $ | 0.38 |
| $ | 0.92 |
| $ | 1.05 |
(a) | As the Company had a net loss for the three and nine months ended September 30, 2021, these shares would have been considered anti-dilutive and therefore there is no effect on the weighted average shares of Class A common stock outstanding EPS calculation. |
(b) | Prior year amounts and per share amounts have been adjusted to reflect the immaterial correction of amortization for certain acquired Independent Regions. See Note 13, Immaterial Corrections to Prior Period Financial Statements for additional information. |
There were no anti-dilutive shares for the three and nine months ended September 30, 2017 and 2016. The one share ofOutstanding Class B common stock outstanding does not share in the earnings of RE/MAX Holdings and is therefore not a participating security. Accordingly, basic and diluted net income (loss) per share of Class B common stock has not been presented.
1314
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Dividends
Dividends declared and paid quarterlyduring each quarter ended per share on all outstanding shares of Class A common stock were as follows (in thousands, except share and per share information):
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| Amount paid to Class A stockholders |
| Amount paid to non-controlling unitholders |
| Date paid |
| Per share |
| Amount paid to Class A stockholders |
| Amount paid to non-controlling unitholders | ||||||
Dividend declared during quarter ended: |
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|
March 31 |
| March 22, 2017 |
| $ | 0.18 |
| $ | 3,184 |
| $ | 2,261 |
| March 23, 2016 |
| $ | 0.15 |
| $ | 2,638 |
| $ | 1,884 |
June 30 |
| May 31, 2017 |
|
| 0.18 |
|
| 3,185 |
|
| 2,261 |
| June 2, 2016 |
|
| 0.15 |
|
| 2,647 |
|
| 1,884 |
September 30 |
| August 30, 2017 |
|
| 0.18 |
|
| 3,185 |
|
| 2,261 |
| August 31, 2016 |
|
| 0.15 |
|
| 2,647 |
|
| 1,884 |
|
|
|
| $ | 0.54 |
| $ | 9,554 |
| $ | 6,783 |
|
|
| $ | 0.45 |
| $ | 7,932 |
| $ | 5,652 |
| | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, | ||||||||||||||||||||
| | 2021 | | 2020 | ||||||||||||||||||
Quarter end declared |
| Date paid |
| Per share |
| Amount paid to Class A |
| Amount paid to Non-controlling |
| Date paid |
| Per share |
| Amount paid to Class A |
| Amount paid to Non-controlling | ||||||
March 31 | | March 17, 2021 | | $ | 0.23 | | $ | 4,326 | | $ | 2,889 | | March 18, 2020 | | $ | 0.22 | | $ | 3,986 | | $ | 2,763 |
June 30 | | June 2, 2021 | | | 0.23 | | | 4,345 | | | 2,889 | | June 2, 2020 | | | 0.22 | | | 3,987 | | | 2,763 |
September 30 | | August 31, 2021 | | | 0.23 | | | 4,345 | | | 2,889 | | September 2, 2020 | | | 0.22 | | | 3,988 | | | 2,763 |
| | | | $ | 0.69 | | $ | 13,016 | | $ | 8,667 | | | | $ | 0.66 | | $ | 11,961 | | $ | 8,289 |
| | | | | | | | | | | | | | | | | | | | | | |
On November 1, 2017,3, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.18 per share on all outstanding shares of Class A common stock, which was paid on November 29, 2017 to shareholders of record at the close of business on November 15, 2017. On February 21, 2018, the Company’s Board of Directors declared a quarterly dividend of $0.20$0.23 per share on all outstanding shares of Class A common stock, which is payable on March 21, 2018December 1, 2021 to stockholders of record at the close of business on March 7, 2018.November 17, 2021.
5. Acquisitions and Dispositions
Acquisitions
RE/MAX of Georgia, Inc., RE/MAX of Kentucky/Tennessee, Inc. and RE/MAX of Southern Ohio, Inc.INTEGRA North America Regions Acquisition
On December 15, 2016, RE/MAX, LLC acquired certain assets of RE/MAX of Georgia, Inc. (“RE/MAX of Georgia”), RE/MAX of Kentucky/Tennessee, Inc. (“RE/MAX of Kentucky/Tennessee”), and RE/MAX of Southern Ohio, Inc. (“RE/MAX of Southern Ohio”), collectively (“RE/MAX Regional Services”) including the franchise agreements issued byJuly 21, 2021, the Company permittingacquired the saleoperating companies of RE/MAX franchises in the North America regions of INTEGRA whose territories cover 5 Canadian provinces (New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, and Prince Edward Island) and 9 U.S. states of Georgia, Kentucky(Connecticut, Indiana, Maine, Massachusetts, Minnesota, New Hampshire, Rhode Island, Vermont and Tennessee and in Southern OhioWisconsin) for cash consideration of $50,400,000. RE/MAX, LLCapproximately $235.0 million. The Company acquired these assetscompanies in order to expandconvert these formerly Independent Regions into Company-Owned Regions, advance its ownedability to scale, deliver value to its affiliates and operated regional franchising operations.recapture the value differential of more than 19,000 agents (approximately 12,000 in Canada and 7,000 in the U.S.). The Company funded the acquisition by refinancing its then outstanding credit facilitySenior Secured Credit Facility (See Note 8, Debt) and using cash from operations.
RE/MAX of New Jersey, Inc.
On December 1, 2016, RE/MAX, LLC acquired certain assets and assumed certain liabilities of RE/MAX of New Jersey, Inc. (“RE/MAX of New Jersey”), including the franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of New Jersey for cash consideration of $45,000,000. RE/MAX, LLC acquired these assets and liabilities in order to expand its owned and operated regional franchising operations. The Company used cash generated from operations to fund the acquisition.
The Company finalized its accounting forallocated $40.5 million of the acquisitionspurchase price to a loss on the pre-existing master franchise agreements with INTEGRA which were effectively settled with the acquisition. The loss represents the fair value of RE/MAX Regional Servicesthe difference between the historical contractual royalty rates paid by INTEGRA and RE/MAXthe current market rate. The loss is recorded in “Settlement and impairment charges” in the accompanying Condensed Consolidated Statements of New Jersey duringIncome (Loss).
For the three and nine months ended September 30, 2017. Adjustments recorded during the measurement-period are calculated as if they were known at the acquisition date, but are recognized in the reporting period in which they are determined. The Company does not revise or adjust any prior period information. In finalizing the accounting for these acquisitions, adjustments were made during the three months ended September 30, 2017 to the condensed consolidated balance sheet2021, INTEGRA contributed incremental revenues of $11.5 million.
1415
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
to decrease “Goodwill” by $4,200,000 with a corresponding increase to “Franchise agreements, net” of $4,200,000. The Company recognized a reduction in depreciation and amortization expense of $765,000 during the three months ended September 30, 2017 in connection with these measurement adjustments.
Full House Mortgage Connection, Inc.
Motto Franchising, LLC (“Motto Franchising”), a wholly-owned subsidiary of RE/MAX, LLC, was formed and developed to franchise mortgage brokerages. On September 12, 2016, Motto Franchising acquired certain assets of Full House, a franchisor of mortgage brokerages that created concepts used to develop Motto, for initial cash consideration of $8,000,000. Motto Franchising, as a franchisor, grants each franchisee a license to use the Motto Mortgage brand, trademark, promotional and operating materials and concepts. The Company used cash generated from operations to initially fund the acquisition. Additional cash consideration may be required based on future revenues generated. The contingent purchase consideration and its subsequent valuation is more fully described in Note 9, Fair Value Measurements.
The following table summarizes the consideration at acquisition (in thousands):
|
|
|
Cash consideration | $ | 8,000 |
Contingent purchase consideration (See note 9) |
| 6,300 |
Total purchase price | $ | 14,300 |
RE/MAX of Alaska, Inc.
On April 1, 2016, RE/MAX, LLC acquired certain assets of RE/MAX of Alaska, Inc. (“RE/MAX of Alaska”), including the franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of Alaska for cash consideration of $1,500,000. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used cash generated from operations to fund the acquisition.
RE/MAX of New York, Inc.
On February 22, 2016, RE/MAX, LLC acquired certain assets of RE/MAX of New York, Inc. (“RE/MAX of New York”), including the franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of New York for cash consideration of $8,500,000. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used cash generated from operations to fund the acquisition.
15
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table summarizes thepreliminary allocation of the purchase price (net of settlement loss) to the fair value of assets acquired and liabilities assumed for the aforementioned acquisitionsacquisition (in thousands):
| | | |
Cash and cash equivalents and restricted cash | | $ | 14,098 |
Accounts and notes receivable, net | | | 6,610 |
Income taxes receivable | | | 494 |
Other current assets | | | 683 |
Property and equipment, net of accumulated depreciation | | | 63 |
Franchise agreements (a) | | | 96,550 |
Other intangible assets, net (a) | | | 9,000 |
Other assets, net of current portion | | | 1,930 |
Goodwill (c) | | | 108,269 |
Accounts payable | | | (3,409) |
Accrued liabilities | | | (14,012) |
Income taxes payable | | | (2,900) |
Deferred revenue | | | (824) |
Deferred tax liabilities, net | | | (20,152) |
Other liabilities, net of current portion | | | (1,900) |
Total purchase price allocated to assets and liabilities | | | 194,500 |
Loss on contract settlement | | | 40,500 |
Total consideration | | $ | 235,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| RE/MAX Regional Services |
| RE/MAX of New Jersey |
| Full House |
| RE/MAX of Alaska |
| RE/MAX of New York |
| Total | ||||||
Cash and cash equivalents |
| $ | - |
| $ | 335 |
| $ | - |
| $ | - |
| $ | 131 |
| $ | 466 |
Franchise agreements |
|
| 30,700 |
|
| 29,700 |
|
| - |
|
| 529 |
|
| 5,000 |
|
| 65,929 |
Non-compete agreement |
|
| - |
|
| - |
|
| 2,500 |
|
| - |
|
| - |
|
| 2,500 |
Other assets |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 340 |
|
| 340 |
Goodwill |
|
| 19,700 |
|
| 15,300 |
|
| 11,800 |
|
| 971 |
|
| 3,029 |
|
| 50,800 |
Other liabilities |
|
| - |
|
| (335) |
|
| - |
|
| - |
|
| - |
|
| (335) |
Total purchase price |
| $ | 50,400 |
| $ | 45,000 |
| $ | 14,300 |
| $ | 1,500 |
| $ | 8,500 |
| $ | 119,700 |
(a) | The Company expects to amortize the acquired Franchise agreements over a weighted average useful life of approximately 12 years and the non-compete agreements included in Other intangible assets, net over a useful life of 5 years using the straight-line method. |
(b) | The Company expects 50% of the goodwill in Canada but NaN in the U.S. to be deductible for tax purposes. |
The amounts above are preliminary as the Company has not yet finalized its valuation of the loss on contract settlement, intangible assets and goodwill with its third-party valuation firm. Evaluation of all tax matters remains preliminary as well, including deferred taxes and uncertain tax positions.
Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisitions of RE/MAX Regional Services, RE/MAX of New Jersey, Full House, RE/MAX of Alaska and RE/MAX of New YorkINTEGRA had occurred on January 1, 2016.2020. The historical financial information has been adjusted to give effect to events that are (1) directly attributed to the acquisitions, (2) factually supportable and (3) expected to have a continuing impact on the combined results, including additional amortization expense associated with the valuation of the acquired franchise agreements. This unaudited pro forma information presented below is for illustrative purposes only and should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the acquisitions had actually occurred on that date, nor of the results that may be obtained in the future (in thousands, except per share information)thousands).
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||
| September 30, 2016 |
| September 30, 2016 | ||
Total revenue | $ | 48,781 |
| $ | 141,073 |
Net income attributable to RE/MAX Holdings, Inc. (a) | $ | 7,090 |
| $ | 18,165 |
Basic earnings per common share | $ | 0.40 |
| $ | 1.03 |
Diluted earnings per common share | $ | 0.40 |
| $ | 1.03 |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30 | | September 30 | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Total revenue | | $ | 93,809 | | $ | 81,943 | | $ | 267,326 | | $ | 226,161 |
Net income (loss) attributable to RE/MAX Holdings, Inc. | | $ | (25,059) | | $ | 2,202 | | $ | (19,325) | | $ | 6,280 |
16
|
|
DispositionsTable of Contents
STC Northwest, LLC d/b/a RE/MAX Northwest RealtorsGadberry & wemlo
On January 20, 2016,September 10, 2020, the Company sold certain operating assetsacquired The Gadberry Group, LLC (“Gadberry”) for $4.6 million in cash, net of cash acquired, and liabilities related$5.5 million in Class A common stock, plus approximately $9.9 million of equity-based compensation, which is accounted for as compensation expense over the service period of two to three owned brokerage offices locatedyears (see Note 11, Equity-Based Compensation for additional information). In addition, the Company recorded a contingent consideration liability in connection with the purchase of Gadberry, which had an acquisition date fair value of $0.9 million, measured at the present value of the probability weighted consideration expected to be transferred. Gadberry is a location intelligence data company whose products have been instrumental in the U.S., of STC Northwest, LLC d/b/a RE/MAX Northwest Realtors, a wholly owned subsidiarysuccess of the Company. TheCompany’s consumer website, www.remax.com. Founded in 2000, Gadberry specializes in building products that help clients solve geospatial challenges through location data. Gadberry plans to expand its non-RE/MAX clients while maintaining and enhancing its contributions to the RE/MAX technology offering.
On August 25, 2020, the Company recognized a loss onacquired Wemlo, Inc. (“wemlo”) for $6.1 million in cash, net of cash acquired, and $3.3 million in Class A common stock, plus approximately $6.7 million of equity-based compensation, the salevast majority of the assets and the liabilities transferred of approximately $90,000 duringwhich was expensed in the first quarter of 2016, which2021 related to 2 employees who departed (see Note 11, Equity-Based Compensation for additional information). Wemlo is reflected in “Loss (gain) on sale or disposition of assets, net” in the accompanying Condensed Consolidated Statements of Income. In connectiona fintech company that has developed its cloud service for mortgage brokers, combining third-party loan processing services with this sale, the Company transferred separate office franchise agreementsan all-in-one digital platform.
The total purchase price for both aforementioned acquisitions was allocated to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees and broker fees.
16
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Sacagawea, LLC d/b/a RE/MAX Equity Group
On December 31, 2015, the Company sold certain operating assets and liabilities related to 12 owned brokerage offices locatedacquired based on their preliminary estimated fair values. The Company recorded $14.4 million in the U.S.,goodwill, virtually all of Sacagawea, LLC d/b/a/ RE/MAX Equity Group (“RE/MAX Equity Group”), a wholly owned subsidiary of the Company. During the third quarter of 2017 the Company recognized a loss of approximately $463,000which is deductible for tax purposes, and $6.3 million in other intangibles as a revised estimateresult of the final settlement on certain provisions of the asset sale agreement which is reflected in the “Loss (gain) on sale or disposition of assets, net” in the accompanying Condensed Consolidated Statements of Income.these acquisitions.
6. Intangible Assets and Goodwill
The following table provides the components of the Company’s intangible assets other than goodwill (in thousands, except weighted average amortization period in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Average |
| As of September 30, 2017 |
| As of December 31, 2016 | ||||||||||||||
|
| Amortization |
| Initial |
| Accumulated |
| Net |
| Initial |
| Accumulated |
| Net | ||||||
|
| Period |
| Cost |
| Amortization |
| Balance |
| Cost |
| Amortization |
| Balance | ||||||
Franchise agreements |
| 12.1 |
| $ | 197,977 |
| $ | (98,343) |
| $ | 99,634 |
| $ | 224,167 |
| $ | (115,027) |
| $ | 109,140 |
Other intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software (a) |
| 4.5 |
| $ | 13,902 |
| $ | (8,177) |
| $ | 5,725 |
| $ | 13,207 |
| $ | (7,154) |
| $ | 6,053 |
Trademarks |
| 14.1 |
|
| 3,153 |
|
| (1,921) |
|
| 1,232 |
|
| 3,102 |
|
| (1,782) |
|
| 1,320 |
Non-compete |
| 10.0 |
|
| 2,500 |
|
| (250) |
|
| 2,250 |
|
| 2,500 |
|
| (62) |
|
| 2,438 |
Total other intangible assets |
| 7.6 |
| $ | 19,555 |
| $ | (10,348) |
| $ | 9,207 |
| $ | 18,809 |
| $ | (8,998) |
| $ | 9,811 |
| | | | | | | | | | | | | | | | | | | | | |
| | | Weighted |
| | |
| | |
| | |
| | |
| | |
| | |
| | | Average | | As of September 30, 2021 | | As of December 31, 2020 | ||||||||||||||
| | | Amortization | | Initial | | Accumulated | | Net | | Initial | | Accumulated | | Net | ||||||
| | | Period | | Cost | | Amortization | | Balance | | Cost | | Amortization | | Balance | ||||||
Franchise agreements | | | 12.6 | | $ | 272,028 | | $ | (118,362) | | $ | 153,666 | | $ | 176,354 | | $ | (106,552) | | $ | 69,802 |
Other intangible assets: | | | | | | | | | | | | | | | | | | | | | |
Software (a) | | | 4.4 | | $ | 49,119 | | $ | (27,012) | | $ | 22,107 | | $ | 44,389 | | $ | (18,926) | | $ | 25,463 |
Trademarks | | | 8.3 | | | 2,352 | | | (1,471) | | | 881 | | | 2,325 | | | (1,274) | | | 1,051 |
Non-compete agreements | | | 5.0 | | | 12,897 | | | (3,868) | | | 9,029 | | | 3,920 | | | (2,814) | | | 1,106 |
Training materials | | | 5.0 | | | 2,400 | | | (1,480) | | | 920 | | | 2,400 | | | (1,120) | | | 1,280 |
Other | | | 5.3 | | | 1,670 | | | (888) | | | 782 | | | 1,670 | | | (601) | | | 1,069 |
Total other intangible assets | | | 4.7 | | $ | 68,438 | | $ | (34,719) | | $ | 33,719 | | $ | 54,704 | | $ | (24,735) | | $ | 29,969 |
(a) |
| As of September 30, |
Amortization expense was $7.9 million and $6.3 million for the three months ended September 30, 20172021 and 2016 was $4,066,000 and $3,666,000,2020, respectively. Amortization expense was $20.6 million and $17.8 million for the nine months ended September 30, 20172021 and 2016 was $15,055,000 and $10,836,000, respectively. Amounts2020. The prior year amounts have been adjusted to reflect the immaterial correction of amortization for the three and nine months ended September 30, 2017 include the measurement period adjustment of $765,000. Refercertain acquired Independent Regions. See Note 13, Immaterial Corrections to Note 5, Acquisitions and Dispositions Prior Period Financial Statementsfor additional information.
As17
The estimated future amortization expense for the next five years related to intangible assets is as followsincludes the estimated amortization expense associated with the Company’s intangible assets assumed with the Company’s acquisitions (in thousands):
|
|
|
|
As of September 30, 2017: |
|
|
|
Remainder of 2017 |
| $ | 4,031 |
2018 |
|
| 15,685 |
2019 |
|
| 15,522 |
2020 |
|
| 15,293 |
2021 |
|
| 14,786 |
|
| $ | 65,317 |
| | | |
As of September 30, 2021 | | | |
Remainder of 2021 | | $ | 8,749 |
2022 | | | 32,598 |
2023 | | | 28,011 |
2024 | | | 24,569 |
2025 | | | 20,163 |
Thereafter | | | 73,295 |
| | $ | 187,385 |
17
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The following table presents changes to goodwill for the period from January 1, 2017 to September 30, 2017by reportable segment (in thousands):
|
|
|
|
Balance, January 1, 2017 |
| $ | 126,633 |
Change in purchase price allocations for 2016 acquisitions |
|
| (3,865) |
Effect of changes in foreign currency exchange rates |
|
| 245 |
Balance, September 30, 2017 |
| $ | 123,013 |
| | | | | | | | | |
| | Real Estate | | Mortgage | | Total | |||
Balance, January 1, 2021 | | $ | 146,725 | | $ | 18,633 | | $ | 165,358 |
Purchase price adjustments | | | 133 | | | — | | | 133 |
Goodwill recognized from acquisitions | | | 108,269 | | | — | | | 108,269 |
Impairment charge | | | (5,123) | | | — | | | (5,123) |
Effect of changes in foreign currency exchange rates | | | (247) | | | — | | | (247) |
Balance, September 30, 2021 | | $ | 249,757 | | $ | 18,633 | | $ | 268,390 |
Impairment charge - goodwill
We assess goodwill for impairment at least annually or whenever an event occurs, or circumstances change that would indicate impairment may have occurred at the reporting unit level. Reporting units are driven by the level at which segment management reviews operating results.
During the third quarter of 2021, the Company identified impairment indicators associated with its First Leads, Inc. (“First”) reporting unit in the Real Estate segment, primarily lower than expected adoption rates of the technology in the third quarter and lower expected adoption rates estimated for the fourth quarter. This also resulted in a downward revision to the long-term adoption rate, which is a significant input in calculating the fair value of the reporting unit. Because of this, the Company performed an interim impairment test on the goodwill at its First reporting unit, as of August 31, 2021, using a discounted cash flow method. As a result of this impairment test, the Company recorded a non-cash impairment charge of $5.1 million, recorded in “Settlement and impairment charges” in the accompanying Condensed Consolidated Statements of Income (Loss).
7. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
|
|
|
|
|
| |||||||
|
| September 30, |
| December 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
| | | | | | | ||||||
| | September 30, 2021 | | December 31, 2020 | ||||||||
Marketing Funds (a) | | $ | 58,481 | | $ | 48,452 | ||||||
Accrued payroll and related employee costs |
| $ | 5,205 |
| $ | 7,035 | | | 18,370 | | | 10,692 |
Accrued taxes |
|
| 1,219 |
| 1,554 | | | 1,712 | | | 2,491 | |
Accrued professional fees |
|
| 1,894 |
| 1,382 | | | 4,232 | | | 1,806 | |
Other |
|
| 6,984 |
|
| 3,297 | | | 8,398 | | | 5,130 |
|
| $ | 15,302 |
| $ | 13,268 | ||||||
| | $ | 91,193 | | $ | 68,571 |
(a) |
|
|
18
8. Debt
Debt, net of current portion, consists of the following (in thousands):
|
|
|
|
| ||||||||
|
| September 30, |
| December 31, | ||||||||
|
| 2017 |
| 2016 | ||||||||
2016 Senior Secured Credit Facility |
| $ | 232,650 |
| $ | 234,412 | ||||||
| | | | | | | ||||||
| | September 30, 2021 | | December 31, 2020 | ||||||||
Senior Secured Credit Facility | | $ | 458,850 | | $ | 225,013 | ||||||
Other long-term financing | | | — | | | 78 | ||||||
Less unamortized debt issuance costs |
| (1,854) |
| (2,076) | | | (4,329) | | | (882) | ||
Less unamortized debt discount costs |
| (1,352) |
| (1,516) | | | (1,531) | | | (644) | ||
Less current portion |
|
| (2,350) |
|
| (2,350) | | | (4,600) | | | (2,428) |
|
| $ | 227,094 |
| $ | 228,470 | ||||||
| | $ | 448,390 | | $ | 221,137 |
Maturities of debt are as follows (in thousands):
|
|
|
As of September 30, 2017: |
|
|
Remainder of 2017 | $ | 588 |
2018 |
| 2,350 |
2019 |
| 2,350 |
2020 |
| 2,350 |
2021 |
| 2,350 |
Thereafter |
| 222,662 |
| $ | 232,650 |
| | | |
As of September 30, 2021 | | | |
Remainder of 2021 | | $ | 1,150 |
2022 | | | 4,600 |
2023 | | | 4,600 |
2024 | | | 4,600 |
2025 | | | 4,600 |
Thereafter | | | 439,300 |
| | $ | 458,850 |
Senior Secured Credit Facility
18
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
On December 15, 2016, RE/MAX, LLC, entered into a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto (the “2016 Senior Secured Credit Facility”), whichJuly 21, 2021, the Company amended and restated a prior credit agreement (the “2013 Senior Secured Credit Facility”). The 2016its Senior Secured Credit Facility consiststo fund the acquisition of INTEGRA and refinance its existing facility. The revised facility provides for a $235,000,000seven-year $460.0 million term loan facility which matures on December 15, 2023July 21, 2028, and a $10,000,000$50.0 million revolving loan facility which if drawn, must be repaid on December 15, 2021. July 21, 2026. The Senior Secured Credit Facility requires RE/MAX, LLC to repay term loans at $1.2 million per quarter.
Borrowings under the term loans and revolving loans if any outstanding, accrue interest, at the Company’s option on (a) LIBOR, (as long asprovided LIBOR is notshall be no less than the floor of 0.75%)0.50% plus a maximuman applicable margin of 2.75%2.50% and, provided further that such rate shall be adjusted for reserve requirements for eurocurrency liabilities, if any (the “LIBOR Rate”) or (b) the greatest of (i) the prime rate as quoted by the Wall Street Journal, (ii) the NYFRB Rate (as defined in the Senior Secured Credit Facility) plus 0.50% and (iii) the one-month Eurodollar Rate plus 1.00%, (such greatest rate, the “ABR”) plus, in each case, an applicable margin of 1.50%. As of September 30, 2017,2021, the interest rate was 4.08%.
Mandatory principal payments of approximately $588,000 are due quarterly until the facility matures on December 15, 2023. RE/MAX, LLC may make optional prepayments on the term loan facility at any time without penalty; however, no such optional prepayments were made during the nine months ended September 30, 2017.was 3.0%.
Under the 2013 Senior Secured Credit Facility, RE/MAX, LLC was required to make additional principal payments out of excess cash flow. RE/MAX, LLC made an excess cash flow prepayment of $12,727,000 on March 31, 2016. RE/MAX, LLC accounted for the mandatory principal excess cash flow prepayment as an early extinguishment of debt and recorded a loss during the nine months ended September 30, 2016 of $136,000 related to unamortized debt discount and issuance costs.
Under the 2016 Senior Secured Credit Facility no additional mandatory prepayment and commitment reduction is required if the total leverage ratio as defined by the 2016 Senior Secured Credit Facility as of the last day of such fiscal year is less than 2.75 to 1.0. RE/MAX, LLC’s total leverage ratio was less than 2.75 to 1.0 as of September 30, 2017, and RE/MAX, LLC does not expect to make an excess cash flow principal prepayment within the next 12-month period.
As of September 30, 2017, RE/MAX, LLC had no revolving loans outstanding under our 2016 Senior Secured Credit Facility. Whenever amounts are drawn under the revolving line of credit, the 2016 Senior Secured Credit Facility requires compliance with a leverage ratio and an interest coverage ratio. A commitment fee of 0.5% per annum (subject to reductions) accrues on the amount of unutilized revolving line of credit. As of the date of this report, 0 amounts were drawn on the revolving line of credit.
9. Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should beis determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering assumptions, the Company follows a three-tier fair value hierarchy, which is described in detail in the Company’s2020 Amendment No. 1 to Annual Report on Form 10-K for the year-ended December 31, 2016. 10-K/A.
19
A summary of the Company’s liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2021 | | As of December 31, 2020 | ||||||||||||||||||||
| | Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | | Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | ||||||||
Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
Motto contingent consideration (a) | | $ | 5,200 | | $ | — | | $ | — | | $ | 5,200 | | $ | 4,750 | | $ | — | | $ | — | | $ | 4,750 |
Gadberry contingent consideration (a) | | | 1,470 | | | — | | | — | | | 1,470 | | | 1,590 | | | — | | | — | | | 1,590 |
Contingent consideration (a) | | $ | 6,670 | | $ | — | | $ | — | | $ | 6,670 | | $ | 6,340 | | $ | — | | $ | — | | $ | 6,340 |
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| Level 1 |
| Level 2 |
| Level 3 |
| Fair Value |
| Level 1 |
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Liabilities |
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Contingent consideration |
| $ | 6,650 |
| $ | - |
| $ | - |
| $ | 6,650 |
| $ | 6,400 |
| $ | - |
| $ | - |
| $ | 6,400 |
(a) | Recorded as a component of “Accrued liabilities” and “Other liabilities, net of current portion” in the accompanying Condensed Consolidated Balance Sheets. |
The Company is required to pay additional purchase consideration totaling eight percent8% of gross revenues generatedreceipts collected by Motto each year for the ten years following the acquisition date(the “Revenue Share Year”) through September 30, 2026, with no limitation as to the maximum payout. The considerationannual payment is payable followingrequired to be made within 120 days of the end of each anniversary, beginning October 1, 2017 and ending September 30, 2026.Revenue Share Year. The acquisition date fair value of the contingent purchase consideration represents the forecasted discounted cash payments that the Company expects to pay Full House with respect to the acquired business. The Company measures this liability each reporting period and recognizes changes in fair value, if any, in earnings of the Company. Any changes are included
19
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income.pay. Increases or decreases in the fair value of the contingent purchase consideration can result from changes in discount rates as well as the timing and amount of forecasted cash payments derived from anticipated gross revenues. The forecasted revenue growth assumption that is most sensitive is the assumed franchise sales count for which the forecast assumes between 70 and 80 franchises sold annually. This assumption is based on historical sales and an assumption of growth over time. A 10% reduction in the number of franchise sales would decrease the liability by $0.2 million. A 1% change to the discount rate applied to the forecast changes the liability by approximately $0.1 million. As of September 30, 2021, contingent consideration also includes an amount recognized in connection with the acquisition of Gadberry (see Note 6, Acquisitions, for more information on this acquisition). The Company measures these liabilities each reporting period and recognizes changes in fair value, if any, in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income (Loss).
The table below presents a reconciliation of all assets and liabilities of the Company measured at fair value on a recurring basis using significant unobservable inputs for the period from January 1, 2017 to September 30, 2017contingent consideration (in thousands):
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| Fair Value of Contingent Consideration Liability | |
Balance at January 1, 2017 |
| $ | 6,400 |
Fair value adjustments |
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| 250 |
Balance at September 30, 2017 |
| $ | 6,650 |
| | | |
| | Total | |
Balance at January 1, 2021 | | $ | 6,340 |
Fair value adjustments | | | 330 |
Balance at September 30, 2021 | | $ | 6,670 |
The Company assesses categorization of assets and liabilities by level at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfer. There were no transfers between Levels I, II and III during the nine months ended September 30, 2017.
The following table summarizes the carrying value and estimated fair value of the 2016 Senior Secured Credit Facility as of September 30, 2017 and December 31, 2016 (in thousands):
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| 2016 | ||||||||
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| Fair Value Level 2 |
| Carrying Amount |
| Fair Value Level 2 | ||||
Senior Secured Credit Facility |
| $ | 229,444 |
| $ | 233,522 |
| $ | 230,820 |
| $ | 233,240 |
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| | September 30, 2021 | | December 31, 2020 | ||||||||
| | Carrying |
| Fair Value |
| Carrying |
| Fair Value | ||||
Senior Secured Credit Facility | | $ | 452,990 | | $ | 457,129 | | $ | 223,487 | | $ | 223,887 |
10. Income Taxes
RE/MAX Holdings is subject to U.S. federal and state income taxation on its allocable portion of the income of RMCO. The “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016(Loss) is based on an estimate of the Company’s annualized effective income tax rate. The Company’s effective tax rate, includes a rate benefit attributable toexcept for the fact that the Company’s subsidiaries operate as a series of limited liability companies which are not themselves subject to federal income tax. Accordingly, the portionloss on settlement of the Company’s subsidiaries’ earnings attributablepre-existing master franchise contracts of $40.5 million (as discussed in Note 5, Acquisitions), which was evaluated discretely. This loss has 0 tax provision under GAAP; hence, the year-to-date tax provision is an expense (as opposed to a benefit) for the non-controlling interest are not subjectnine months ended September 30, 2021, even though the Company has a pre-tax year-to-date loss.
Uncertain Tax Positions
The company has recognized uncertain tax position liabilities and related tax expense for certain foreign tax matters, along with a receivable for amounts of such foreign taxes expected to be creditable in the U.S. federal and stateBased upon the settlement of certain of these matters, the Company adjusted its liability to reflect the amounts ultimately paid during the three months ended June 30, 2021. This resulted in a reduction to income tax asexpense of $1.4 million (including interest and penalties) in the income is passed throughCondensed Consolidated Statements of Income (Loss) for the three months ended June 30, 2021.
20
During the three months ended September 30, 2021 and in connection with the INTEGRA acquisition, the Company assumed an uncertain tax position related to certain U.S. tax matters and also recorded a largely offsetting related indemnification asset. See Note 5 for further details.
While the non-controlling interest holders. TheCompany believes the liabilities recognized for uncertain tax positions are adequate to cover reasonable expected tax risks, there can be no assurance that an issue raised by a tax authority will be resolved at a cost that does not exceed the liability recognized.
Uncertain tax position liabilities represent the aggregate tax effect of differences between the tax return positions and the amounts otherwise recognized in the consolidated financial statements and are recognized in “Income taxes payable” in the Condensed Consolidated Balance Sheets. Interest and penalties are accrued on the uncertain tax positions and included in the “Provision for income taxes” is comprisedin the accompanying Consolidated Statements of a provision for income taxes attributable to RE/MAX Holdings and to entities other than RE/MAX Holdings. The provision for income taxes attributable to RE/MAX Holdings is primarily comprised of U.S. federal and state income taxes on its proportionate shareIncome.
A reconciliation of the pass-through income from RMCO. However, it also includes its share of taxes imposed directly on RE/MAX, LLC, related primarily to tax liabilities in certain foreign jurisdictions. The provision for income taxes attributable tobeginning and ending amount, excluding interest and penalties is as follows:
| | | | | | |
| | As of September 30, | ||||
| | 2021 | | 2020 | ||
Balance, January 1 | | $ | 5,300 | | $ | 4,810 |
Increases related to prior period tax positions | | | 96 | | | 338 |
Decrease related to prior year tax positions | | | (815) | | | — |
Increase related to tax positions from acquired companies | | | 1,587 | | | — |
Settlements | | | (3,776) | | | — |
Foreign currency transaction gains/losses | | | 351 | | | — |
Balance, September 30 | | $ | 2,743 | | $ | 5,148 |
Of the non-controlling interest represents its share of taxes imposed on RE/MAX, LLC related to tax liabilities primarily in certain foreign jurisdictions.
The Company recognizes the effect of incomeCompany’s remaining uncertain tax positions, only if those positions are more likely than not$1.9 million have a reasonable possibility of being sustained. Recognized income tax positions are measured atsettled within the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. As of September 30, 2017, the Company does not believe it has any significant uncertain tax positions.next 12 months.
20
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
The Company and its subsidiaries file, or will file, income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. RMCO is not subject to federal income taxes as it is a flow-through entity, however, RMCO is required to file an annual U.S. Return of Partnership Income.
11. Equity-Based Compensation
The Company’s Board of Directors adoptedEmployee equity-based compensation expense under the RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan (the “2013 Incentive“Incentive Plan”), under which 3,576,466 shares are currently authorized. (See below for shares available for grant at September 30, 2017.) The 2013 Incentive Plan provides for the grant of incentive stock options to the Company’s employees, and for the grant of shares of RE/MAX Holdings Class A common stock, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) which may have time-based or performance-based vesting criteria, dividend equivalent rights, cash-based awards and any combination thereof to employees, directors and consultantsnet of the Company.
The Company recognizes equity-based compensation expenseamount capitalized in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income. The Company recognizes corporate income tax benefits relating to the exercise of options and vesting of restricted stock units in “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income.
Employee stock-based compensation expense under the Company’s 2013 Incentive Plan wasinternally developed software, is as follows (in thousands):
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| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Expense from time-based awards (a)(b) | | $ | 3,756 | | $ | 3,040 | | $ | 17,321 | | $ | 7,535 |
Expense from performance-based awards (a)(c) | | | 3,188 | | | 374 | | | 4,855 | | | 844 |
Expense from bonus to be settled in shares (d) | | | 2,064 | | | — | | | 5,139 | | | — |
Equity-based compensation capitalized | | | — | | | — | | | — | | | (32) |
Equity-based compensation expense | | $ | 9,008 | | $ | 3,414 | | $ | 27,315 | | $ | 8,347 |
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| 2016 |
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| 2016 | ||||
Expense from Time-based RSUs | $ | 750 |
| $ | 501 |
| $ | 1,892 |
| $ | 1,812 |
Expense from Performance-based RSUs |
| 118 |
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| - |
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| 269 |
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Equity-based compensation expense |
| 868 |
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| 501 |
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| 2,161 |
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| 1,812 |
Tax benefit from equity-based compensation |
| (191) |
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| (110) |
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| (475) |
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| (398) |
Excess tax benefit from equity-based compensation |
| - |
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| - |
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| (324) |
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| (201) |
Net compensation cost | $ | 677 |
| $ | 391 |
| $ | 1,362 |
| $ | 1,213 |
Time-based Restricted Stock Units
Time-based RSUs granted under the 2013 Incentive Plan are valued using the Company’s closing stock price on the date of grant. Grants awarded to the Company’s Board of Directors generally vest over a one year period. Grants awarded to the Company’s employees generally vest equally in annual installments over a three year period. Compensation expense is recognized on a straight line basis over the vesting period.
(a) | Includes awards granted to booj, First, wemlo and Gadberry employees and former owners at the time of acquisition. |
(b) | During the nine months ended September 30, 2021, the Company recognized $5.5 million of expense as a result of the acceleration of significant grants that were issued to 2 employees of an acquired company who departed during the first quarter of 2021. |
(c) | Expense recognized for performance-based awards is re-assessed each quarter based on expectations of achievement against the performance conditions. The acquisition of INTEGRA significantly increased the expected performance against the revenue performance condition resulting in an increase in expense for those awards. |
(d) | A portion of the annual corporate bonus earned is to be settled in shares. These amounts are recognized as “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets and are not included in “Additional paid-in capital” until the shares are issued. |
21
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Time-based Restricted Stock
The following table summarizes equity-based compensation activity related to time-based RSUs as ofrestricted stock units and for the nine months ended September 30, 2017: restricted stock awards:
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| Time-based restricted stock units |
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| Weighted average grant date fair value per share |
Balance, January 1, 2017 |
| 127,011 |
| $ | 33.00 |
Granted |
| 43,450 |
| $ | 55.45 |
Shares vested (including tax withholding)(a) |
| (58,426) |
| $ | 33.03 |
Forfeited |
| (2,935) |
| $ | 40.70 |
Balance, September 30, 2017 |
| 109,100 |
| $ | 41.71 |
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| | Shares | | Weighted average | |
Balance, January 1, 2021 | | 1,018,008 | | $ | 36.74 |
Granted | | 268,858 | | $ | 39.16 |
Shares vested (including tax withholding) (a) | | (498,446) | | $ | 37.78 |
Forfeited | | (20,545) | | $ | 38.05 |
Balance, September 30, 2021 | | 767,875 | | $ | 36.88 |
(a) |
| Pursuant to the terms of the |
AtAs of September 30, 2017,2021, there was $3,001,000$17.6 million of total unrecognized time-based RSU expense, all of which is related to unvested awards.expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 1.63 years for time-based1.6 years.
Performance-based Restricted Stock
As discussed in more detail in the Company’s Amendment No.1 to Annual Report on Form 10-K/A, the Company has historically issued performance-based restricted stock units.
Performance-based Restricted Stock Units
Performance-based RSUs granted under the 2013 Incentive Plan are stock-based awards in which the number of shares ultimately received depends on the Company’s achievement of a specified(PSUs) that contained revenue as well as the Company’sperformance targets and relative total shareholder return (“TSR”) relative to the TSR of all companies in the S&P SmallCap 600 Index(rTSR) targets, both measured over a three year3-year performance period. The numberIn 2021, the Company changed the structure of its PSUs by issuing awards with only a revenue target and eliminated the rTSR component. Additionally, the revenue target is being measured over 3 distinct 1-year performance periods, with the target determined near the beginning of each performance period. As a result, the target for 2021 has been determined but will be determined subsequently for 2022 and 2023. These awards cliff-vest at the end of a 3-year period, although the amount of shares that couldmay be issued range from 0% to 150% ofearned is fixed after each 1-year performance period ends and performance against target for that period is measured. As with prior revenue performance awards, the participant’s target award. Performance-based RSUs are valued on the date of grant using a Monte Carlo simulation for the TSR element of the award. The Company’s expense will be adjusted based on the estimated achievement of revenue versus each target. Earned performance-based RSUs cliff-vest atBecause the end ofperformance targets for the three year performance period. Compensation expense is recognized over1-year periods in 2022 and 2023 have not yet been determined, they do not yet have a grant date under GAAP and are therefore excluded from the vesting period based on the Company’s estimated performance. table below.
The following table summarizes equity-based compensation activity related to performance-based RSUs as of and for the nine months ended September 30, 2017: restricted stock units:
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| Performance-based restricted stock units |
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| Weighted average grant date fair value per share |
Balance, January 1, 2017 |
| — |
| $ | — |
Granted (a) |
| 33,961 |
| $ | 57.88 |
Forfeited |
| (1,155) |
| $ | 57.88 |
Balance, September 30, 2017 |
| 32,806 |
| $ | 57.88 |
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| | Shares | | Weighted average | |
Balance, January 1, 2021 | | 281,735 | | $ | 32.34 |
Granted (a) | | 56,716 | | $ | 40.07 |
Forfeited | | (2,843) | | $ | 28.77 |
Balance, September 30, 2021 | | 335,608 | | $ | 33.68 |
(a) |
| Represents the total participant target award. |
AtAs of September 30, 2017,2021, there was $1,060,000$6.6 million of total unrecognized performance-based RSU expense, all of which is related to unvested awards.expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 2.25 years for performance-based RSUs.
After giving effect to all outstanding awards (assuming maximum achievement of performance goals for performance-based awards), there were 2,396,156 additional shares available for the Company to grant under the 2013 Incentive Plan as of September 30, 2017.
1.7 years.
22
12. Commitments and Contingencies
A number of putative class action complaints are pending against the National Association of Realtors (“NAR”), Realogy Holdings Corp., HomeServices of America, Inc., RE/MAX, HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
12. Leadership Changes
On January 7, 2016, the Company’s former Chief Financial OfficerLLC and Chief Operating Officer entered into a separation and transition agreement (the “Separation and Transition Agreement”) pursuant to which he separated from the Company effectiveKeller Williams Realty, Inc. The first was filed on March 31, 2016. The Company incurred a total cost of $1,043,000, including $331,000 of equity-based compensation expense, which was recorded to “Selling, operating and administrative expenses”6, 2019, by plaintiff Christopher Moehrl in the accompanying Condensed Consolidated StatementsUnited States District Court for the Northern District of Income duringIllinois. The second was filed in the nine months ended September 30, 2016. There were no such expenses incurred during the nine months ended September 30, 2017.
On December 31, 2014, the Company’s former Chief Executive Officer retired and pursuant to the terms of the Separation and Release of Claims Agreementsame court on April 15, 2019, by plaintiff Sawbill Strategic, Inc. These two actions have now been consolidated (the “Separation Agreement”“Moehrl Action”), the Company is required to provide severance. Similar actions have been filed in federal courts: a) by Joshua Sitzer and other related benefits over a 36-month period. The Company recorded a liability, measured at its estimated fair value, for payments that will be made under the Separation Agreement, with a corresponding charge to “Selling, general and administrative expenses.” The Company incurred a total cost of $3,581,000, including $1,007,000 of equity-based compensation expense related to this retirement in 2014.
The following table presents a rollforward of the estimated fair value liability for the period from January 1, 2017 to September 30, 2017 established for the aforementioned leadership changes (in thousands):
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Balance, January 1, 2017 |
| $ | 964 |
Accretion |
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| 17 |
Cash payments |
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| (783) |
Balance, September 30, 2017 |
| $ | 198 |
13. Commitments and Contingencies
Commitments
The Company leases offices and equipment under noncancelable leases, subject to certain provisions for renewal options and escalation clauses.
On August 16, 2017, the Company entered into a sublease agreement for certain office space at its corporate headquarters where the Company’s expected costs related to the subleased space, including lease payments the Company will make to its lessor, exceed the anticipated revenue, and as a result, the Company recorded a loss of $3,725,000 during the three and nine months ended September 30, 2017. On September 11, 2017, the Company amended an existing sublease agreement for certain office space at its corporate headquarters. The existing liability was reduced, resulting in a net gain of $294,000 during the three and nine months ended September 30, 2017. As of September 30, 2017, the liability related to the aforementioned sublease agreements was included in “Other liabilities, net of current portion”plaintiffs in the accompanying Condensed Consolidated Balance Sheets.
Contingencies
In connection withWestern District of Missouri (the “Sitzer Action”); b) by Mark Rubenstein and Jeffery Nolan in the purchaseDistrict of Full House,Connecticut (the “Rubenstein Action”); c) by plaintiff Jennifer Nosalek in the District of Massachusetts (the “Nosalek Action”); and d) by plaintiff Judah Leeder in the Northern District of Illinois (the “Leeder Action”). The complaints make substantially similar allegations and seek substantially similar relief. For convenience, all of these lawsuits are collectively referred to as described in Note 5, Acquisitions and Dispositionsthe Company entered into an arrangement to pay additional purchase consideration based on Motto’s future gross revenues, excluding certain fees, over the next ten years. As of September 30, 2017, this liability was estimated to be $6,650,000.
In connection with the sale of the assets and liabilities related to the Company’s previously owned brokerages, the Company entered into three Assignment and Assumption of Lease Agreements (the “Assignment Agreements”) pursuant to which the Company assigned its obligations under and rights, title and interest in 21 leases to the respective
23
RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
purchasers. For certain leases, the Company remains secondarily liable for future lease payments through July 2021 under the respective lease agreements and accordingly, as of September 30, 2017, the Company has outstanding lease guarantees of $4,284,000. This amount represents the maximum potential amount of future payments under the respective lease guarantees.“Moehrl-related suits.” In the event of default byMoehrl Action, the purchaser, the indemnity and default clauses in the Assignment Agreements govern the Company’s ability to pursue and recover damages incurred, if any, against the purchaser.
Litigation
The Company is subject to litigation claims arising in the ordinary course of business. The Company believesplaintiffs allege that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable and for related legal costs as incurred. The Company does not reduce these liabilities for potential insurance or third-party recoveries.
On October 7, 2013, RE/MAX Holdings acquired the net assets, excluding cash, of Tails for consideration paid of $20,175,000. Following earlier litigation that was dismissed, several shareholders of Tails filed a complaint entitled Robert B. Fisher, Carla L. Fisher, Bradley G. Rhodes and James D. Schwartz v. Gail Liniger, Dave Liniger, Bruce Benham, RE/MAX Holdings, Inc. and Tails Holdco, Inc. in Denver District Court ("Tails II"). On February 13, 2018, the parties signed a formal Settlement Agreement and Mutual General Release resulting in the Company recording a charge of $2,550,000 in “Selling, operating and administrative expenses” in the accompanying Consolidated Statements of Income during the nine months ended September 30, 2017. On February 27, 2018 the Company received $1,950,000 from its insurance carriers as reimbursement of attorneys’ fees and a portion of the settlement. On February 28, 2018, the Company paid $4,500,000 to satisfy the terms of the Settlement Agreement. As a result of the settlement, the litigation was dismissed with prejudice on March 1, 2018.
Management of the Company believes no other such litigation matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on the Company's financial condition, results of operations and cash flows.
14. Related-Party Transactions
The majority stockholders of RIHI, including the Company’s current Chairman and Co-Founder and the Company’s Vice Chair and Co-Founder have made and continueNAR rule requires brokers to make a golf course they own availableblanket, non-negotiable offer of buyer broker compensation when listing a property, resulting in inflated costs to sellers in violation of federal antitrust law. They further allege that certain defendants use their agreements with franchisees to require adherence to the Company for business purposes.NAR rule in violation of federal antitrust law. Amended complaints added allegations regarding buyer steering and non-disclosure of buyer-broker compensation to the buyer. While similar to the Moehrl Action, various other lawsuits: allege violations of the Missouri Merchandising Practices Act (the Sitzer Action); include a multiple listing service (MLS) defendant (the Nosalek Action); allege state antitrust violations (the Sitzer Action and Nosalek Action); allege harm to home buyers rather than sellers (the Rubenstein Action and Leeder Action); allege unjust enrichment (the Leeder Action); and/or allege violations of the Racketeer Influenced and Corrupt Organizations Act (RICO) rather than antitrust law (the Rubenstein Action). Among other requested relief, plaintiffs seek damages against the defendants and injunctive relief. In July 2021, the court granted RE/MAX, LLC’s motion to dismiss the Rubenstein Action and ordered the case dismissed with prejudice. The Company usedintends to vigorously defend against all remaining claims. The Company may become involved in additional litigation or other legal proceedings concerning the golf course and related facilities for business purposes at minimal chargesame or similar claims. We are unable to predict whether resolution of these matters would have a material effect on our financial position or results of operations.
On April 9, 2021, a putative class action claim was filed in both 2017 and 2016. Additionally,the Federal Court of Canada against the Toronto Regional Real Estate Board (“TRREB”), The Canadian Real Estate Association (“CREA”), RE/MAX Ontario-Atlantic Canada Inc. (“RE/MAX OA”), which was acquired by the Company recorded expensein July 2021 (see Note 5, Acquisitions, for additional information), Century 21 Canada Limited Partnership, Brookfield Asset Management Inc., Royal Lepage Real Estate Services Ltd., Homelife Realty Services Inc., Right At Home Realty Inc., Forest Hill Real Estate Inc., Harvey Kalles Real Estate Ltd., Sotheby's International Realty Canada, Chestnut Park Real Estate Limited, Sutton Group Realty Services Ltd. and IPRO Realty Ltd. by the putative representative plaintiff, Mark Sunderland (the “Plaintiff”). The Plaintiff alleges that the Defendants and their co-conspirators conspired, agreed or arranged with each other to fix, maintain, increase, control, raise, or stabilize the rate of $502,000real estate buyers’ brokerages’ and $204,000 for the valuesalespersons’ commissions in respect of the benefits providedpurchase and sale of properties listed on TRREB’s multiple listing service system (the “Toronto MLS”); that the Defendants and their co-conspirators acted in furtherance of their conspiracy, agreement or arrangement to Company personnel forfix, maintain, increase, control, raise, or stabilize the complimentary userate of real estate buyers’ brokerages’ and salespersons’ commissions in respect of the golf course duringpurchase and sale of properties listed on the three months ended September 30, 2017Toronto MLS; and 2016, respectively,violation of Part VI of the Competition Act, R.S.C. 1985, c. C-34 (“Competition Act”). Among other requested relief, Plaintiff seeks damages against the defendants and $502,000injunctive relief. RE/MAX OA denies the allegations in the claim and $454,000 duringintends to vigorously defend the nine months ended September 30, 2017 and 2016, respectively, with an offsetting increase in additional paid in capital. See Note 15, action.
13. Immaterial Corrections to Prior Period Financial Statements
During the third quarter of 2021, in analyzing the purchase accounting with respect to the acquisition of INTEGRA, the Company determined that a portion of the acquisition purchase price was attributable to a loss on the settlement of the pre-existing master franchise agreements in which the pre-acquisition royalty rates paid by INTEGRA were below the current market rate. This is in contrast to prior Independent Region acquisitions where the Company allocated the entire purchase price to acquired assets, primarily goodwill and other identifiable intangible assets. The Company has determined this same conclusion applied to certain other Independent Regions acquired between 2007 and 2017 where the region paid a royalty rate below the market rate as of the acquisition date. In these circumstances, the Company failed to recognize a loss on settlement of the master franchise contract in the year of acquisition, which caused overstated goodwill and identifiable intangible assets and generally overstated levels of intangible asset amortization expense subsequent to acquisition. The control deficiencies that led to these errors were deemed to constitute a material weakness in the Company’s internal control over financial reporting.
Accordingly, management is correcting the relevant consolidated financial statements and related footnotes for further discussion regarding the amounts recorded for theunaudited three and nine monthsmonth period ended September 30, 2016.
The Company provides services, such as accounting, legal, marketing, technology, human resources2020 within these condensed consolidated financial statements. Management has evaluated the materiality of these misstatements based on an analysis of quantitative and public relations services, to certain affiliated entities (primarily the advertising funds), and it allows these companies to share its leased office space. During the three months ended September 30, 2017 and 2016, the total amounts allocated for services rendered and rent for office space provided on behalf of affiliated entities were $930,000 and $507,000, respectively. During the nine months ended September 30, 2017 and 2016, the total amounts allocated for services rendered and rent for office space provided on behalf of affiliated entities were $2,409,000 and $1,459,000, respectively. Amounts are generally paid within 30 days and no amounts were outstanding at September 30, 2017 or December 31, 2016.
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Related party advertising funds had current outstanding amounts due from the Company of $83,000 and $145,000 as of September 30, 2017 and December 31, 2016, respectively. Such amounts are included in “Accounts payable to affiliates” in the accompanying Condensed Consolidated Balance Sheets.
15. Immaterial Corrections to Prior Period Financial Statements
The Company identified certain related party transactions with its controlling stockholder that had not been recognized as expenses in previously issued financial statements, the largest being the complimentary use by Company personnel of a golf facility owned by David and Gail Liniger. The value of these benefits is required to be reflected as an expense in the financial statements with a corresponding increase to additional paid in capital. The Company concluded that the omission of the expense associated with these transactions from prior period financial statements, was immaterial to each affected reporting period and therefore amendment of previously filed reports was not required. However, the Company corrected this immaterial errorindividually or in the prior years included herein. These adjustments resulted in an increase in “Selling, operating, and administrative expenses” with a corresponding decrease in “Net Income” in the Condensed Consolidated Statements of Income of $214,000 and $467,000 for the three and nine months ended September 30, 2016, respectively. In addition, these adjustments resulted in an increase to “Additional paid-in capital” of $1,712,000, a decrease to “Retained earnings” of $803,000 and a decrease to “Non-controlling interest” of $909,000 in the Condensed Consolidated Balance Sheets as of December 31, 2016. This adjustment to “Additional paid-in capital” in the Consolidated Balance Sheets includes adjustments of $584,000, $575,000and $553,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
16. Subsequent Events
RE/MAX of Northern Illinois Acquisition
On November 15, 2017, RE/MAX, LLC acquired certain assets of RE/MAX of Northern Illinois, Inc. (“RE/MAX of Northern Illinois”), including the franchise agreements issued by the Company permitting the sale of RE/MAX franchises in Northern Illinois. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used $35,720,000 in cash generated from operations to fund the acquisition. The assets acquired constitute a business and were accounted for using the fair value acquisition method. The total purchase price was allocated to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the total purchase price over the estimated fair value of the identifiable assets acquired was recorded as goodwill. The goodwill recognized is attributable to expected synergies and projected long-term revenue growth. All of the goodwill recognized is tax deductible.aggregate.
The following table summarizesreflects the preliminary allocationimpact of the purchase priceimmaterial correction on the Company’s previously reported consolidated financial statements (in thousands, except per share information):
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| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, 2020 | | September 30, 2020 | ||||||||
| | As previously | | | | As previously | | | ||||
| | reported | | As Adjusted | | reported | | As Adjusted | ||||
Depreciation and amortization | | $ | 6,850 | | $ | 6,730 | | $ | 19,572 | | $ | 19,154 |
Operating income (loss) | | $ | 10,815 | | $ | 10,935 | | $ | 31,260 | | $ | 31,678 |
Income (loss) before provision for income taxes | | $ | 8,775 | | $ | 8,895 | | $ | 24,485 | | $ | 24,903 |
Provision for income taxes | | $ | (2,051) | | $ | (2,057) | | $ | (6,547) | | $ | (6,584) |
Net income (loss) | | $ | 6,724 | | $ | 6,838 | | $ | 17,938 | | $ | 18,319 |
Less: net income (loss) attributable to non-controlling interest | | $ | 3,171 | | $ | 3,221 | | $ | 8,265 | | $ | 8,436 |
Net income (loss) attributable to RE/MAX Holdings, Inc. | | $ | 3,553 | | $ | 3,617 | | $ | 9,673 | | $ | 9,883 |
Net income (loss) attributable to RE/MAX Holdings, Inc. per share of Class A common stock, basic | | $ | 0.20 | | $ | 0.20 | | $ | 0.53 | | $ | 0.55 |
Net income (loss) attributable to RE/MAX Holdings, Inc. per share of Class A common stock, diluted | | $ | 0.19 | | $ | 0.20 | | $ | 0.53 | | $ | 0.54 |
14. Segment Information
The Company operates under the following 4 operating segments: Real Estate, Mortgage, Marketing Funds and booj. Due to quantitative insignificance, the fair valuebooj operating segment does not meet the criteria of assets acquireda reportable segment and liabilities assumedis included in “Other”. Mortgage does not meet the quantitative significance test; however, management has chosen to report results for RE/MAXthe segment as it believes it will be a key driver of Northern Illinoisfuture success for Holdings. Management evaluates the operating results of its segments based upon revenue and adjusted earnings before interest, the provision for income taxes, depreciation and amortization and other non-cash and non-recurring cash charges or other items (“Adjusted EBITDA”). The Company’s presentation of Adjusted EBITDA may not be comparable to similar measures used by other companies. Except for the adjustments identified below in arriving at Adjusted EBITDA, the accounting policies of the reportable segments are the same as those described in the Company’s 2020 Amendment No. 1 to Annual Report on Form 10-K/A.
The following table presents revenue from external customers by segment (in thousands):
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| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Continuing franchise fees | | $ | 30,416 | | $ | 22,799 | | $ | 79,064 | | $ | 61,471 |
Annual dues | | | 8,967 | | | 8,638 | | | 26,508 | | | 26,304 |
Broker fees | | | 19,245 | | | 15,457 | | | 48,651 | | | 35,327 |
Franchise sales and other revenue | | | 5,995 | | | 4,058 | | | 17,845 | | | 16,126 |
Total Real Estate | | | 64,623 | | | 50,952 | | | 172,068 | | | 139,228 |
Continuing franchise fees | | | 2,048 | | | 1,540 | | | 5,729 | | | 3,749 |
Franchise sales and other revenue | | | 572 | | | 366 | | | 1,624 | | | 685 |
Total Mortgage | | | 2,620 | | | 1,906 | | | 7,353 | | | 4,434 |
Marketing Funds fees | | | 23,269 | | | 17,290 | | | 59,456 | | | 46,577 |
Other | | | 485 | | | 925 | | | 1,661 | | | 3,313 |
Total revenue | | $ | 90,997 | | $ | 71,073 | | $ | 240,538 | | $ | 193,552 |
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Franchise agreements | $ | 23,500 |
Goodwill |
| 12,220 |
Total purchase price | $ | 35,720 |
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The following table presents a reconciliation of Adjusted EBITDA by segment to income (loss) before provision for income taxes (in thousands):
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| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Adjusted EBITDA: Real Estate | | $ | 36,292 | | $ | 30,959 | | $ | 92,014 | | $ | 71,008 |
Adjusted EBITDA: Mortgage | | | (1,282) | | | (176) | | | (3,165) | | | (1,495) |
Adjusted EBITDA: Other | | | (56) | | | (448) | | | (238) | | | (730) |
Adjusted EBITDA: Consolidated | | | 34,954 | | | 30,335 | | | 88,611 | | | 68,783 |
Gain (loss) on sale or disposition of assets, net | | | — | | | 11 | | | 10 | | | 33 |
Loss on contract settlement (a) | | | (40,500) | | | — | | | (40,500) | | | — |
Loss on extinguishment of debt (b) | | | (264) | | | — | | | (264) | | | — |
Impairment charge - leased assets (c) | | | — | | | (7,902) | | | — | | | (7,902) |
Impairment charge - goodwill (d) | | | (5,123) | | | — | | | (5,123) | | | — |
Equity-based compensation expense | | | (9,008) | | | (3,414) | | | (27,315) | | | (8,347) |
Acquisition-related expense (e) | | | (9,432) | | | (1,021) | | | (14,303) | | | (1,915) |
Fair value adjustments to contingent consideration (f) | | | (320) | | | (250) | | | (330) | | | 105 |
Interest income | | | 19 | | | 25 | | | 201 | | | 328 |
Interest expense | | | (3,315) | | | (2,159) | | | (7,537) | | | (7,028) |
Depreciation and amortization (g) | | | (8,582) | | | (6,730) | | | (22,236) | | | (19,154) |
Income (loss) before provision for income taxes (g) | | $ | (41,571) | | $ | 8,895 | | $ | (28,786) | | $ | 24,903 |
(a) | Represents the effective settlement of the pre-existing master franchise agreement with INTEGRA that was recognized with the acquisition. See Note 5, Acquisitions for additional information. |
(b) | The loss was recognized in connection with the amended and restated Senior Secured Credit Facility. See Note 8, Debt for additional information. |
(c) | Represents the impairment recognized on a portion of the Company’s corporate headquarters office building in the prior year. See Note 2, Summary of Significant Accounting Policies for additional information. |
(d) | Lower than expected adoption rates of the First technology resulted in downward revisions to long-term forecasts, resulting in an impairment charge to the First reporting unit goodwill. See Note 6, Intangible Assets and Goodwill for additional information. |
(e) | Acquisition-related expense includes personnel, legal, accounting, advisory and consulting fees incurred in connection with the evaluation, due diligence, execution and integration of acquisitions. |
(f) | Fair value adjustments to contingent consideration include amounts recognized for changes in the estimated fair value of the contingent consideration liabilities. See Note 9, Fair Value Measurements for additional information. |
(g) | Prior year amounts have been adjusted to reflect the immaterial correction of amortization for certain acquired Independent Regions. See Note 13, Immaterial Corrections to Prior Period Financial Statements for additional information. |
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RE/MAX HOLDINGS, INC.
Notes to Condensed Consolidated Financial Statements (Continued)
(Unaudited)
Separation Agreement
On February 9, 2018 the Company announced the retirement of the Company’s President. The President will remain with the Company as a Senior Advisor through June 30, 2018. The Company entered into a Separation Agreement with the President, and pursuant to the terms of this agreement, the Company accrued a total cost of approximately $1,900,000 in the first quarter of 2018, which will be paid over a 39- month period.
Booj acquisition
On February 26, 2018, RE/MAX, LLC acquired certain assets of booj, a real estate technology company, for cash consideration of $26,250,000, plus up to $10,000,000 in equity-based compensation to be earned over time. RE/MAX, LLC acquired these assets in order to deliver core technology solutions designed for and with RE/MAX affiliates. The Company used cash generated from operations to fund the acquisition. The assets acquired constitute a business that will be accounted for using the fair value acquisition method. The total purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated fair values. Due to the timing of this acquisition, the Company has not completed a preliminary purchase price allocation.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results of our operations should be read togetherin conjunction with theour condensed consolidated financial statements (“financial statements”) and the relatedaccompanying notes of RE/MAX Holdings, Inc. included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with theour audited consolidated financial statements and the relatedaccompanying notes of RE/MAX Holdings, Inc. included in our most recent Annual Report on Form 10-K10-K/A for the year ended December 31, 2016.2020 (“2020 Amendment No. 1 to Annual Report on Form 10-K/A”), filed with the Securities and Exchange Commission (“SEC”) on December 21, 2021.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended or the Exchange Act.(the “Exchange Act”). These statements are often identified by the use of words such as “believe,” “intend,” “expect,” “estimate,” “plan,” “outlook,” “project,” “anticipate,” “may,” “will,” “would” and other similar words and expressions that predict or indicate future events or trends that are not statements of historical matters. Forward-looking statements include statements related to:
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Table of Contentsthe global coronavirus (“COVID-19”) pandemic on our results of operations, financial condition, liquidity and business, including agent count, revenues, expenses, operations, goodwill, income taxes and allowance for doubtful accounts; support that we offered to our franchisees, its effectiveness, and the implication of this support (or future support) to our revenue; our business model, revenue streams, cost structure, balance sheet, and financial flexibility; management of expenses and capital expenditures in response to the impacts of the COVID-19 pandemic, including the amounts and timing of anticipated reductions; revenue; operating expenses; financial outlook; our plans regarding dividends; non-GAAP financial measures; housing and mortgage market condition and trends; economic and demographic trends; competition; the anticipated benefits our technology initiatives; our anticipated sources and uses of liquidity including for potential acquisitions; future litigation expenses relating to the Moehrl-related suits; our strategic and operating plans and business models including our plans to re-invest in our business; and the expected impact of acquisitions.
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Forward-looking statements should not be read as a guarantee of future performance or results and will not necessarily accurately indicate the times at which such performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and/or management’s good faith belief as of that time with respect to future events and are subject to risks and uncertainties that could cause actual performance or results to differ materiality from those expressed in or suggested by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors,” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our most recent2020 Amendment No. 1 to Annual Report on Form 10-K.10-K/A. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required by law, we do not intend, and we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.
The results of operations discussed in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are those of RE/MAX Holdings, Inc. (“RE/MAX Holdings”) and its consolidated subsidiaries, including RMCO, LLC and its consolidated subsidiaries (“RMCO”), collectively, the “Company,” “we,” “our” or “us.”
Business Overview
We are one of the world’s leading franchisors in the real estate industry, franchisingindustry. We franchise real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages withinin the U.S. under the Motto Mortgage brand (“Motto”) brand. RE/MAX, founded. We also sell ancillary products and services, primarily technology, to our franchise networks and, in 1973, has over 115,000 agents operatingcertain instances, we sell those offerings outside our franchise networks. We organize our business based on the services we provide in over 7,000 offices and a presence in more than 100 countries and territories. RE/MAX has held the number one market share in residential real estate in the U.S. and Canada since 1999 as measured by total residential transaction sides completed by our agents. The RE/MAX brand has the highest level of unaided brand awareness in real estate in the U.S. and Canada according to a 2016 consumer study conducted by MMR Strategy Group,Real Estate, Mortgage and our iconic red, whitecollective franchise marketing operations, known as the Marketing Funds. RE/MAX and blue RE/MAX hot air balloon is oneMotto are 100% franchised—we do not own any of the most recognized real estate logos inbrokerages that operate under these brands. We focus on enabling our networks’ success by providing powerful technology, quality education and training, and valuable marketing to build the world. Motto, founded in 2016, is the first nationwide mortgage brokerage franchise offering in the U.S.
Special Committee Investigation
In October 2017, our Board of Directors appointed a special committee of independent directors (the “Special Committee”) to investigate actions of certain membersstrength of the Company’s senior management including (i) a previously undisclosed loan from David L. Liniger,RE/MAX and Motto brands. We support our franchisees in growing their brokerages, although, they fund the Company’s controlling stockholder, Chairman and former Chief Executive Officer to Adam M. Contos, the Company’s Chief Executive Officer, (ii) certain other transactions, including cash and non-cash gifts from David and Gail Liniger to Mr. Contos and others over a periodcost of time, and (iii) wrongdoing in employment practices and workplace conduct (the “Special Committee Investigation”). The Special Committee Investigation was performed with the assistance of independent outside advisors and was completed in February 2018.
Although the loan, gifts, and other transactions between the Linigers and Mr. Contos did not involve use of any corporate funds, the Special Committee concluded that these transactions created an actual or apparent conflict of interest. The Special Committee also concluded that Mr. Liniger and Mr. Contos violated the Company’s Supplemental Code of Ethics for CEO and Senior Financial Officers (the “Code of Ethics”) by engaging in these transactions and by failing to report them to the Company. The Special Committee concluded that credible evidence did not substantiate that Mr. Liniger and Mr. Contos intentionally failed to disclose the loan or gifts.
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The Special Committee also identified other instances of noncompliance by Mr. Liniger with the Code of Ethics and other Company policies related to workplace conduct, which were limited to Mr. Liniger’s actions and did not extend to other members of the Company’s leadership team.
developing their brokerages. As a result, we maintain a low fixed-cost structure which, combined with our recurring fee-based models, enables us to capitalize on the economic benefits of the Special Committee investigation,franchising model, yielding high margins and significant cash flow.
Acquisition
On July 21, 2021, we acquired the Company’s management team is implementing, underoperating companies of North American regions of RE/MAX INTEGRA (“INTEGRA NA or “INTEGRA”) for cash consideration of approximately $235 million. INTEGRA’s regions include five Canadian provinces (New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario and Prince Edward Island) and nine U.S. states (Connecticut, Indiana, Maine, Massachusetts, Minnesota, New Hampshire, Rhode Island, Vermont and Wisconsin).The
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acquisition converted these formerly Independent Regions into Company-Owned Regions, allowing us to scale, enhance our ability to deliver value to our affiliates and recapture the oversightvalue differential of the independent members of the Board of Directors, remedial measures to address various findings of the Special Committee as well as to address deficienciesmore than 19,000 agents (approximately 12,000 in our internal controls. These efforts include among other matters (i) enhanced corporate policiesCanada and practices including with respect to gifts, loans, conflicts of interest and workplace conduct, (ii) enhanced procedures and practices concerning reporting including with respect to compliance matters, (iii) enhanced training on a range of matters including the responsibilities of officers and leaders related to workplace conduct and various compliance issues, (iv) a range of other actions designed to reinforce changes to the corporate culture in key areas including compliance and workplace practices, and (v) various remedial measures in connection with the deficiencies in our internal controls over financial reporting including an identified material weakness. The remedial measures referred to above are in process and not complete as of the date of this Quarterly Report on Form 10-Q and it is expected that these remedial measures and improvements to governance and corporate policies and practices will continue in future periods over a sustained period of time. See “Item 4—Controls and Procedures—Remediation.”
During the fourth quarter of 2017, the Company incurred $2.6 million in expenses related to the Special Committee investigation, and will continue to incur significant expenses7,000 in the first quarter of 2018 and future periods related to the Special Committee investigation and the ongoing implementation of the remedial measures adopted as a result of the findings of the Special Committee as well as the control deficiencies including the identified material weakness.U.S.).
Financial and Operational Highlights – Three Months Ended September 30, 2017 2021
(Compared to the three months ended September 30, 20162020, unless otherwise noted)
| Revenue of $91.0 million, an increase of 28.0% from the prior year. |
● | Revenue, excluding the Marketing Funds, increased to $67.7 million or 25.9%, which was comprised of 6.9% organic growth, 18.3% growth from acquisitions and 0.7% growth from foreign currency movements (a). |
● | Net income (loss) attributable to RE/MAX Holdings, Inc. decreased to ($25.1) million. |
● | Adjusted EBITDA grew 15.2% to $35.0 million compared to $30.3 million in the prior year. |
● | Adjusted EBITDA margin decreased to 38.4% from 42.7% in the prior year. |
● | Total agent count grew by |
| U.S. and Canada combined agent count increased |
| Total open Motto Mortgage offices increased 32.3% to 176 offices. |
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We achieved record financial results in the three months ended September 30, 2017,third quarter, which included all-time high quarterly revenue and Adjusted EBITDA which were primarily driven by the INTEGRA acquisition, broad-based performance from our core operations and a robust housing market. Our third quarter revenue increased $3.8 million, or 8.4%, to $49.4 million primarily due togrowth included contributions from many facets of our business, including: the four Independent Regions thatINTEGRA acquisition, fewer agent recruiting incentives, higher broker fees stemming from rising home prices, increased pricing and Motto expansion, among other factors.
Despite record revenue performance, we incurred a net loss of $42.4 million as positive revenue contributions were acquiredmore than offset by settlement and impairment charges of $45.6 million (for additional information on the loss on contract settlements, refer to Note 5, Acquisitions), acquisition costs for INTEGRA, an increase in December 2016 (New Jersey, Georgia, Kentucky/Tennesseeequity-based compensation expense. Specifically, in connection with the INTEGRA acquisition, we allocated $40.5 million of the purchase price to a loss on the pre-existing master franchise agreements which were effectively settled. The loss represents the fair value of the difference between the historical contractual royalty rates paid by INTEGRA and Southern Ohio, collectively, the “2016 Acquired Regions”) which experienced agent countcurrent market rate.
We also added more than 6,000 net new agents compared to the third quarter of 2020, including significant growth of 3.4% from the prior year quarter and foreign currency movements. Organic revenuein Canada alongside strong growth remained relatively flat as growth from agent count increases wereglobally, partially offset by a decreaseslight decline in revenue recognized from preferred marketing arrangements and the impact of waiving approximately $1.7 million of continuing franchise fees and broker fees during the third quarter for associates adversely impacted by Hurricanes Harvey and Irma. Expenses increased primarily due toU.S. agent count.
For a $3.7 million loss recognized related to subleasing a portion of our corporate office building; a net charge of $2.6 million incurred in connection with a litigation settlement and additional corresponding professional fees related to our 2013 acquisitiondetailed discussion of the net assetsimpacts of Tails, Inc. (“Tails”);COVID-19 on our results in 2020, please see our Quarterly Report on Form 10-Q for the three and costs for Motto, the 2016 Acquired Regions, certain employee benefits and the refresh of the RE/MAX brand.
six months ended June 30, 2020.
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Selected Operating and Financial Highlights
For comparability purposes, theThe following tables set forthsummarize several key performance indicators and our agent count and results of operations for the periods presented in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The period-to-period comparison of agent count and financial results is not necessarily indicative of future performance.operations.
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| | 2021 | | 2020 | | # | | % | |
Total agent count growth | | 4.6 | % | 5.1 | % | | | | |
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Agent Count: | | | | | | | | | |
U.S. | | 62,007 | | 62,304 | | (297) | | (0.5) | % |
Canada | | 23,649 | | 21,498 | | 2,151 | | 10.0 | % |
Subtotal | | 85,656 | | 83,802 | | 1,854 | | 2.2 | % |
Outside U.S. and Canada | | 55,280 | | 50,967 | | 4,313 | | 8.5 | % |
Total | | 140,936 | | 134,769 | | 6,167 | | 4.6 | % |
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Motto open offices (2) | | 176 | | 133 | | 43 | | 32.3 | % |
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| | 2021 | | 2020 | | # | | % | |
RE/MAX franchise sales (1) | | 688 | | 633 | | 55 | | 8.7 | % |
Motto franchise sales (2) | | 42 | | 47 | | (5) | | (10.6) | % |
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| 2.1 | % | |||||||||||||||||||||||||
Canada |
| 21,160 |
| 20,556 |
| 604 |
| 2.9 | % | |||||||||||||||||||||||||
U.S. and Canada Total |
| 84,709 |
| 82,797 |
| 1,912 |
| 2.3 | % | |||||||||||||||||||||||||
Outside U.S. and Canada |
| 32,859 |
| 28,391 |
| 4,468 |
| 15.7 | % | |||||||||||||||||||||||||
Network-wide agent count |
| 117,568 |
| 111,188 |
| 6,380 |
| 5.7 | % | |||||||||||||||||||||||||
|
|
|
|
|
|
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|
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| ||||||||||||||||||||
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||||||||||||||||||||
|
| September 30, |
|
| September 30, |
| ||||||||||||||||||||||||||||
|
| 2017 |
| 2016 |
|
| 2017 |
| 2016 |
| ||||||||||||||||||||||||
Total revenue |
| $ | 49,377 |
| $ | 45,559 |
|
| $ | 146,425 |
| $ | 131,880 |
| ||||||||||||||||||||
Total selling, operating and administrative expenses(2) |
| $ | 31,832 |
| $ | 20,539 |
|
| $ | 79,263 |
| $ | 62,866 |
| ||||||||||||||||||||
Operating Income |
| $ | 12,808 |
| $ | 21,142 |
|
| $ | 51,058 |
| $ | 57,447 |
| ||||||||||||||||||||
Net income attributable to RE/MAX Holdings, Inc.(2) |
| $ | 3,835 |
| $ | 6,786 |
|
| $ | 16,277 |
| $ | 18,539 |
| ||||||||||||||||||||
Adjusted EBITDA(1) |
| $ | 25,781 |
| $ | 25,487 |
|
| $ | 77,443 |
| $ | 71,527 |
| ||||||||||||||||||||
Adjusted EBITDA margin(1) |
|
| 52.2 | % |
| 55.9 | % |
|
| 52.9 | % |
| 54.2 | % |
(1) |
|
(2) | Excludes virtual offices and Branchises. |
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | ||||
Total revenue | | | 90,997 | | | 71,073 | | $ | 240,538 | | $ | 193,552 | |
Total selling, operating and administrative expenses (1) | | | 51,099 | | | 28,216 | | $ | 133,591 | | $ | 88,241 | |
Operating income (loss) (1) | | | (37,576) | | | 10,935 | | $ | (20,368) | | $ | 31,678 | |
Net income (loss) (1) | | | (42,363) | | | 6,838 | | $ | (30,240) | | $ | 18,319 | |
Net income (loss) attributable to RE/MAX Holdings, Inc. (1) | | | (25,149) | | | 3,617 | | $ | (18,725) | | $ | 9,883 | |
Adjusted EBITDA (2) | | | 34,954 | | | 30,335 | | $ | 88,611 | | $ | 68,783 | |
Adjusted EBITDA margin (2) | | | 38.4 | % | | 42.7 | % | | 36.8 | % | | 35.5 | % |
(1) | Prior year amounts have been adjusted to reflect the immaterial correction of amortization for certain acquired Independent Regions. See Note 13, Immaterial Corrections to Prior Period Financial Statements for additional information. |
(2) | See “—Non-GAAP Financial Measures” for further discussion of Adjusted EBITDA and Adjusted EBITDA margin and a reconciliation of the differences between Adjusted EBITDA and net income (loss), which is the most comparable U.S. generally accepted accounting principles (“U.S. GAAP”) measure for operating performance. Adjusted EBITDA margin represents Adjusted EBITDA as a percentage of total revenue. |
|
|
3028
Results of Operations
Comparison of the Three Months Ended September 30, 2017 2021and 20162020
Revenue
A summary of the components of our revenue foris as follows (in thousands except percentages):
| | | | | | | | | | | | |
| | Three Months Ended | | Change | | |||||||
| | September 30, | | Favorable/(Unfavorable) | | |||||||
| | 2021 | | 2020 | | $ | | % | | |||
Revenue: | | | | | | | | | | | | |
Continuing franchise fees | | $ | 32,464 | | $ | 24,339 | | $ | 8,125 | | 33.4 | % |
Annual dues | | | 8,967 | | | 8,638 | | | 329 | | 3.8 | % |
Broker fees | | | 19,245 | | | 15,457 | | | 3,788 | | 24.5 | % |
Marketing Funds fees | | | 23,269 | | | 17,290 | | | 5,979 | | 34.6 | % |
Franchise sales and other revenue | | | 7,052 | | | 5,349 | | | 1,703 | | 31.8 | % |
Total revenue | | $ | 90,997 | | $ | 71,073 | | $ | 19,924 | | 28.0 | % |
Consolidated revenue increased primarily due to contributions from acquisitions, fewer agent recruiting initiatives in the current year as compared to the prior year and increased Broker fees. RE/MAX continuing franchise fee increases and Motto expansion also contributed to growth, partially offset by continued attrition of booj’s legacy customer base.
Continuing Franchise Fees
Revenue from Continuing franchise fees increased primarily due to contributions from the acquisition of INTEGRA, fewer agent recruiting initiatives in the current year as compared to prior year, RE/MAX monthly fee increases and Motto expansion. Beginning April 1, 2021, there was an average price increase of 3.8% in RE/MAX continuing franchise fees in the majority of our U.S. Company-Owned regions.
Broker Fees
Revenue from Broker fees increased primarily due to contributions from the acquisition of INTEGRA and rising home prices, partially offset by lower total transactions per agent as compared to the prior year.
Marketing Funds Fees
Revenue from the Marketing Funds fees increased primarily due to contributions from the acquisition of INTEGRA and fewer agent recruiting initiatives in the current year as compared to the prior year.
Franchise Sales and Other Revenue
Franchise sales and other revenue increased primarily due to incremental revenue from our 2020 acquisitions, partially offset by the attrition of the booj legacy customer base which negatively impacted the three months ended September 30, 20172021 by $0.4 million and 2016 is expected to negatively impact the full year 2021 by approximately $2.0 million, as follows:
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|
|
|
|
|
|
|
|
| ||
|
| Three Months Ended |
| Change |
| |||||||||
|
| September 30, |
| Favorable/(Unfavorable) |
| |||||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||||
|
| (in thousands, except percentages) |
| |||||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
| ||
Continuing franchise fees |
| $ | 23,049 |
| $ | 20,938 |
| $ | 2,111 |
| 10.1 | % | ||
Annual dues |
|
| 8,592 |
|
| 8,321 |
|
| 271 |
| 3.3 | % | ||
Broker fees |
|
| 12,125 |
|
| 10,517 |
|
| 1,608 |
| 15.3 | % | ||
Franchise sales and other franchise revenue |
|
| 5,611 |
|
| 5,783 |
|
| (172) |
| (3.0) | % | ||
Total revenue |
| $ | 49,377 |
| $ | 45,559 |
| $ | 3,818 |
| 8.4 | % |
Consolidated revenue increased primarily duecompared to the acquisitions of the 2016 Acquired Regions, which added $3.5 million or 7.7%. Organic growth remained relatively flat as growth from agent count increases were offset by a decrease in revenue recognized from preferred marketing arrangements and the impact of waiving approximately $1.7 million of continuing franchise fees and broker fees during the third quarter for hurricane-impacted associates.
Continuing Franchise Fees
Revenue from continuing franchise fees increased primarily as a result of contributions from the 2016 Acquired Regions, which added $2.2 million, and agent count growth, which added $0.5 million. Additionally, the Company waived approximately $1.1 million of continuing franchise fees during the third quarter for hurricane-impacted associates.
Annual Dues
Revenue from annual dues increased primarily due to an increase in agent count in the U.S. and Canada. Revenue from annual dues is not affected by our acquisitions of Independent Regions because agents in the U.S. and Canadian Independent Regions already pay annual dues to us in the same amounts as agents in Company-owned regions.
Broker Fees
Revenue from broker fees increased primarily due to the acquisitions of the 2016 Acquired Regions, which contributed a $1.2 million increase, as well as organic growth of $0.4 million driven primarily by rising average home prices and agent count growth which contributed to a reduction in the mix of home sale transactions completed by agents that do not pay broker fees. Additionally, the Company waived approximately $0.5 million of broker fees during the third quarter for hurricane-impacted associates.
Franchise Sales and Other Franchise Revenue
Franchise sales and other franchise revenue decreased primarily due to a decrease in revenue recognized from preferred marketing arrangements and a reduction in franchise sales. These decreases were partially offset by increases in master franchise sales.
prior year.
3129
Operating Expenses
A summary of the components of our operating expenses for the three months ended September 30, 2017 and 2016 is as follows:follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Three Months Ended | | Change | | |||||||
| | September 30, | | Favorable/(Unfavorable) | | |||||||
| | 2021 | | 2020 | | $ | | % | | |||
Operating expenses: | | | | | | | | | | | | |
Selling, operating and administrative expenses | | $ | 51,099 | | $ | 28,216 | | $ | (22,883) | | (81.1) | % |
Marketing Funds expenses | | | 23,269 | | | 17,290 | | | (5,979) | | (34.6) | % |
Depreciation and amortization (1) | | | 8,582 | | | 6,730 | | | (1,852) | | (27.5) | % |
Settlement and impairment charges | | | 45,623 | | | 7,902 | | | (37,721) | | (477.4) | % |
Total operating expenses | | $ | 128,573 | | $ | 60,138 | | $ | (68,435) | | (113.8) | % |
Percent of revenue | | | 141.3 | % | | 84.6 | % | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Change |
| |||||||
|
| September 30, |
| Favorable/(Unfavorable) |
| |||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||
|
| (in thousands, except percentages) |
| |||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, operating and administrative expenses |
| $ | 31,832 |
| $ | 20,539 |
| $ | (11,293) |
| (55.0) | % |
Depreciation and amortization |
|
| 4,286 |
|
| 3,889 |
|
| (397) |
| (10.2) | % |
Loss (gain) on sale or disposition of assets, net |
|
| 451 |
|
| (11) |
|
| (462) |
| n/a |
|
Total operating expenses |
| $ | 36,569 |
| $ | 24,417 |
| $ | (12,152) |
| (49.8) | % |
Percent of revenue |
|
| 74.1 | % |
| 53.6 | % |
|
|
|
|
|
Selling, Operating and Administrative Expenses
(1) | Prior year amounts have been adjusted to reflect the immaterial correction of amortization for certain acquired Independent Regions. See Note 13, Immaterial Corrections to Prior Period Financial Statements for additional information. |
Selling, operating and administrative expenses primarily consistedconsists of personnel costs, professional fee expenses, rent and related facility operations expense (including losses on subleases)lease costs and other expenses. Other expenses within Selling, operating and administrative expenses include certain marketing and production costs that are not paid by our related party advertising funds,the Marketing Funds, including travel and entertainment costs, and costs associated with our annual conventions in the U.S. and other events.
A summary of the components of our selling, operatingevents and administrative expenses for the three months ended September 30, 2017 and 2016 is as follows:technology services.
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
| Three Months Ended |
| Change |
| |||||||||||||||||||
|
| September 30, |
| Favorable/(Unfavorable) |
| |||||||||||||||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||||||||||||||
|
| (in thousands, except percentages) |
| |||||||||||||||||||||
| | | | | | | | | | | | |||||||||||||
| | Three Months Ended | | Change | | |||||||||||||||||||
| | September 30, | | Favorable/(Unfavorable) | | |||||||||||||||||||
| | 2021 | | 2020 | | $ | | % | | |||||||||||||||
Selling, operating and administrative expenses: |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | ||||
Personnel |
| $ | 11,981 |
| $ | 9,729 |
| $ | (2,252) |
| (23.1) | % | | $ | 30,306 | | $ | 16,613 | | $ | (13,693) | | (82.4) | % |
Professional fees |
|
| 3,855 |
|
| 2,702 |
| (1,153) |
| (42.7) | % | | 8,848 | | | 3,530 | | | (5,318) | | (150.7) | % | ||
Rent and related facility operations |
|
| 5,877 |
|
| 2,139 |
| (3,738) |
| n/a |
| |||||||||||||
Lease costs | | 2,137 | | | 2,296 | | | 159 | | 6.9 | % | |||||||||||||
Other |
|
| 10,119 |
|
| 5,969 |
|
| (4,150) |
| (69.5) | % | | | 9,808 | | | 5,777 | | | (4,031) | | (69.8) | % |
Total selling, operating and administrative expenses |
| $ | 31,832 |
| $ | 20,539 |
| $ | (11,293) |
| (55.0) | % | | $ | 51,099 | | $ | 28,216 | | $ | (22,883) | | (81.1) | % |
Percent of revenue |
|
| 64.5 | % |
| 45.1 | % |
|
|
|
|
| | | 56.2 | % | | 39.7 | % | | | | | |
Total selling,Selling, operating and administrative expenses increased as follows:
| Personnel costs increased primarily due to |
| Professional fees increased primarily due to |
|
|
| Other selling, operating and administrative expenses increased primarily due to |
Marketing Funds Expenses
32
expenses to revenue such that there is no impact to our overall profitability.
Depreciation and Amortization
Depreciation and amortization expense increased primarily due to new amortization expense related to our acquisitions and placing internally developed software into service. Prior year amounts have been adjusted to reflect the franchise agreementsimmaterial correction of amortization for certain acquired Independent Regions. See Note 13, Immaterial Corrections to Prior Period Financial Statements for additional information.
30
Settlement and Impairment Charges
Loss on Contract Settlement
We recorded a $40.5 million loss on our contractual relationship with INTEGRA which was settled with the 2016 Acquired Regions, partially offsetacquisition of INTEGRA. The loss represents the fair value of the difference between the historical contractual rates paid by certain acquired franchise agreements reachingINTEGRA and the endcurrent market rate. The loss is recorded in “Settlement and impairment charges” in the accompanying Condensed Consolidated Statements of their contractual term and an adjustment recorded related to finalizing the purchase price for certain acquisitions.Income (Loss). See Note 5, Acquisitions and Dispositionsfor additional information. information about our acquisition.
Loss (gain) on sale or disposition of assets, netImpairment Charge - Goodwill
The change in loss (gain) on sale or disposition of assets, net was primarily due to the $463,000 loss recognized duringDuring the third quarter of 2017 for an estimated final settlement of certain provisions2021, we identified impairment indicators associated with the First reporting unit in the Real Estate segment, primarily lower than expected adoption rates of the asset sale agreement relatedtechnology, resulting in downward revisions to long-term forecasts which is a significant input in the Decemberfair value of the reporting unit. Therefore, we performed an interim impairment test as of August 31, 2015 disposition2021 on the goodwill of Sacagawea, LLC d/b/the First reporting unit and recorded a RE/MAX Equity Group (“RE/MAX Equity Group”).non-cash impairment charge of $5.1 million.
Impairment Charge - Leased Assets
During the third quarter of 2020, we began executing on a plan to both refresh our corporate headquarters and sublease space made available through the refresh. As a result, we performed an impairment test on the portion of our headquarters we intend to sublease and recognized an impairment charge of $7.9 million. See Note 5, Acquisitions and Dispositions 2, Summary of Significant Accounting Policiesfor additional information. information about our leases.
Other Expenses, Net
A summary of the components of our otherOther expenses, net is as follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Three Months Ended | | Change | | |||||||
| | September 30, | | Favorable/(Unfavorable) | | |||||||
| | 2021 | | 2020 | | $ | | % | | |||
Other expenses, net: | | | | | | | | | | | | |
Interest expense | | $ | (3,315) | | $ | (2,159) | | $ | (1,156) | | 53.5 | % |
Interest income | | | 19 | | | 25 | | | (6) | | (24.0) | % |
Foreign currency transaction gains (losses) | | | (435) | | | 94 | | | (529) | | n/m | % |
Loss on early extinguishment of debt | | | (264) | | | — | | | (264) | | n/m | % |
Total other expenses, net | | $ | (3,995) | | $ | (2,040) | | $ | (1,955) | | 95.8 | % |
Percent of revenue | | | 4.4 | % | | 2.9 | % | | | | | |
| | | | | | | | | | | | |
n/m - not meaningful | | | | | | | | | | | | |
Other expenses, net increased primarily due to an increase in interest expense and loss on extinguishment of debt because of the refinance and increase of our Senior Secured Credit Facility (see Note 8, Debt, for more information). Foreign currency transaction gains (losses) are primarily the result of transactions denominated in the Canadian Dollar.
Provision for Income Taxes
Our effective income tax rate decreased to (1.9)% from 23.1% for the three months ended September 30, 20172021 and 2016, is as follows:
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|
| Three Months Ended |
| Change |
| |||||||
|
| September 30, |
| Favorable/(Unfavorable) |
| |||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||
|
| (in thousands, except percentages) |
| |||||||||
Other expenses, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| $ | (2,598) |
| $ | (2,121) |
| $ | (477) |
| (22.5) | % |
Interest income |
|
| 145 |
|
| 32 |
|
| 113 |
| n/a |
|
Foreign currency transaction gain (loss) |
|
| 273 |
|
| (115) |
|
| 388 |
| n/a |
|
Total other expenses, net |
| $ | (2,180) |
| $ | (2,204) |
| $ | 24 |
| 1.1 | % |
Percent of revenue |
|
| 4.4 | % |
| 4.8 | % |
|
|
|
|
|
Other expenses, net remained relatively flat. Interest expense increased as a result of a higher principal balance of term loans outstanding under our 2016 Senior Secured Credit Facility, which replaced our 2013 Senior Secured Credit facility2020, respectively, primarily driven by the $40.5 million loss on December 15, 2016, offset by an increase in foreign currency transaction gains (losses) primarily due to the strengthening of the Canadian dollar against the U.S. dollar.
Provision for contract settlement that has no tax provision (see Note 10, Income Taxes
Our effective income tax rate increased to 29.1% from 24.5% for the three months ended September 30, 2017 and 2016, respectively. The increase in the effective tax rate was primarily due to a Canadian branch tax assessment on a significant distribution of cash from our Western Canada subsidiary to the United States which occurred during the third quarter of 2017.additional information). Our effective income tax rate depends on many factors, including a rate benefit attributable to the fact that the portion of RMCO’s earnings attributable to the non-controlling interests are not subject to corporate-level taxes because RMCO is classified as a partnership for U.S. federal income tax purposes and therefore is treated as a “flow through“flow-through entity,” as well as annual changes in state and foreign income tax rates. See Note 3, Non-controlling Interest to the accompanying unaudited condensed consolidated financial statements for further details on the allocation of income taxes between RE/MAX Holdings and the non-controlling interest.
Net interest and see Note 10, Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest, which represents the portion of earnings attributable to the economic interest in RMCO held by RIHI, decreased $3.8 million primarily due to a decrease in RMCO’s net income during the three months ended September 30, 2017 compared to September 30, 2016.
Taxes for additional information.
3331
Adjusted EBITDA
See “—Non-GAAP Financial Measures” for our definition of Adjusted EBITDA and for further discussion of our presentation of Adjusted EBITDA as well as a reconciliation of Adjusted EBITDA to net income (loss), which is the most comparable GAAP measure for operating performance.
Adjusted EBITDA was $25.8$35.0 million for the three months ended September 30, 2017,2021, an increase of $0.3$4.6 million from the comparable prior year period. Adjusted EBITDA increased primarily due to $2.9 million in contributions from the 2016 Acquired RegionsINTEGRA acquisition, fewer agent recruiting initiatives in the current year and agent count growth,higher Broker fees revenue, partially offset by higher operating expenses relatedpersonnel costs due to Motto, certain employee benefitsheadcount increases and the refreshelimination of the RE/MAX brand. In addition, fee waivers for hurricane-impacted associates reduced Adjusted EBITDA by approximately $1.7 million. corporate bonus and the suspension of the 401(k) match in the prior year.
Comparison of the Nine Months Ended September 30, 20172021 and 20162020
Revenue
A summary of the components of our revenue foris as follows (in thousands except percentages):
| | | | | | | | | | | | |
| | Nine Months Ended | | Change | | |||||||
| | September 30, | | Favorable/(Unfavorable) | | |||||||
| | 2021 | | 2020 | | $ | | % | | |||
Revenue: | | | | | | | | | | | | |
Continuing franchise fees | | $ | 84,793 | | $ | 65,220 | | $ | 19,573 | | 30.0 | % |
Annual dues | | | 26,508 | | | 26,304 | | | 204 | | 0.8 | % |
Broker fees | | | 48,651 | | | 35,327 | | | 13,324 | | 37.7 | % |
Marketing Funds fees | | | 59,456 | | | 46,577 | | | 12,879 | | 27.7 | % |
Franchise sales and other revenue | | | 21,130 | | | 20,124 | | | 1,006 | | 5.0 | % |
Total revenue | | $ | 240,538 | | $ | 193,552 | | $ | 46,986 | | 24.3 | % |
Consolidated revenue increased primarily due to contributions from acquisitions, temporary COVID-19 financial support initiatives introduced in the prior year, and an increase in Broker fees. Fewer agent recruiting initiatives in the current year and Motto expansion also contributed to growth, partially offset by lower event-based revenue and continued attrition of booj’s legacy customer base.
Continuing Franchise Fees
Revenue from Continuing franchise fees increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year, which included a waiver or discount of Continuing franchise fees, contributions from the acquisition of INTEGRA, fewer agent recruiting initiatives in the current year, Motto expansion and RE/MAX monthly fee increases. Beginning April 1, 2021, there was an average price increase of 3.8% in RE/MAX Continuing franchise fees in most of our U.S. Company-Owned regions.
Broker Fees
Revenue from Broker fees increased primarily due to rising home prices, higher total transactions per agent and contributions from the acquisition of INTEGRA.
Marketing Funds fees
Revenue from the Marketing Funds fees increased primarily due to temporary COVID-19 financial support initiatives introduced in the prior year, which included a waiver or discount of Marketing Funds fees, contributions from the acquisition of INTEGRA and fewer agent recruiting initiatives in the current year.
Franchise Sales and Other Revenue
Franchise sales and other revenue increased primarily due to incremental revenue from our 2020 acquisitions, partially offset by lower event-based revenue due to our 2021 annual agent conference having limited in-person attendance due to COVID-19 restrictions and continued attrition of booj’s legacy customer base. The attrition of the booj legacy customer base negatively impacted the nine months ended September 30, 2017 and 2016 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| Change |
| |||||||
|
| September 30, |
| Favorable/(Unfavorable) |
| |||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||
|
| (in thousands, except percentages) |
| |||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing franchise fees |
| $ | 69,298 |
| $ | 59,691 |
| $ | 9,607 |
| 16.1 | % |
Annual dues |
|
| 25,148 |
|
| 24,271 |
|
| 877 |
| 3.6 | % |
Broker fees |
|
| 32,914 |
|
| 28,102 |
|
| 4,812 |
| 17.1 | % |
Franchise sales and other franchise revenue |
|
| 19,065 |
|
| 19,704 |
|
| (639) |
| (3.2) | % |
Brokerage revenue |
|
| — |
|
| 112 |
|
| (112) |
| n/a |
|
Total revenue |
| $ | 146,425 |
| $ | 131,880 |
| $ | 14,545 |
| 11.0 | % |
Consolidated revenue increased primarily due to the acquisitions of the 2016 Acquired Regions, which added $10.2 million or 7.7%. Organic growth increased revenue $4.3 million or 3.3% primarily due to agent count increases and July 1, 2016 fee increases in our Company-owned Regions, offset2021 by a decrease in revenue recognized from preferred marketing arrangements and the impact of waiving approximately $1.7 million of continuing franchise fees and broker fees during the third quarter for hurricane-impacted associates.
Continuing Franchise Fees
Revenue from continuing franchise fees increased primarily as a result of contributions from the 2016 Acquired Regions, which added $6.5 million or 10.8%, an increase of $1.1 million as a result of July 1, 2016 fee increases in our Company-owned Regions and an increase of $1.8 million due to agent count growth. Additionally, the Company waived approximately $1.1 million of continuing franchise fees for hurricane-impacted associates.
Annual Dues
Revenue from annual dues increased primarily due to an increase in agent count in the U.S. and Canada. Revenue from annual dues is not affected by our acquisitions of Independent Regions because agents in the U.S. and Canadian Independent Regions already pay annual dues to us in the same amounts as agents in Company-owned regions.
Broker Fees
Revenue from broker fees increased primarily due to the acquisition of the 2016 Acquired Regions, which contributed a $3.2 million increase, as well as organic growth of $1.6 million driven primarily by rising average home prices and agentmillion.
3432
count growth which contributed to a reduction in the mix of home sale transactions completed by agents that do not pay broker fees. Additionally, the Company waived approximately $0.5 million of broker fees for hurricane-impacted associates.
Franchise Sales and Other Franchise Revenue
Franchise sales and other franchise revenue decreased primarily due to a decrease in revenue recognized from preferred marketing arrangements and a reduction in franchise sales. These decreases were partially offset by increases in master franchise sales and contributions from Motto and the 2016 Acquired Regions.
Operating Expenses
A summary of the components of our operating expenses for the nine months ended September 30, 2017 and 2016 is as follows:follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Nine Months Ended | | Change | | |||||||
| | September 30, | | Favorable/(Unfavorable) | | |||||||
| | 2021 | | 2020 | | $ | | % | | |||
Operating expenses: | | | | | | | | | | | | |
Selling, operating and administrative expenses | | $ | 133,591 | | $ | 88,241 | | $ | (45,350) | | (51.4) | % |
Marketing Funds expenses | | | 59,456 | | | 46,577 | | | (12,879) | | (27.7) | % |
Depreciation and amortization (1) | | | 22,236 | | | 19,154 | | | (3,082) | | (16.1) | % |
Settlement and impairment charges | | | 45,623 | | | 7,902 | | | (37,721) | | (477.4) | % |
Total operating expenses | | $ | 260,906 | | $ | 161,874 | | $ | (99,032) | | (61.2) | % |
Percent of revenue | | | 108.5 | % | | 83.6 | % | | | | | |
|
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|
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|
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|
|
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|
|
|
|
| Nine Months Ended |
| Change |
| |||||||
|
| September 30, |
| Favorable/(Unfavorable) |
| |||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||
|
| (in thousands, except percentages) |
| |||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, operating and administrative expenses |
| $ | 79,263 |
| $ | 62,866 |
| $ | (16,397) |
| (26.1) | % |
Depreciation and amortization |
|
| 15,678 |
|
| 11,482 |
|
| (4,196) |
| (36.5) | % |
Loss on sale or disposition of assets, net |
|
| 426 |
|
| 85 |
|
| (341) |
| n/a |
|
Total operating expenses |
| $ | 95,367 |
| $ | 74,433 |
| $ | (20,934) |
| (28.1) | % |
Percent of revenue |
|
| 65.1 | % |
| 56.4 | % |
|
|
|
|
|
(1) | Prior year amounts have been adjusted to reflect the immaterial correction of amortization for certain acquired Independent Regions. See Note 13, Immaterial Corrections to Prior Period Financial Statements for additional information. |
Selling, Operating and Administrative Expenses
A summary of the components of our selling, operating and administrative expenses forconsists of personnel costs, professional fee expenses, lease costs and other expenses. Other expenses within Selling, operating and administrative expenses include certain marketing and production costs that are not paid by the nine months ended September 30, 2017Marketing Funds, including travel and 2016 is as follows:entertainment costs, and costs associated with our annual conventions in the U.S. and other events and technology services.
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|
| |||||||||||||||
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| Nine Months Ended |
| Change |
| |||||||||||||||||||
|
| September 30, |
| Favorable/(Unfavorable) |
| |||||||||||||||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||||||||||||||
|
| (in thousands, except percentages) |
| |||||||||||||||||||||
| | | | | | | | | | | | |||||||||||||
| | Nine Months Ended | | Change | | |||||||||||||||||||
| | September 30, | | Favorable/(Unfavorable) | | |||||||||||||||||||
| | 2021 | | 2020 | | $ | | % | | |||||||||||||||
Selling, operating and administrative expenses: |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | ||||
Personnel |
| $ | 33,582 |
| $ | 31,040 |
| $ | (2,542) |
| (8.2) | % | | $ | 81,322 | | $ | 47,419 | | $ | (33,903) | | (71.5) | % |
Professional fees |
|
| 10,354 |
|
| 7,269 |
| (3,085) |
| (42.4) | % | | 19,719 | | | 9,370 | | | (10,349) | | (110.4) | % | ||
Rent and related facility operations |
|
| 10,398 |
|
| 6,513 |
| (3,885) |
| (59.6) | % | |||||||||||||
Lease costs | | 6,258 | | | 6,899 | | | 641 | | 9.3 | % | |||||||||||||
Other |
|
| 24,929 |
|
| 18,044 |
|
| (6,885) |
| (38.2) | % | | | 26,292 | | | 24,553 | | | (1,739) | | (7.1) | % |
Total selling, operating and administrative expenses |
| $ | 79,263 |
| $ | 62,866 |
| $ | (16,397) |
| (26.1) | % | | $ | 133,591 | | $ | 88,241 | | $ | (45,350) | | (51.4) | % |
Percent of revenue |
|
| 54.1 | % |
| 47.7 | % |
|
|
|
|
| | | 55.5 | % | | 45.6 | % | | | | | |
Total selling,Selling, operating and administrative expenses increased as follows:
|
|
| Professional fees increased primarily due to |
35
|
|
| Other selling, operating and administrative expenses increased primarily due to |
Marketing Funds Expenses
We recognize an equal and offsetting amount of expenses to revenue such that there is no impact to our overall profitability.
Depreciation and Amortization
Depreciation and amortization expense increased primarily due to new amortization expense related to our acquisitions and placing internally developed software into service. Prior year amounts have been adjusted to reflect the franchise agreements acquired with the 2016 Acquired Regions, partially offset byimmaterial
33
correction of amortization for certain acquired franchise agreements reachingIndependent Regions. See Note 13, Immaterial Corrections to Prior Period Financial Statements for additional information.
Settlement and Impairment Charges
See the enddiscussion of their contractual term.
Loss on sale or dispositionthe Results of assets, net
Loss on sale or disposition of assets, net increased primarily due toOperations for the $463,000 loss recognized during the ninethree months ended September 30, 20172021 and 2020 for an estimated final settlement of certain provisionsa discussion of the asset sale agreement related to the December 31, 2015 disposition of RE/MAX Equity Group. See Note 5, Acquisitions and Dispositions for additional information. impairment charges.
Other Expenses, Net
A summary of the components of our otherOther expenses, net is as follows (in thousands, except percentages):
| | | | | | | | | | | | |
| | Nine Months Ended | | Change | | |||||||
| | September 30, | | Favorable/(Unfavorable) | | |||||||
| | 2021 | | 2020 | | $ | | % | | |||
Other expenses, net: | | | | | | | | | | | | |
Interest expense | | $ | (7,537) | | $ | (7,028) | | $ | (509) | | 7.2 | % |
Interest income | | | 201 | | | 328 | | | (127) | | (38.7) | % |
Foreign currency transaction gains (losses) | | | (818) | | | (75) | | | (743) | | n/m | % |
Loss on early extinguishment of debt | | | (264) | | | — | | | (264) | | n/m | % |
Total other expenses, net | | $ | (8,418) | | $ | (6,775) | | $ | (1,643) | | 24.3 | % |
Percent of revenue | | | 3.5 | % | | 3.5 | % | | | | | |
| | | | | | | | | | | | |
n/m - not meaningful | | | | | | | | | | | | |
Other expenses, net increased due to an increase in interest expense and loss on extinguishment of debt because of the refinance and increase of our Senior Secured Credit Facility (see Note 8, Debt, for more information) and lower interest earnings on our cash balances from lower interest rates. Foreign currency transaction gains (losses) are primarily the result of transactions denominated in the Canadian Dollar.
Provision for Income Taxes
Our effective income tax rate decreased to (5.1)% from 26.4% for the nine months ended September 30, 20172021 and 2016, is as follows:
|
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| Nine Months Ended |
| Change |
| |||||||
|
| September 30, |
| Favorable/(Unfavorable) |
| |||||||
|
| 2017 |
| 2016 |
| $ |
| % |
| |||
|
| (in thousands, except percentages) |
| |||||||||
Other expenses, net: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| $ | (7,414) |
| $ | (6,493) |
| $ | (921) |
| (14.2) | % |
Interest income |
|
| 195 |
|
| 118 |
|
| 77 |
| (65.3) |
|
Foreign currency transaction gain |
|
| 289 |
|
| 69 |
|
| 220 |
| n/a |
|
Loss on early extinguishment of debt |
|
| — |
|
| (136) |
|
| 136 |
| n/a |
|
Total other expenses, net |
| $ | (6,930) |
| $ | (6,442) |
| $ | (488) |
| (7.6) | % |
Percent of revenue |
|
| 4.7 | % |
| 4.9 | % |
|
|
|
|
|
Other expenses, net increased mainly due2020, respectively, primarily driven by (a) the $40.5 million loss on contract settlement that has no tax provision and (b) decreases in 2021 related to higher interest expense as a resultthe settlement of an increase in the principal balance of term debt outstanding under our 2016 Senior Secured Credit Facility, which replaced our 2013 Senior Secured Credit facility on December 15, 2016.
Provision for uncertain tax positions (see Note 10, Income Taxes
Our effective income tax rate increased to 24.7% from 23.9% for the nine months ended September 30, 2017 and 2016, respectively.additional information). Our effective income tax rate depends on many factors, including a rate benefit attributable to the fact that the portion of RMCO’s earnings attributable to the non-controlling interests are not subject to corporate-level taxes because RMCO is classified as a partnership for U.S. federal income tax purposes and therefore is treated as a “flow through“flow-through entity,” as well as annual changes in state and foreign income tax rates. See Note 3, Non-controlling Interest to the accompanying unaudited condensed consolidated financial statements for further details on the allocation of income taxes between RE/MAX Holdings and the non-controlling interest.interest and see Note 10, Income Taxes for additional information.
36
Net Income Attributable to Non-controlling Interest
Net income attributable to non-controlling interest, which represents the portion of earnings attributable to the economic interest in RMCO held by RIHI, decreased $3.3 million primarily due to a decrease in RMCO’s net income during the nine months ended September 30, 2017 compared to September 30, 2016.
Adjusted EBITDA
See “—Non-GAAP Financial Measures” for our definition of Adjusted EBITDA and for further discussion of our presentation of Adjusted EBITDA as well as a reconciliation of Adjusted EBITDA to net income (loss), which is the most comparable GAAP measure for operating performance.
Adjusted EBITDA was $77.4$88.6 million for the nine months ended September 30, 2017,2021, an increase of $5.9$19.8 million from the comparable prior year period. Adjusted EBITDA increased primarily increased due to $8.1 millionhigher Broker fees revenue, temporary COVID-19 financial support initiatives introduced in the prior year, fewer agent recruiting initiatives in the current year and lower bad debt expense from improved collections and net contributions from the 2016 Acquired Regions, agent count growth, July 1, 2016 fee increases in our Company-owned Regions and an increase in master franchise sales.
These increases areacquisitions, partially offset by higher operating expenses relatedpersonnel costs due to Motto, certain employee benefits, the refreshelimination of the RE/MAX brand, litigationcorporate bonus in the prior year and a reduction in revenue recognized for preferred marketing arrangements. In addition, fee waivers granted for hurricane-impacted associates reduced Adjusted EBITDA by approximately $1.7 million. headcount increases.
34
Non-GAAP Financial Measures
The Securities and Exchange Commission (“SEC”) has adopted rules to regulate the use in filings with the SEC and in public disclosures of financial measures that are not in accordance with U.S. GAAP, such as Adjusted EBITDA and the ratios related thereto. These measures are derived on the basis of methodologies other than in accordance with U.S. GAAP.
We define Adjusted EBITDA as EBITDA (consolidated net income (loss) before depreciation and amortization, interest expense, interest income and the provision for income taxes, each of which is presented in our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q), adjusted for the impact of the following items that are either non-cash or that we do not consider representative of our ongoing operating performance: lossgain or gainloss on sale or disposition of assets, settlement and sublease, loss on early extinguishment of debt,impairment charges, equity-based compensation expense, professional feesacquisition-related expense, gain or losses from changes in the tax receivable agreement liability, expense or income related to changes in the estimated fair value measurement of contingent consideration and certain expenses incurred in connection with the issuance of Class A common stock as a result of RIHI’s redemption of common units in RMCO and acquisition related expenses. During the first quarter of 2017, we revised our definition of Adjusted EBITDA to better reflect the performance of our business and comply with SEC guidance. We now adjust for equity-based compensation expense and no longer adjust for straight-line rent expense and severance related expenses. Adjusted EBITDA was revised in prior periods to reflect this change for consistency in presentation. other non-recurring items.
BecauseAs Adjusted EBITDA omits certain non-cash items and other non-recurring cash charges or other items, we believe that it is less susceptible to variances that affect our operating performance resulting from depreciation, amortization and other non-cash and non-recurring cash charges or other items. We present Adjusted EBITDA, and the related Adjusted EBITDA margin, because we believe they are useful as supplemental measures in evaluating the performance of our operating businesses and provides greater transparency into our results of operations. Our management uses Adjusted EBITDA and Adjusted EBITDA margin as factors in evaluating the performance of our business.
Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and you should not consider these measures either in isolation or as a substitute for analyzing our results as reported under U.S. GAAP. Some of these limitations are:
| these measures do not reflect changes in, or cash requirements for, our working capital needs; |
| these measures do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
37
| these measures do not reflect our income tax expense or the cash requirements to pay our taxes; |
| these measures do not reflect the cash requirements to pay dividends to stockholders of our Class A common stock and tax and other cash distributions to our non-controlling unitholders; |
| these measures do not reflect the cash requirements |
| although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often require replacement in the future, and these measures do not reflect any cash requirements for such replacements; |
| although equity-based compensation is a non-cash charge, the issuance of equity-based awards may have a dilutive impact on earnings per share; and |
| other companies may calculate these measures differently, so similarly named measures may not be comparable. |
35
A reconciliation of Adjusted EBITDA to net income for our consolidated results for the three and nine months ended September 30, 2017 and 2016(loss) is set forth in the following table:table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | ||||
|
| (in thousands) | ||||||||||
Net income |
| $ | 7,537 |
| $ | 14,306 |
| $ | 33,245 |
| $ | 38,829 |
Depreciation and amortization |
|
| 4,286 |
|
| 3,889 |
|
| 15,678 |
|
| 11,482 |
Interest expense |
|
| 2,598 |
|
| 2,121 |
|
| 7,414 |
|
| 6,493 |
Interest income |
|
| (145) |
|
| (32) |
|
| (195) |
|
| (118) |
Provision for income taxes |
|
| 3,091 |
|
| 4,632 |
|
| 10,883 |
|
| 12,176 |
EBITDA |
|
| 17,367 |
|
| 24,916 |
|
| 67,025 |
|
| 68,862 |
Loss (gain) on sale or disposition of assets and sublease, net (1) |
|
| 3,980 |
|
| (99) |
|
| 3,859 |
|
| (175) |
Loss on early extinguishment of debt |
|
| — |
|
| — |
|
| — |
|
| 136 |
Equity-based compensation expense |
|
| 868 |
|
| 501 |
|
| 2,161 |
|
| 1,812 |
Public offering related expenses |
|
| — |
|
| — |
|
| — |
|
| 193 |
Acquisition related expenses (2) |
|
| 3,566 |
|
| 169 |
|
| 4,398 |
|
| 699 |
Adjusted EBITDA (3) |
| $ | 25,781 |
| $ | 25,487 |
| $ | 77,443 |
| $ | 71,527 |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | September 30, | | September 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
Net income (loss) (1) | | $ | (42,363) | | $ | 6,838 | | $ | (30,240) | | $ | 18,319 |
Depreciation and amortization (1) | | | 8,582 | | | 6,730 | | | 22,236 | | | 19,154 |
Interest expense | | | 3,315 | | | 2,159 | | | 7,537 | | | 7,028 |
Interest income | | | (19) | | | (25) | | | (201) | | | (328) |
Provision for income taxes | | | 792 | | | 2,057 | | | 1,454 | | | 6,584 |
EBITDA | | | (29,693) | | | 17,759 | | | 786 | | | 50,757 |
(Gain) loss on sale or disposition of assets | | | — | | | (11) | | | (10) | | | (33) |
Loss on contract settlement (2) | | | 40,500 | | | — | | | 40,500 | | | — |
Loss on extinguishment of debt (3) | | | 264 | | | — | | | 264 | | | — |
Impairment charge - leased assets (4) | | | — | | | 7,902 | | | — | | | 7,902 |
Impairment charge - goodwill (5) | | | 5,123 | | | — | | | 5,123 | | | — |
Equity-based compensation expense | | | 9,008 | | | 3,414 | | | 27,315 | | | 8,347 |
Acquisition-related expense (6) | | | 9,432 | | | 1,021 | | | 14,303 | | | 1,915 |
Fair value adjustments to contingent consideration (7) | | | 320 | | | 250 | | | 330 | | | (105) |
Adjusted EBITDA | | $ | 34,954 | | $ | 30,335 | | $ | 88,611 | | $ | 68,783 |
(1) |
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||
|
| September 30, 2016 |
| September 30, 2016 | ||
Adjusted EBITDA as previously reported |
| $ | 25,955 |
| $ | 72,262 |
Equity-based compensation expense |
|
| 501 |
|
| 1,812 |
Straight-line rent expense (a) |
|
| (169) |
|
| (580) |
Severance related expenses (b) |
|
| (586) |
|
| (1,500) |
Immaterial correction (c) |
|
| (214) |
|
| (467) |
Adjusted EBITDA as currently reported |
| $ | 25,487 |
| $ | 71,527 |
|
|
|
|
|
|
(2) | Represents the effective settlement of the pre-existing master franchise agreement with INTEGRA that was recognized with the acquisition. See Note 5, Acquisitions for additional information. |
(3) | The loss was recognized in connection with the amended and restated Senior Secured Credit Facility. See Note 8, Debt for additional information. |
(4) | Represents the impairment recognized on a portion of the Company’s corporate headquarters office building in the prior year. See Note 2, Summary of Significant Accounting Policies for additional information. |
(5) | Lower than expected adoption rates of the First technology resulted in downward revisions to long-term forecasts, resulting in an impairment charge to the First reporting unit goodwill. See Note 6, Intangible Assets and Goodwill for additional information. |
(6) | Acquisition-related expense includes personnel, legal, accounting, advisory and consulting fees incurred in connection with the evaluation, due diligence, execution and integration of acquisitions. |
(7) | Fair value adjustments to contingent consideration include amounts recognized for changes in the estimated fair value of the contingent consideration liabilities. See Note 9, Fair Value Measurements to the accompanying unaudited condensed consolidated financial statements for additional information. |
Liquidity and Capital Resources
Overview of Factors Affecting Our Liquidity
Our liquidity position has been positivelyis affected by the growth of our agent base and improving conditions in the real estate market. In this regard, our short-term liquidity position from time to time has been, and will continue to be, affected by the number ofseveral factors including agents in the RE/MAX network.network, particularly in Company-Owned Regions. Our cash flows are primarily related to the timing of:
(i) | cash receipt of revenues; |
(ii) | payment of selling, operating and administrative expenses; |
(iii) | investments in technology and Motto; |
(iv) | cash consideration for acquisitions and acquisition-related expenses; |
| principal payments and related interest payments on our |
| dividend payments to stockholders of our Class A common stock; |
| distributions and other payments to non-controlling unitholders pursuant to the terms of RMCO’s |
36
| corporate tax payments paid by the Company; and |
| payments to the TRA |
We have satisfied these needs primarily through our existing cash balances, cash generated by our operations and funds available under our 2016 Senior Secured Credit Facility. We may also utilize our Senior Secured Credit Facility, and we may pursue other sources of capital that may include other forms of external financing, such as additional financing in the public capital markets, in order to increase our cash position and preserve financial flexibility as needs arise.
Financing Resources
On December 15, 2016,RMCO and RE/MAX, LLC, a wholly owned subsidiary of RMCO, entered intohave a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto (the “2016 Senior“Senior Secured Credit Facility”), which. On July 21, 2021, we amended and restated the 2013 Senior Secured Credit Facility. The 2016our Senior Secured Credit Facility to fund the acquisition of INTEGRA and refinance our existing facility. The revised facility provides tofor a seven-year $460.0 million term loan facility and a five-year $50.0 million revolving loan facility. The revised facility also provides for incremental facilities under which RE/MAX, LLC $235.0may request to add one or more tranches of term facilities or increase any then existing credit facility in the aggregate principal amount of up to $100 million in term loans(or a higher amount subject to the terms and a $10.0 million revolving facility. conditions of the Senior Secured Credit Facility), subject to lender participation.
The 2016 Senior Secured Credit Facility requires RE/MAX, LLC to repay term loans at $1.2 million per quarter. We are also required to repay the term loans and reduce revolving commitments with (i) 100.0% of proceeds of any incurrence of additional debt not permitted by the 2016 Senior Secured Credit Facility, (ii) 100.0% of proceeds of asset sales and 100.0% of amounts recovered under insurance policies, subject to certain exceptions and a reinvestment right and (iii) 50.0%50% of excess cash flowExcess Cash Flow (or “ECF” as defined in the Senior Secured Credit Facility) at the end of the applicable fiscal year if
39
RE/MAX, LLC’s total leverage ratioTotal Leverage Ratio (or “TLR” as defined in the 2016 Senior Secured Credit FacilityFacility) is in excess of 3.25:1.00, with such percentage decreasing4.25:1. If the TLR as RE/MAX, LLC’s leverage ratio decreases. The 2013 Senior Secured Credit Facility required RE/MAX, LLC to repay term loans with 50% of excess cash flow at the end of the applicablelast day of such fiscal year is equal to or less than 4.25:1 but above 3.75:1, the repayment percentage is 25% of ECF and if its total leverage ratiothe TLR as defined therein was in excess of 2.50:1.00, withthe last day of such percentage decreasing as RE/MAX, LLC’s leverage ratio decreased.fiscal year is less than 3.75:1, no repayment from ECF is required.
The 2016 Senior Secured Credit Facility is guaranteed by RMCO and RE/MAX of Western Canada (1998), LLC, a wholly owned subsidiary of RE/MAX, LLC, and is secured by a lien on substantially all of the assets of RMCO, RE/MAX, LLC and each guarantor.
Borrowings under the term loans and revolving loans accrue interest, at London Interbank Offered Rate (“LIBOR”), provided that LIBOR shall be no less than 0.75% plus a maximum applicable margin of 2.75%.
RE/MAX, LLC entered into the 2013 Senior Secured Credit Facility, which was paid off when RE/MAX, LLC amended and restated the 2013 Senior Secured Credit Facility by entering into the 2016 Senior Secured Credit Facility, in July 2013 with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto. Under the 2013 Senior Secured Credit Facility, RE/MAX, LLC borrowed $230.0 million in term loans and had a revolving line of credit available of up to $10.0 million. other operating companies.
The 2016 Senior Secured Credit Facility, like the 2013 Senior Secured Credit Facility provides for customary restrictions on, among other things, additional indebtedness, liens, dispositions of property, dividends, transactions with affiliates and fundamental changes such as mergers, consolidations and liquidations. With certain exceptions, any default under any of our other agreements evidencing indebtedness in the amount of $15.0 million or more constitutes an event of default under the 2016 Senior Secured Credit Facility. Certain of the restrictions under the 2016 Senior Secured Credit Facility are less restrictive, as compared with the comparable terms in the 2013 Senior Secured Credit Facility.
The 2016Borrowings under the term loans and revolving loans accrue interest, at our option on (a) LIBOR, provided LIBOR shall be no less than 0.50% plus an applicable margin of 2.50% and, provided further that such rate shall be adjusted for reserve requirements for eurocurrency liabilities, if any (the “LIBOR Rate”) or (b) the greatest of (i) the prime rate as quoted by the Wall Street Journal, (ii) the NYFRB Rate (as defined in the Senior Secured Credit Facility restrictsFacility) plus 0.50% and (iii) the aggregate acquisition consideration for permitted acquisitions,one-month Eurodollar Rate plus 1.00%, (such greatest rate, the “ABR”) plus, in a situation in which RE/MAX, LLC would not be in pro forma compliance with a 3.5:1.0 total leverage ratio (basedeach case, an applicable margin of 1.50%. As of September 30, 2021, the interest rate on how suchthe term is defined therein),loan facility was 3.0%.
A commitment fee of 0.5% per annum (subject to $100.0 million in any fiscal year. The 2016 Senior Secured Credit Facility also provides for incremental facilities, subject to lender participation, as long asreductions) accrues on the total leverage ratio (calculated as net debt to EBITDA as defined therein) remains below 4.00:1.00. amount of unutilized revolving line of credit.
As of September 30, 2017, RE/MAX, LLC2021, we had $229.4$453.0 million of term loans outstanding, net of an unamortized discount and issuance costs, and no revolving loans outstanding under our 2016 Senior Secured Credit Facility. If any loan or other amounts are outstanding under the revolving line of credit, the 2016 Senior Secured Credit Facility requires compliance with a leverage ratio and an interest coverage ratio. A commitment fee of 0.5% per annum accrues on the amount of unutilized revolving line of credit.
Sources and Uses of Cash
As of September 30, 20172021 and December 31, 2016,2020, we had $83.9$119.4 million and $57.6$101.4 million, respectively, of cash and cash equivalents, of which approximately $1.8$6.0 million and $11.6$4.2 million, respectively, were denominated in foreign currencies, respectively.
currencies.
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The following table summarizes our cash flows from operating, investing, and financing activities:activities (in thousands):
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Cash provided by (used in): |
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Operating activities |
| $ | 53,440 |
| $ | 49,040 |
| $ | 4,400 | | $ | 16,644 | | $ | 43,471 |
Investing activities |
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| (1,781) |
| (21,067) |
| 19,286 | | | (192,471) | | | (15,202) | ||
Financing activities |
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| (26,408) |
| (36,577) |
| 10,169 | | | 199,142 | | | (27,070) | ||
Effect of exchange rate changes on cash |
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| 1,076 |
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| 373 |
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| 703 | | | 54 | | | (30) |
Net change in cash and cash equivalents |
| $ | 26,327 |
| $ | (8,231) |
| $ | 34,558 | ||||||
Net change in cash, cash equivalents and restricted cash | | $ | 23,369 | | $ | 1,169 |
Operating Activities
Cash provided by operating activities decreased primarily as a result of:
● | a decrease due to the loss on contract settlements of $40.5 million; |
● | an increase in Adjusted EBITDA of $19.8 million; |
● | a decrease due to higher tax payments of $7.5 million, primarily related to settlement of uncertain tax positions; |
● | a decrease due to higher acquisition related costs, which are excluded from Adjusted EBITDA; and |
● | timing differences on various operating assets and liabilities. |
Investing Activities
During the nine months ended September 30, 2017,2021 the change in cash (used in) provided by operatinginvesting activities increasedwas primarily as athe result of an increasethe INTEGRA acquisition and work completed on our corporate headquarters refresh and higher capitalizable investments in Adjusted EBITDA of $5.9 million. Also impacting cash flows from operating activities were:technology as compared to the prior year.
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InvestingFinancing Activities
During the nine months ended September 30, 2017,2021 the change in cash used in investingprovided by (used in) financing activities decreasedwas primarily as a result ofdue to net cash received from the acquisitions of RE/MAX of New York, RE/MAX of Alaska and Full House in 2016 and a reduction in the investmentsincrease in our information technology infrastructure.term loan, partially offset by an increase in payments related to tax withholding for vested share-based compensation.
Financing ActivitiesCapital Allocation Priorities
During the nine months ended September 30, 2017 cash used in financing activities decreased as a result of:
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Cash Priorities
Liquidity
Our objective is to maintain a strong liquidity position. We have existing cash balances, cash flows from operating activities, access to our revolving line of creditfacility and incremental facilities under our 2016 Senior Secured Credit Facility available to support the needs of our business. As needs arise, we may seek additional financing in the public capital markets.
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Acquisitions
As part of our growth strategy, we may pursue reacquisitionsacquisitions of regional franchise rights in Independent Regions in the U.S. and Canada as well as additional acquisitions or investments in complementary businesses, services and technologies that would provide access to new markets, or customers,revenue streams, or otherwise complement our existing operations. We wouldmay fund any such growth with various sources of capital including existing cash balances funds generatedand cash flow from operations, and access to our revolving line ofas well as proceeds from debt financings including under existing credit and incremental facilities under our 2016 Senior Secured Credit Facility. or new arrangements raised in the public capital markets.
Capital Expenditures
The total aggregate amount paid for purchases of property and equipment and purchased andcapitalization of developed software was $1.7$12.1 million and $3.2$4.6 million during the nine months ended September 30, 20172021 and 2016,2020, respectively. Amounts paid for purchases of property, equipmentThese amounts primarily relate to spend on our corporate headquarters refresh and software primarily related to investments in our information technology infrastructure and leasehold improvements.technology. In order to expand our technological capabilities,technology, we plan to continue to re-invest in our business in order to improve operational efficiencies and enhance the tools and services provided to the franchisees and agentsaffiliates in our network.networks. Total capital expenditures for 2017 is2021 are expected to be approximately $2.2 million.between $15 million and $17 million as we continue with the corporate headquarters refresh and higher capitalizable investments. See Financial and Operational Highlights above for additional information.
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Return of Capital
Dividends
Return of capital to shareholders is one of our primary capital allocation priorities. Our Board of Directors declared and we paid quarterly cash dividends of $0.18$0.23 per share on all outstanding shares of Class A common stock during the first second and third quarterthree quarters of 2017, as disclosed in Note 4, Earnings Per Share and Dividends.2021. On November 1, 2017,3, 2021, our Board of Directors declared a quarterly cash dividend of $0.18 per share on all outstanding shares of Class A common stock, which was paid on November 29, 2017 to stockholders of record at the close of business on November 15, 2017. On February 21, 2018, the Company’s Board of Directors declared a quarterly dividend of $0.20$0.23 per share on all outstanding shares of Class A common stock, which is payable on March 21, 2018December 1, 2021 to stockholders of record at the close of business on March 7, 2018. The declarationNovember 17, 2021. Future capital allocation decisions with respect to return of capital either in the form of additional future dividends, and, if declared, the amount of any such future dividend, or potentially in the form of share buybacks, will be subject to our actual future earnings and capital requirements and any amounts authorized will be at the discretion of our Board of Directors; however, we currently intend to continue to pay a cash dividend on shares of Class A common stock on a quarterly basis. Directors.
Distributions and Other Payments to Non-controlling Unitholders (RIHI, Inc.)
Distributions to Non-Controlling Unitholders Pursuant to the New RMCO, LLC Agreement
As authorized by the New RMCO, LLC Agreement, RMCO makes cash distributions to its unitholders, RE/MAX Holdings and RIHI, also referred to as its members. In accordance with the New RMCO, LLC Agreement, distributions are required to be made by RMCO to its members on a pro-rata basis in accordance with each members’ ownership percentage in RMCO. These distributions have historically been either in the form of payments to cover its members’ estimated tax liabilities, dividend payments, or payments to ensure pro-rata distributions have occurred.
As a limited liability company (treated as a partnership for income tax purposes), RMCO does not incur significant domestic federal, state or local income taxes, as these taxes are primarily the obligations of its members. RMCO is generally required to distribute cash to its members to cover each member’s estimated tax liabilities, if any, with respect to their allocable share of RMCO earnings. Such distributions are required if any other distributions from RMCO (i.e., in the form of dividend payments) for the relevant period are otherwise insufficient to enable each member to cover its estimated tax liabilities.
RE/MAX Holdings’ only source of cash flow from operations is in the form of distributions from RMCO. RE/MAX Holdings receives distributions from RMCO on a quarterly basis that are equal to the dividend payments RE/MAX Holdings’ make to the stockholders of its Class A common stock. As a result, absent any additional distributions, RE/MAX Holdings may have insufficient funds to cover its estimated tax and TRA liabilities. Therefore, as necessary, RMCO makes a separate distribution to RE/MAX Holdings, and because all distributions must be made on a pro-rata basis, RIHI receives a separate payment to ensure such pro-rata distributions have occurred.
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Throughout the year until completion of its tax returns with respect to such year, RMCO may pay required or pro-rata true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the year. See Note 3, Non-controlling Interest for further details on distributions made by RMCO.
Payments Pursuant to the Tax Receivable Agreements
As of September 30, 2017, the Company reflected a total liability of $92.0 million under the terms of these TRAs. The liability pursuant to the TRAs will increase in the future upon future exchanges by RIHI of RMCO common units, with the increase representing 85% of the estimated future tax benefits, if any, resulting from such exchanges. We receive funding from RMCO in order to fund the payment of amounts due under the TRAs.
The actual payments, and associated tax benefits, will vary depending upon a number of factors, including the timing of exchanges by RIHI, the price of our Class A common stock at the time of such exchanges, the amount and timing of the taxable income we generate in the future and the tax rate then applicable. We made additional payments of approximately $6.1 million in the fourth quarter of 2017 related to the TRAs.
Distributions and other payments pursuant to the New RMCO, LLC Agreement and TRAs in the nine months ended September 30, 2017 were comprised of the following (in thousands):
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Required distributions for taxes and pro rata distributions as a result of distributions to RE/MAX Holdings in order to satisfy its estimated tax liabilities | $ | 7,430 |
| $ | 8,442 | ||||||
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Distributions and other payments pursuant to the RMCO, LLC Agreement: | | | | | | | |||||
Pro rata distributions to RIHI as a result of distributions to RE/MAX Holdings in order to satisfy its estimated tax liabilities | | $ | 2,113 | | $ | 2,277 | |||||
Dividend distributions |
| 6,783 |
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| 5,652 | | | 8,667 | | | 8,289 |
Total distributions to RIHI |
| 14,213 |
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| 14,094 | | | 10,780 | | | 10,566 |
Payments pursuant to the TRAs |
| 7,296 |
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| 1,344 | | | — | | | — |
Total distributions to RIHI and TRA payments | $ | 21,509 |
| $ | 15,438 | | $ | 10,780 | | $ | 10,566 |
Commitments and Contingencies
Except for the outstanding lease guarantees acquired in connection with the dispositions of our previously owned brokerages as disclosed inSee Note 13, 12, Commitments and Contingencies our management does not believe there are any other litigation matters involving us that could result, individually or in to the aggregate, in a material adverse effect on ouraccompanying unaudited condensed consolidated financial condition, results of operations and cash flows.statements for additional information.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of September 30, 2017.2021.
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Critical Accounting Judgments and Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts and disclosures in the financial statements and accompanying notes. Actual results could differ from those estimates. Our Critical Accounting Judgments and Estimates disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Judgments and Estimates” in our 2020 Amendment No. 1 to Annual Report on Form 10-K for the year ended December 31, 2016,10-K/A for which there were no material changes, included:
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New Accounting Pronouncements
New Accounting Pronouncements Not Yet Adopted
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 us on January 1, 2019. Early adoption is permitted in any interim or annual reporting period. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. WeThere have been no new accounting pronouncements not yet determined the effect of the standard oneffective that we believe have a significant impact, or potential significant impact, to our consolidated 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 amountstatements. See Note 2, Summary of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. We adopted this standard on January 1, 2018. We will use the modified retrospective transition method, which will result in restating each prior reporting period presented, fiscal years 2016 and 2017, in the year of adoption. Additionally, a cumulative effect adjustment will be recordedSignificant Accounting Policies to the opening balance sheet as of the first day of fiscal year 2016, the earliest period presented. The adoption of the new guidance will change the timing of recognition of franchise sales and franchise renewal revenue. Currently, we recognize revenue upon completion of a sale or renewal. Under the new guidance, franchise sales and renewal revenue, which are included in “Franchise Sales and Other Franchise Revenue” in the Consolidated Statements of Income, will be recognized over the contractual term of the franchise agreement. The impact to both “Franchise Sales and Other Franchise Revenue” and “Operating Income” in the Consolidated Statements of Incomeaccompanying unaudited condensed consolidated financial statements for 2017 from this change will be a decrease of less than $2,000,000. However, the Consolidated Balance Sheet as of December 31, 2017 will be adjusted in the first quarter of 2018 to reflect an increase in “Deferred revenue and deposits” of approximately $26,000,000. The commissions related to franchise sales will be recorded as a contract asset and be recognized over the contractual term of the franchise agreement. Currently, we expense the commissions upon franchise sale completion. The impact from this change to “Selling, operating and administrative expenses” and “Operating Income” in the Consolidated Statements of Income for 2017 is immaterial and the Consolidated Balance Sheet as of December 31, 2017 will be adjusted in the first quarter of 2018 to reflect an increase in “Total assets” of approximately $4,000,000. We do not expect the adoption of the standard to have a material impact on other revenue streams.
additional information.
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Item 3. Quantitative and Qualitative Disclosures About Market Risks
We have operations both within the U.S. and globally and we are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate, foreign exchange and inflationcredit risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. To reduce certain of these risks, we monitor the financial condition of our large franchisees. In addition, our investment strategy has been to invest in financial instruments that are highly liquid and mature within three months from the date of purchase. We do not currently use derivative instruments to mitigate the impact of certain of our market risk exposures norexposures. We do wenot use derivatives for trading or speculative purposes.
Credit Risk
We are exposed to credit risk related to receivables from franchisees. We perform quarterly reviews of credit exposure above an established threshold for each franchisee and are in regular communication with those franchisees about their balance. For significant delinquencies, we will terminate the franchise. Bad debt expense is less than 1% of revenue for the three months ended September 30, 2021 and 2020 and for the nine months ended September 30, 2021.
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our 2016 Senior Secured Credit Facility which bear interest at variable rates. At September 30, 2017, $232.72021, $458.9 million in term loans were outstanding under our 2016 Senior Secured Credit Facility. As of September 30, 2017, the undrawn borrowing availability under the revolving line of credit under our 2016 Senior Secured Credit Facility was $10.0 million. We currently do not engage in any interest rate hedging activity, but given our variable rate borrowings, we monitor interest rates and if appropriate, may engage in hedging activity prospectively. The interest rate on our 2016 Senior Secured Credit Facility entered into in December 2016 is currently based on LIBOR, subject to a floor of 0.75%0.50%, plus an applicable margin of 2.75%2.50%. As of September 30, 2017,2021, the interest rate was 4.08%3.0%. If LIBOR rises such that our rate is above the floor, then each hypothetical 0.125%0.25% increase would result in additional annual interest expense of $0.3$1.1 million. To mitigate a portion of this risk, we invest our cash balances in short-term investments that earn interest at variable rates.
Currency Risk
We have a network of global franchisees in over 100110 countries and territories. Fees imposed on independent franchisees and agents in foreign countries are charged in the local currency. Fluctuations in exchange rates of the U.S. dollar against foreign currencies and cash held in foreign currencies can result, and have resulted, in fluctuations in our(a) revenue and operating income due to a portion of our revenue being denominated in foreign currencies and (b) foreign exchange transaction gains and losses due primarily to cash, accounts receivable and liability balances denominated in foreign currencies, with the Canadian dollar representing the most significant exposure. We currently do not engage in anyTo mitigate a portion of this risk related to (b), we enter into short-term foreign exchange hedging activity but may do so in the future. currency contracts, such as forwards, to minimize exposures related to foreign currency. See Note 2, Summary of Significant Accounting Policies, for more information. In addition, we actively convert cash balances into U.S. dollars to mitigate currency risk on cash positions.
During the three and nine months ended September 30, 2017,2021, a hypothetical 5% strengthening/weakening in the value of the U.S. dollar compared to the Canadian dollar would have resulted in a decrease/increase to pre-taxoperating income of approximately $0.3 million and $0.8$0.9 million, respectively. respectively, related to currency risk (a) above.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that as of September 30, 2017 2021
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our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting described below.
Material WeaknessNotwithstanding the material weakness, management believes the consolidated financial statements included in Internal Control over Financial Reportingthis Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows as of and for the periods presented in accordance with U.S. GAAP.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’sour annual or interim financial statements will not be prevented or detected on a timely basis.
ManagementAs discussed in our Annual Report on Form 10K/A, management has determined that we had ineffective controls regarding a failure to consult with appropriate internal subject matter experts when evaluating the Company did not havemarket value for re-acquired franchise rights in acquisitions of previous Independent Regions beginning in 2007, as well as ineffective controls over the review of certain inputs used in the valuation of intangible assets. These ineffective controls were due to an effectiveineffective risk assessment process to sufficiently identify and assess theall financial reporting risks related to benefits provided by principal stockholders. As a consequence, the Company did not have effective controlspurchase accounting for acquisitions of previous Independent Regions and training of personnel over the identification and communication of related party transactions to financial reporting personnel, management and the Board, as appropriate, to identify and evaluate recognition, measurement and disclosure of such transactions. These control deficiencies resulted in errors in purchase accounting for certain of the acquisitions. These errors resulted in immaterial misstatements in theto our consolidated financial statements for the periods presented that were corrected in current and prior periods as discussed in Note 15, 13, Immaterial Corrections to Prior Period Financial Statements.
These control deficiencies create a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis, and, therefore, management has concluded that the control deficiencies represent a material weakness in, our internal control over financial reporting and our internal control overof financial reporting was not effective as of September 30, 2017.
Notwithstanding the material weakness, management believes the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Remediation Plans2021.
To remediate the material weakness in internal control over financial reporting, we are making several changes, includingwill augment our risk assessment process related to accounting for acquisitions and implement additional controls in connection with the following:
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Several of these changes have already been implemented and the Company continuesIndependent Regions. These additional controls will then be tested in order to work on the remainder. However,validate that the material weakness will not be considered fully remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect the remediation will be completed in 2018, but there can be no assurance that we will meet this goal and we may also conclude that additional measures are required to remediate the material weakness which may necessitate additional implementation and evaluation time.been remediated.
Changes in Internal Control over Financial Reporting
Except as related to the material weakness and remedial measures described above, there have been no changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during our third fiscal quarter ended September 30, 20172021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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From time to time we are involved in litigation, claims and other proceedings relating to the conduct of our business.business, and the disclosures set forth in Note 12, Commitments and Contingencies relating to certain legal matters is incorporated herein by reference. Such litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, commercial arrangements, franchising arrangements, brokerage disputes, vicarious liability based upon conduct of individuals or entities outside of our control including franchisees and independent agents, and employment law claims. Litigation and other disputes are inherently unpredictable and subject to substantial uncertainties and unfavorable resolutions could occur. WeOften these cases raise complex factual and legal issues, which are subject to risks and uncertainties and which could require significant time and resources from management. Although we do not believe we have any currently pending litigation of which the outcome will have a material adverse effect on our business, financial condition or operations; however,operations, there are inherent uncertainties in litigation and other claims and regulatory proceedings against usand such pending matters could result in unexpected expenses and liabilityliabilities and could alsomight materially adversely affect our business, financial condition or operations, andincluding our reputation.
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For a discussion of our potential risks and uncertainties, please see “Risk Factors” in our 2020 Amendment No. 1 to Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 Annual Report”). In addition, the following risk factor updates and supplements the risk factors described in10-K/A, as updated by our 2016 Annual Report. Except as provided below, there2021 second quarter Form 10-Q. There have been no material changes to the risk factors as disclosed in our 20162020 Annual Report.
Risks Related to Our Business and Industry
Our business is dependent on key personnel including key members ofReport, as updated by our senior management team and loss of key individuals, or the inability to retain additional qualified personnel could adversely affect our operations, our brand and our financial performance.2021 second quarter Form 10-Q.
Our senior management team has recently undergone significant changes in personnel, including the completion of transitioning the CEO role from David Liniger, who has been serving as Co-CEO and principal executive officer, to Adam Contos, who will now serve as our sole CEO and as principal executive officer. We also recently enhanced the role of our Lead Independent Director in order to provide additional involvement by our board of directors (the “Board of Directors”) to support the senior management team during this period of transition and to enhance our governance at the Board of Directors level in part in response to the findings of the Special Committee (as defined below).
Our future success will likely continue to depend heavily on the efforts and abilities of key personnel including our CEO, Adam Contos and other members of our senior management, other key employees and the services of our Lead Independent Director, Richard Covey. The loss of services from any of these key personnel could make it more difficult to successfully operate our business and achieve our business goals. In addition, we do not maintain key employee life insurance policies on Mr. Contos or our other key employees. As a result, we may not be able to cover the financial loss we may incur in losing the services of any of these individuals.
In the event of the loss of the services of any of such key personnel, we may be unable to implement or execute upon our corporate succession plan due to factors including the timing of the loss relative to the development of key successor employees or the loss of those successors themselves.
Our ability to retain such key personnel and other key individuals is generally subject to numerous factors, including the compensation and benefits we pay, our ability to provide pathways for professional development and overall morale. As such, we could suffer significant attrition among these key individuals unexpectedly. Competition for qualified personnel in the real estate franchising industry is intense, and we cannot assure you that we will be successful in attracting and retaining qualified employees.
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The Special Committee investigation has caused us to incur significant expenses, and wemay continue to incur additional expenses and other adverse effects following the completion of the Special Committee investigation as we implement remedial measures in response to the findings of the Special Committee and address other consequences of the investigation.
In October 2017, our Board of Directors appointed a special committee of independent directors (the “Special Committee”) to investigate actions of certain members of our senior management. The Special Committee completed its investigation in February 2018 and identified previously undisclosed transactions involving a loan of personal funds from the Company’s then CEO and principal executive officer, David Liniger, to the Company’s then COO, Adam Contos, as well as certain other personal transactions, including cash and non-cash gifts from David and Gail Liniger to Mr. Contos and others. Although the loan, gifts, and other transactions between the Linigers and Mr. Contos did not involve use of any corporate funds, the Special Committee concluded that these transactions created an actual or apparent conflict of interest. The Special Committee also concluded that Mr. Liniger and Mr. Contos violated the Company’s Code of Ethics by engaging in certain transactions and by failing to report those transactions to the Company. The Special Committee also identified instances of noncompliance with other Company policies related to workplace conduct that were limited to actions of Mr. Liniger and did not extend to other members of the Company’s leadership team.
As a result of the Special Committee investigation, the Company’s management team is implementing, under the oversight of the Board of Directors, remedial measures to address various findings of the Special Committee as well as to address deficiencies in our internal controls. These efforts include among other matters (i) enhanced corporate policies and practices including with respect to gifts, loans, conflicts of interest and workplace conduct, (ii) enhanced procedures and practices concerning reporting including with respect to compliance matters, (iii) enhanced training on a range of matters including the responsibilities of officers and leaders related to workplace conduct and various compliance issues, (iv) a range of other actions designed to reinforce changes to the corporate culture in key areas including compliance and workplace practices, and (v) various remedial measures in connection with the deficiencies in our internal controls over financial reporting including an identified material weakness. The remedial measures referred to above are in process are not complete as of the date of this Quarterly Report on Form 10-Q and it is expected that these remedial measures and improvements to governance and corporate policies and practices will continue in future periods over a sustained period of time. See “Item 4—Controls and Procedures.”
During the fourth quarter of 2017, we incurred $2.6 million in expenses related to the Special Committee investigation, and we will continue to incur significant expenses in the first quarter of 2018 and future periods related to the Special Committee investigation and the ongoing implementation of the remedial measures adopted as a result of the findings of the Special Committee.
Some of the anticipated increase in costs will result from enhanced procedures and corrective measures that we need to take with respect to public company compliance work including with respect to our internal controls and disclosures controls and procedures in order to report our financial results and file our SEC filings in a timely manner. In addition, our Board of Directors, senior management and other employees have spent, and will continue to spend, significant time and resources in connection with the Special Committee investigation and the response to the findings of the Special Committee including the adoption and implementation of remedial measures. The time and attention required for these matters may divert management and our Board of Directors from other actions that would be devoted toward our operations and the implementation of our business strategy and thereby could have a material adverse effect on our business, financial condition, results of operations and cash flows.
As a consumer-facing company, maintaining, protecting and enhancing the “RE/MAX” brand is critical to growing our business. The findings by the Special Committee could adversely affect our reputation, our brand and our ability to obtain new business or retain existing business, attract and retain employees, access the capital markets and secure financing, any of which could have a material adverse effect on our business, financial condition, results of operations and cash flows and the market price of our common stock.
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We may experience legal proceedings related to the matters underlying the Special Committee investigation and such legal proceedings may result in adverse findings, the imposition of fines or other penalties, increased costs and expenses and the diversion of management’s time and resources.
We may experience legal proceedings including investigations, securities class action claims and/or derivative litigation related to matters reviewed by the Special Committee. The Company has advised the staff of the SEC regarding the internal investigation being undertaken by the Special Committee. The SEC is performing its own investigative review of certain matters related to the Special Committee investigation. The Company has been, and intends to continue, cooperating fully with the SEC with respect to its review of these matters.
Any legal proceedings related to the Special Committee investigation including any shareholder derivative litigation or governmental inquiries or investigations may divert management’s time and attention and may result in the incurrence of significant expense, including legal fees. Such legal proceedings could also have a material adverse effect on our business, financial condition, results of operations and cash flows including as a result of such expenses or arising from any consequences of such legal proceedings including damages, monetary fines, sanctions, penalties, adverse publicity and damage to reputation.
We have identified control deficiencies in our internal control over financial reporting that constitute a material weakness in our internal control over financial reporting. If we are unable to remediate these control deficiencies including this material weakness, we may not be able to accurately or timely report our financial condition or results of operations, which could cause investors to lose confidence in our reported financial information and thereby adversely affect the market price of our common stock.
As disclosed in Item 4 of this Quarterly Report on Form 10-Q, the Company did not have an effective risk assessment process to identify and assess the financial reporting risks related to benefits provided by principal stockholders. As a consequence, the Company did not have effective controls and training of personnel over the identification and communication of related party transactions to financial reporting personnel, management, and the Board, as appropriate, to identify and evaluate recognition, measurement and disclosure of such transactions.
In particular, the Company’s controls failed to timely identify, record and disclose certain transactions between the Company’s non-Executive Chairman and Co-Founder and other Company personnel. A material weakness is defined as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
As a result of this material weakness, our management concluded that our internal control over financial reporting was not effective as of September 30, 2017 and our disclosure controls and procedures were not effective as of September 30, 2017. These control deficiencies have been in existence for a substantial period of time, but we are actively engaged in developing and implementing remedial measures designed to address these control deficiencies including the identified material weakness, but we have not remedied these matters as of the date of this Quarterly Report on Form 10-Q and can provide no assurance that we will be successful in remediating these deficiencies or the material weakness in a timely manner, or at all, or that we will not identify additional deficiencies and material weaknesses in the future. If our remedial measures are insufficient to address these deficiencies or the material weakness, or if additional material weaknesses or deficiencies in our internal control over financial reporting are discovered or occur in the future, we may not be able to accurately or timely report our financial condition or results of operations, which could cause investors to lose confidence in our reported financial information and thereby adversely affect the perception of our business and the market price of our common stock. See “Item 4—Controls and Procedures.”
We have recently experienced changes in our senior management team, our management structure and our governance, any of which changes may be disruptive to, or cause uncertainty in, our business, which may have an adverse effect on our financial performance and results of operations.
We have recently experienced significant changes in our senior management team and in our management structure. On February 14, 2018, we announced that we had completed the transition of CEO responsibilities from our Co-Founder
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David Liniger, who had previously been serving as our Co-CEO and principal executive officer, to Adam Contos, who was previously Co-CEO with Mr. Liniger. Effective February 14, 2018, Mr. Contos became our sole CEO and our principal executive officer. Mr. Liniger continues to serve on our Board of Directors as non-executive Chairman. In addition, the Board of Directors broadened the scope of authority and responsibilities of our Lead Independent Director position, in part to assist with the Company’s further response to the findings of the Special Committee and to provide enhanced Board oversight and involvement during the transition in management roles. Richard Covey has been appointed to serve as the Lead Independent Director.
These changes in our senior management team and our governance structure and the short time period over which they occurred may be disruptive to, or cause uncertainty in, our business. In addition, our future success will depend in part on Mr. Contos’ successful transition to his role as the sole CEO and principal executive officer. One of the findings of the Special Committee was that Mr. Contos had violated our Code of Ethics in connection with the failure to disclose the loan and certain other transactions involving Mr. Liniger.
David Liniger transitioned to the role of non-executive Chairman of our Board of Directors on February 14, 2018. Findings of the Special Committee included that Mr. Liniger had violated our Code of Ethics in connection with the failure to disclose the loan and certain other transactions involving Mr. Contos. The Special Committee also identified instances of noncompliance with other Company policies related to workplace conduct, which were limited to Mr. Liniger’s actions and did not extend to other members of senior management. For more information regarding the Special Committee investigation, see “Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Special Investigation.”
The Board of Directors appointed Richard Covey to serve as Lead Independent Director with enhanced authority and responsibilities in order to provide additional oversight and assistance to the senior management team from the Board of Directors during this period of transition in the management and governance structure of the Company.
There can be no assurance that we will manage to navigate successfully the transition in our management and governance structure that we have begun to implement during the time period of the conclusion of the Special Committee investigation. In addition, the transition structure that we are implementing may not prove to be successful in certain respects and we may experience other developments that lead us to implement further changes in governance and management structure.
Our financial condition and results of operations may suffer if we experience adverse developments our outcomes in connection with our efforts to manage the transition in our management team and governance structure. In the event that our management team is unable to effectively manage our business, for example, during this time period, we may experience a decline in our business and results of operation. In addition, uncertainty regarding the effectiveness of these management and governance transitions may harm our business in other ways and may adversely affect the trading price of our common stock.
Risks Related to Our Organizational Structure
RIHI has substantial control over us including over decisions that require the approval of stockholders, and its interest in our business may conflict with yours.
RIHI is controlled by David Liniger, our current Chairman and Co-Founder, and Gail Liniger, our Vice Chair and Co-Founder, respectively, holds a majority of the combined voting power of our capital stock through its ownership of 100% of our outstanding Class B common stock. Although the Class B common stock has no economic rights, shares of Class B common stock entitle the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of RE/MAX Holdings that is equal to two times the aggregate number of common units of RMCO held by such holder, and unless certain events occur, may continue to do so until October 7, 2018.
Accordingly, RIHI, acting alone, has the ability to approve or disapprove substantially all matters submitted to a vote of our stockholders. These rights may enable RIHI to consummate transactions that may not be in the best interests of
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holders of our Class A common stock or, conversely, prevent the consummation of transactions that may be in the best interests of holders of our Class A common stock. In addition, although RIHI has voting control of us, RIHI’s entire economic interest in us is in the form of its direct interest in RMCO through the ownership of RMCO common units, the payments it may receive from us under its tax receivable agreement and the proceeds it may receive upon any redemption of its RMCO common units, including issuance of shares of our Class A common stock upon any such redemption and any subsequent sale of such Class A common stock. As a result, RIHI’s interests may conflict with the interests of our Class A common stockholders. For example, RIHI may have a different tax position from us which could influence its decisions regarding certain transactions, especially in light of the existence of the tax receivable agreements that we entered into in connection with our IPO, and whether and when we should terminate the tax receivable agreements and accelerate our obligations thereunder. In addition, the structuring of future transactions may take into consideration the tax or other considerations of RIHI, even in situations where no similar considerations are relevant to us.
In addition, Mr. Liniger served as our Co-CEO until February 2018. As described above, in connection with its investigation, the Special Committee concluded that Mr. Liniger violated the Company’s Code of Ethics and other Company policies. Although Mr. Liniger is no longer involved in the day-to-day management of the Company, his control of RIHI and therefore his position as a controlling shareholder of the Company, as well as his position as Chairman of the Board of Directors, may allow him to exert significant influence over the decisions of management and our business, which may result in conflicts with other members of the Board of Directors.
Risks Related to Ownership of Our Class A Common Stock
The dual class structure of our common stock has the effect of concentrating voting control with RIHI and David Liniger, our Chairman and Co-Founder, as well as his spouse Gail Liniger, our Vice Chair and Co-Founder.
The Class B common stock has no economic rights but entitles the holder, without regard to the number of shares of Class B common stock held, to a number of votes on matters presented to stockholders of RE/MAX Holdings that is equal to two times the aggregate number of common units of RMCO held by such holder. Our Class A common stock has one vote per share.
Based on the voting rights associated with our Class B common stock, and the number of common units of RMCO that RIHI currently owns, RIHI holds nearly 60% of the voting power of our outstanding capital stock. As a result, RIHI controls a majority of the combined voting power of our common stock and therefore is able to control all matters submitted to our stockholders for approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.
RIHI is a Delaware corporation that is majority owned and controlled by David Liniger, our Chairman and Co-Founder, and Gail Liniger, our Vice Chair and Co-Founder. Mr. Liniger served as our Co-CEO until February 2018. As described above, in connection with its investigation, the Special Committee concluded that Mr. Liniger violated the Company’s Code of Ethics and other Company policies. Although Mr. Liniger is no longer involved in the day-to-day management of the Company, his control of RIHI and therefore his position as a controlling shareholder of the Company gives him significant influence over the decisions of management. Any differences in the interests of Mr. Liniger and the interests of owners of our Class A common stock may have a negative impact on the market price of our Class A common stock and may harm our business, financial condition and results of operations.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
None.
On March 14, 2018, the Compensation Committee approved compensation increases for Adam Contos based on his promotion to Chief Executive Officer, including: (i) an increase in base salary to $650,000 per year, (ii) a 2018 cash incentive bonus target of 60% of base salary and (iii) a 2018 RSU equity award target of 100% of base salary. The Company has not yet approved detailed metrics for the 2018 Performance Evaluation and Incentive Plan for cash bonus payments or the performance and vesting terms for 2018 long-term equity incentive compensation awards for officers. The 2018 cash bonus and equity award for Adam Contos will be subject to the final terms and incentive goals approved by the Compensation Committee for such bonus program and such equity awards for 2018.
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Exhibit No. |
| Exhibit Description |
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| Filed |
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3.1 |
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| 10-Q |
| 001-36101 |
| 11/14/2013 |
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3.2 |
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| 001-36101 |
| 11/14/2013 |
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4.1 |
| Form of RE/MAX Holdings, Inc.’s Class A common stock certificate. |
| S-1 |
| 333-190699 |
| 9/27/2013 |
| 4.1 |
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31.1 |
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31.2 |
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32.1 |
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101.INS |
| XBRL Instance Document |
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101.SCH |
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101.CAL |
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
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2.1 | | | 8-K | | 001-36101 | | 6/3/2021 | | 2.1 | | | |
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3.1 | | | 10-Q | | 001-36101 | | 11/14/2013 | | 3.1 | | | |
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3.2 | | | 8-K | | 001-36101 | | 2/22/2018 | | 3.1 | | | |
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4.1 | | Form of RE/MAX Holdings, Inc.’s Class A common stock certificate. | | S-1 | | 333-190699 | | 9/27/2013 | | 4.1 | | |
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10.1 | | | 8-K | | 001-36101 | | 7/21/2021 | | 10.1 | | | |
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101.INS | | XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | | | X |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | | | | X |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | | | X |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | | | X |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | | | X |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | | | X |
104 | | Cover Page Interactive Data File – The cover page XBRL tags are embedded within the Inline XBRL document. | | | | | | | | | | X |
† Indicates a management contract or compensatory plan or arrangement.
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SIGNATURES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| RE/MAX Holdings, Inc. (Registrant) | |||||||||
| | | | | | |||||
Date: | |
| By: | | /s/ Adam M. Contos | |||||
| | | | | Adam M. Contos | |||||
| | | | | Director and Chief Executive Officer | |||||
| | | | | (Principal Executive Officer) | |||||
| | | | |||||||
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Date: | |
| By: | | /s/ Karri R. Callahan | |||||
| | Karri R. Callahan Chief Financial Officer (Principal Financial Officer) | ||||||||
| | | | | | |||||
Date: | |
| By: | | /s/ Brett A. Ritchie | |||||
| | | | | Brett A. Ritchie Chief Accounting Officer (Principal Accounting Officer) |
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