UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2021.
OR
☐ |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission file number: 001-36101
RE/MAX Holdings, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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80-0937145 |
(State or other jurisdiction of
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(I.R.S. Employer
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5075 South Syracuse Street
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80237 |
(Address of principal executive offices) |
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(Zip Code) |
(303) 770-5531
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer |
☐ |
Accelerated filer |
☒ |
Emerging growth company |
☐ |
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 ☒
On 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 per share, and 1 outstanding share of Class B common stock, $0.0001 par value per share.
TABLE OF CONTENTS
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Page No. |
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3 |
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3 |
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4 |
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Condensed Consolidated Statements of Comprehensive Income (Loss) |
5 |
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6 |
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8 |
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Notes to Unaudited Condensed Consolidated Financial Statements |
9 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
26 |
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40 |
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43 |
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45 |
2
PART I. – FINANCIAL INFORMATION
Item 1. Financial Statements
RE/MAX HOLDINGS, INC.
Condensed Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
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September 30, |
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December 31, |
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2021 |
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2020 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
119,446 |
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$ |
101,355 |
Restricted cash |
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25,150 |
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19,872 |
Accounts and notes receivable, current portion, less allowances of $10,581 and $11,724, respectively |
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35,295 |
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29,985 |
Income taxes receivable |
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2,459 |
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1,222 |
Other current assets |
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19,248 |
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13,938 |
Total current assets |
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201,598 |
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166,372 |
Property and equipment, net of accumulated depreciation of $16,017 and $14,731, respectively |
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12,455 |
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7,872 |
Operating lease right of use assets |
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36,555 |
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38,878 |
Franchise agreements, net |
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153,666 |
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69,802 |
Other intangible assets, net |
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33,719 |
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29,969 |
Goodwill |
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268,390 |
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165,358 |
Deferred tax assets, net |
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52,714 |
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50,702 |
Income taxes receivable, net of current portion |
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1,980 |
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1,980 |
Other assets, net of current portion |
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18,102 |
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15,435 |
Total assets |
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$ |
779,179 |
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$ |
546,368 |
Liabilities and stockholders' equity |
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Current liabilities: |
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Accounts payable |
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$ |
4,895 |
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$ |
2,108 |
Accrued liabilities |
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91,193 |
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68,571 |
Income taxes payable |
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5,581 |
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9,579 |
Deferred revenue |
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25,196 |
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25,282 |
Current portion of debt |
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4,600 |
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2,428 |
Current portion of payable pursuant to tax receivable agreements |
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3,590 |
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3,590 |
Operating lease liabilities |
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6,045 |
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5,687 |
Total current liabilities |
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141,100 |
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117,245 |
Debt, net of current portion |
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448,390 |
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221,137 |
Payable pursuant to tax receivable agreements, net of current portion |
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29,974 |
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29,974 |
Deferred tax liabilities, net |
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20,619 |
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490 |
Deferred revenue, net of current portion |
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18,356 |
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19,864 |
Operating lease liabilities, net of current portion |
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46,614 |
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50,279 |
Other liabilities, net of current portion |
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7,945 |
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5,722 |
Total liabilities |
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712,998 |
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444,711 |
Commitments and contingencies |
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Stockholders' equity: |
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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 |
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2 |
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2 |
Class B common stock, par value $.0001 per share, 1,000 shares authorized; 1 share issued and outstanding as of September 30, 2021 and December 31, 2020, respectively |
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— |
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— |
Additional paid-in capital |
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510,424 |
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491,422 |
Retained earnings (accumulated deficit) |
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(6,585) |
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25,628 |
Accumulated other comprehensive income, net of tax |
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639 |
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612 |
Total stockholders' equity attributable to RE/MAX Holdings, Inc. |
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504,480 |
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517,664 |
Non-controlling interest |
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(438,299) |
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(416,007) |
Total stockholders' equity |
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66,181 |
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101,657 |
Total liabilities and stockholders' equity |
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$ |
779,179 |
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$ |
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)
See accompanying notes to unaudited condensed consolidated financial statements.
4
RE/MAX HOLDINGS, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)
See accompanying notes to unaudited condensed consolidated financial statements.
5
RE/MAX HOLDINGS, INC.
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
(Unaudited)
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Retained |
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Accumulated other |
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Class A |
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Class B |
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Additional |
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earnings |
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comprehensive |
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Non- |
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Total |
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common stock |
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common stock |
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paid-in |
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(accumulated |
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income (loss), |
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controlling |
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stockholders' |
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Shares |
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Amount |
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Shares |
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Amount |
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capital |
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deficit) |
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net of tax |
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interest |
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equity |
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Balances, January 1, 2021 |
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18,390,691 |
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$ |
2 |
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1 |
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$ |
— |
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$ |
491,422 |
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$ |
25,628 |
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$ |
612 |
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$ |
(416,007) |
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$ |
101,657 |
Net income (loss) |
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— |
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— |
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— |
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— |
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— |
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1,163 |
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— |
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600 |
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1,763 |
Distributions to non-controlling unitholders |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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(2,889) |
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(2,889) |
Equity-based compensation expense and dividend equivalents |
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459,330 |
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— |
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— |
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— |
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12,679 |
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(472) |
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— |
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— |
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12,207 |
Dividends to Class A common stockholders |
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— |
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— |
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— |
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— |
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— |
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(4,326) |
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— |
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— |
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(4,326) |
Change in accumulated other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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— |
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— |
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41 |
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38 |
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79 |
Payroll taxes related to net settled restricted stock units |
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(130,773) |
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— |
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— |
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— |
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(5,291) |
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— |
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— |
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— |
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(5,291) |
Balances, March 31, 2021 |
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18,719,248 |
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2 |
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1 |
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— |
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498,810 |
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21,993 |
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653 |
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(418,258) |
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103,200 |
Net income (loss) |
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— |
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— |
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— |
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— |
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— |
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5,261 |
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— |
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5,099 |
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10,360 |
Distributions to non-controlling unitholders |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
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(4,110) |
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(4,110) |
Equity-based compensation expense and dividend equivalents |
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640 |
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— |
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— |
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— |
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4,615 |
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— |
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— |
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— |
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4,615 |
Dividends to Class A common stockholders |
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— |
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— |
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— |
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— |
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— |
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(4,345) |
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— |
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— |
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(4,345) |
Change in accumulated other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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— |
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— |
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110 |
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97 |
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207 |
Payroll taxes related to net settled restricted stock units |
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(223) |
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— |
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— |
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— |
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(7) |
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— |
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— |
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— |
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(7) |
Other |
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— |
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— |
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— |
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— |
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12 |
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— |
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— |
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— |
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12 |
Balances, June 30, 2021 |
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18,719,665 |
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$ |
2 |
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1 |
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$ |
— |
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$ |
503,430 |
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$ |
22,909 |
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$ |
763 |
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$ |
(417,172) |
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$ |
109,932 |
Net income (loss) |
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— |
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— |
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— |
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— |
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— |
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(25,149) |
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— |
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(17,214) |
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(42,363) |
Distributions to non-controlling unitholders |
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— |
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— |
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— |
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— |
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— |
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— |
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— |
|
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(3,781) |
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(3,781) |
Equity-based compensation expense and dividend equivalents |
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87,428 |
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— |
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— |
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— |
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7,004 |
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— |
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— |
|
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— |
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7,004 |
Dividends to Class A common stockholders |
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— |
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— |
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— |
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— |
|
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— |
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(4,345) |
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— |
|
|
— |
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(4,345) |
Change in accumulated other comprehensive income (loss) |
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— |
|
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— |
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— |
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— |
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— |
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— |
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(124) |
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(132) |
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(256) |
Payroll taxes related to net settled restricted stock units |
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(899) |
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— |
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— |
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— |
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(31) |
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— |
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— |
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— |
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(31) |
Other |
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— |
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— |
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— |
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— |
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21 |
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— |
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— |
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— |
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21 |
Balances, September 30, 2021 |
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18,806,194 |
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2 |
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1 |
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— |
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510,424 |
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(6,585) |
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|
639 |
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(438,299) |
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66,181 |
6
See accompanying notes to unaudited condensed consolidated financial statements.
7
RE/MAX HOLDINGS, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
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Nine Months Ended |
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September 30, |
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2021 |
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2020 |
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Cash flows from operating activities: |
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Net income (loss) |
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$ |
(30,240) |
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$ |
18,319 |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
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Depreciation and amortization |
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22,236 |
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19,154 |
Impairment charge - leased assets |
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— |
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7,902 |
Impairment charge - goodwill |
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5,123 |
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— |
Bad debt expense |
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(208) |
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4,024 |
Loss on early extinguishment of debt |
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264 |
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— |
Equity-based compensation expense |
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27,315 |
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8,347 |
Deferred income tax expense (benefit) |
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(1,869) |
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1,889 |
Fair value adjustments to contingent consideration |
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330 |
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(105) |
Non-cash lease expense (benefit) |
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(984) |
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— |
Other, net |
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|
453 |
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|
209 |
Changes in operating assets and liabilities |
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(5,776) |
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(16,268) |
Net cash provided by operating activities |
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16,644 |
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|
43,471 |
Cash flows from investing activities: |
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Purchases of property, equipment and capitalization of software |
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(12,069) |
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(4,575) |
Acquisitions, net of cash, cash equivalents and restricted cash acquired of $14.1 million and $0.9 million, respectively |
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(180,402) |
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(10,627) |
Net cash used in investing activities |
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(192,471) |
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(15,202) |
Cash flows from financing activities: |
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Proceeds from the issuance of debt |
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458,850 |
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— |
Payments on debt |
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(226,240) |
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(1,986) |
Capitalized debt amendment costs |
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(3,871) |
|
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— |
Distributions paid to non-controlling unitholders |
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|
(10,780) |
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|
(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 |
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|
(27,070) |
Effect of exchange rate changes on cash |
|
|
54 |
|
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(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: |
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|
Cash paid for interest |
|
$ |
3,962 |
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$ |
6,638 |
Net cash paid for income taxes |
|
$ |
11,452 |
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$ |
3,963 |
Schedule of non-cash investing activities: |
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|
|
|
|
Class A shares issued as consideration for acquisitions |
|
$ |
— |
|
$ |
8,800 |
See accompanying notes to unaudited condensed consolidated financial statements.
8
1. Business and Organization
RE/MAX Holdings, Inc. (“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 (“Motto”). RE/MAX, founded in 1973, has nearly 140,000 agents operating in over 8,000 offices and a presence in more than 110 countries and territories. Motto, founded in 2016, is the first nationally franchised mortgage brokerage in the U.S. RE/MAX and Motto are 100% franchised—the Company 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.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying Condensed Consolidated Balance Sheet at December 31, 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”). 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 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, 2021 and the results of its operations and comprehensive income (loss), cash flows and changes in its stockholders’ equity for the three and nine months ended September 30, 2021 and 2020. Interim results may not be indicative of full-year performance.
These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements within the Company’s Amendment No. 1 to Annual Report on Form 10-K/A for the year ended December 31, 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.
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.
Segment Reporting
The Company operates under the following four operating segments: Real Estate, Mortgage, Marketing Funds and booj. Due to quantitative insignificance, the booj operating segment does not meet the criteria of a 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):
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):
Leases
The Company leases corporate offices, a distribution center, billboards and certain equipment. As all franchisees are independently owned and operated, there are no leases recognized for any offices used by the Company’s franchisees. 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, 2021, the Company had an aggregate U.S. dollar equivalent of $58.5 million notional amount of Canadian dollar forward contracts to hedge these exposures.
12
Recently Adopted Accounting Pronouncements
None.
New Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which contains temporary optional expedients and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The new guidance is effective upon issuance and may be adopted on any date on or after March 12, 2020. The relief is temporary and only available until December 31, 2022, when the reference rate replacement activity is expected to have completed. The Company believes the amendments of ASU 2020-04 will not have a significant impact on the Company’s consolidated financial statements and related disclosures as the Company does not currently engage in interest rate hedging of its LIBOR based debt, nor does it believe it has any material contracts tied to LIBOR other than its Senior Secured Credit Facility, as discussed in Note 8, Debt. The Company does not expect any material adverse consequences from this transition.
3. Non-controlling Interest
Holdings is the sole managing member of RMCO and operates and controls all the business affairs of RMCO. The ownership of the common units in RMCO is summarized as follows:
The weighted average ownership percentages for the applicable reporting periods are used to calculate the “Net income (loss) attributable to RE/MAX Holdings, Inc.” A reconciliation of “Income (loss) before provision for income taxes” to “Net income (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 percentages):
(a) | The weighted average ownership percentage of RMCO differs from the allocation of income (loss) before provision for income taxes between Holdings and the non-controlling interest due to certain relatively insignificant items recorded at Holdings. |
(b) | The provision for income taxes attributable to Holdings is primarily comprised of U.S. federal and state income taxes on its proportionate share of the flow-through income (loss) from RMCO. It also includes Holdings’ share of taxes directly incurred by RMCO and its subsidiaries, including taxes in certain foreign jurisdictions. |
13
(c) | The provision for income taxes attributable to the non-controlling interest represents its share of taxes incurred by RMCO and its subsidiaries (both foreign taxes and taxes from non-flow through subsidiaries). Otherwise, because RMCO is a flow-through entity, there is no U.S. federal and state income tax provision recorded on the non-controlling interest. Amounts shown for the nine months ended September 30, 2021 include a reversal of an uncertain tax position, the majority of which was allocated to the non-controlling interest (see Note 10, Income Taxes for additional information). |
(d) | 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. |
Distributions and Other Payments to Non-controlling Unitholders
Under the terms of RMCO’s limited liability company operating agreement, RMCO makes cash distributions to non-controlling unitholders on a pro-rata basis. The distributions paid or payable to non-controlling unitholders are summarized as follows (in thousands):
|
|
|
|
|
|
|
Nine Months Ended |
||||
|
September 30, |
||||
|
2021 |
|
2020 |
||
Tax and other distributions |
$ |
2,113 |
|
$ |
2,277 |
Dividend distributions |
|
8,667 |
|
|
8,289 |
Total distributions to non-controlling unitholders |
$ |
10,780 |
|
$ |
10,566 |
4. Earnings (Loss) Per Share and Dividends
Earnings (Loss) Per Share
The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except shares and per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
(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. |
Outstanding Class B common stock does not share in the earnings of 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.
14
Dividends
Dividends declared and paid during each quarter ended per share on all outstanding shares of Class A common stock were as follows (in thousands, except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 3, 2021, the Company’s Board of Directors declared a quarterly dividend of $0.23 per share on all outstanding shares of Class A common stock, which is payable on December 1, 2021 to stockholders of record at the close of business on November 17, 2021.
5. Acquisitions
RE/MAX INTEGRA North America Regions Acquisition
On July 21, 2021, the Company acquired the operating companies of the North America regions of INTEGRA whose territories cover 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) for cash consideration of approximately $235.0 million. The Company acquired these companies in order to convert these formerly Independent Regions into Company-Owned Regions, advance its ability to scale, deliver value to its affiliates and 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 Senior Secured Credit Facility (See Note 8, Debt) and using cash from operations.
The Company allocated $40.5 million of the purchase 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 the difference between the historical contractual royalty rates paid by INTEGRA and the current market rate. The loss is recorded in “Settlement and impairment charges” in the accompanying Condensed Consolidated Statements of Income (Loss).
For the three and nine months ended September 30, 2021, INTEGRA contributed incremental revenues of $11.5 million.
15
The following table summarizes the preliminary allocation of the purchase price (net of settlement loss) to the fair value of assets acquired and liabilities assumed for the acquisition (in thousands):
(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 none 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 INTEGRA had occurred on January 1, 2020. The 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).
16
Gadberry & wemlo
On September 10, 2020, the Company acquired The Gadberry Group, LLC (“Gadberry”) for $4.6 million in cash, net of cash acquired, and $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 years (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 success of the Company’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 acquired 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 vast majority of which was expensed in the first quarter of 2021 related to two employees who departed (see Note 11, Equity-Based Compensation for additional information). Wemlo is a fintech company that has developed its cloud service for mortgage brokers, combining third-party loan processing services with an all-in-one digital platform.
The total purchase price for both aforementioned acquisitions was allocated to the assets and liabilities acquired based on their preliminary estimated fair values. The Company recorded $14.4 million in goodwill, virtually all of which is deductible for tax purposes, and $6.3 million in other intangibles as a result of these acquisitions.
6. Intangible Assets and Goodwill
The following table provides the components of the Company’s intangible assets (in thousands, except weighted average amortization period in years):
(a) | As of September 30, 2021 and December 31, 2020, capitalized software development costs of $3.5 million and $1.4 million, respectively, were related to technology projects not yet complete and ready for their intended use and thus were not subject to amortization. |
Amortization expense was $7.9 million and $6.3 million for the three months ended September 30, 2021 and 2020, respectively. Amortization expense was $20.6 million and $17.8 million for the nine months ended September 30, 2021 and 2020. The 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.
17
The estimated future amortization expense related to intangible assets includes the estimated amortization expense associated with the Company’s intangible assets assumed with the Company’s acquisitions (in thousands):
|
|
|
|
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 |
The following table presents changes to goodwill by reportable segment (in thousands):
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):
(a) | Consists primarily of liabilities recognized to reflect the contractual restriction that all funds collected in the Marketing Funds must be spent for designated purposes. See Note 2, Summary of Significant Accounting Policies for additional information. |
18
8. Debt
Debt, net of current portion, consists of the following (in thousands):
Maturities of debt are as follows (in thousands):
|
|
|
|
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
On July 21, 2021, the Company amended and restated its Senior Secured Credit Facility to fund the acquisition of INTEGRA and refinance its existing facility. The revised facility provides for a seven-year $460.0 million term loan facility which matures on July 21, 2028, and a $50.0 million revolving loan facility which must be repaid on 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 accrue interest, at the Company’s 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) 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, 2021, the interest rate on the term loan facility was 3.0%.
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, no 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 is 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 2020 Amendment No. 1 to Annual Report on Form 10-K/A.
19
A summary of the Company’s liabilities measured at fair value on a recurring basis is as follows (in thousands):
(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 8% of gross receipts collected by Motto each year (the “Revenue Share Year”) through September 30, 2026, with no limitation as to the maximum payout. The annual payment is required to be made within 120 days of the end of each Revenue Share Year. The fair value of the contingent purchase consideration represents the forecasted discounted cash payments that the Company expects to 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 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 the contingent consideration (in thousands):
|
|
|
|
|
|
Total |
|
Balance at January 1, 2021 |
|
$ |
6,340 |
Fair value adjustments |
|
|
330 |
Balance at September 30, 2021 |
|
$ |
6,670 |
The following table summarizes the carrying value and estimated fair value of the Senior Secured Credit Facility (in thousands):
10. Income Taxes
The “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income (Loss) is based on an estimate of the Company’s annualized effective income tax rate, except for the loss on settlement of the pre-existing master franchise contracts of $40.5 million (as discussed in Note 5, Acquisitions), which was evaluated discretely. This loss has no tax provision under GAAP; hence, the year-to-date tax provision is an expense (as opposed to a benefit) for the nine 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. Based 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 expense of $1.4 million (including interest and penalties) in the Condensed 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 Company 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” in the accompanying Consolidated Statements of Income.
A reconciliation of the beginning and ending amount, excluding interest and penalties is as follows:
Of the Company’s remaining uncertain tax positions, $1.9 million have a reasonable possibility of being settled within the next 12 months.
11. Equity-Based Compensation
Employee equity-based compensation expense under the RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan (the “Incentive Plan”), net of the amount capitalized in internally developed software, is as follows (in thousands):
(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 two 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
Time-based Restricted Stock
The following table summarizes equity-based compensation activity related to time-based restricted stock units and restricted stock awards:
|
|
|
|
|
|
|
|
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 Incentive Plan, shares withheld by the Company for the payment of the employee's tax withholding related to shares vesting are added back to the pool of shares available for future awards. |
As of September 30, 2021, there was $17.6 million of total unrecognized expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 1.6 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 awards (PSUs) that contained revenue performance targets and relative total shareholder return (rTSR) targets, both measured over a 3-year performance period. In 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 three 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 may be earned 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 Company’s expense will be adjusted based on the estimated achievement of revenue versus each target. Because the performance targets for the 1-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 table below.
The following table summarizes equity-based compensation activity related to performance-based restricted stock units:
(a) | Represents the total participant target award. |
As of September 30, 2021, there was $6.6 million of total unrecognized expense. This compensation expense is expected to be recognized over the weighted-average remaining vesting period of 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, LLC and Keller Williams Realty, Inc. The first was filed on March 6, 2019, by plaintiff Christopher Moehrl in the United States District Court for the Northern District of Illinois. The second was filed in the same court on April 15, 2019, by plaintiff Sawbill Strategic, Inc. These two actions have now been consolidated (the “Moehrl Action”). Similar actions have been filed in federal courts: a) by Joshua Sitzer and other plaintiffs in the Western District of Missouri (the “Sitzer Action”); b) by Mark Rubenstein and Jeffery Nolan in the District of 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 the “Moehrl-related suits.” In the Moehrl Action, the plaintiffs allege that a NAR rule requires brokers to make a blanket, 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 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 intends to vigorously defend against all remaining claims. The Company may become involved in additional litigation or other legal proceedings concerning the same 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 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 in 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 real estate buyers’ brokerages’ and salespersons’ commissions in respect of the purchase 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 fix, maintain, increase, control, raise, or stabilize the rate of real estate buyers’ brokerages’ and salespersons’ commissions in respect of the purchase and sale of properties listed on the Toronto MLS; and 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 injunctive relief. RE/MAX OA denies the allegations in the claim and intends to vigorously defend the 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 the unaudited three and nine month period ended September 30, 2020 within these condensed consolidated financial statements. Management has evaluated the materiality of these misstatements based on an analysis of quantitative and
23
qualitative factors and concluded they were not material to the prior period financial statements, individually or in aggregate.
The following table reflects the impact of the immaterial correction on the Company’s previously reported consolidated financial statements (in thousands, except per share information):
14. Segment Information
The Company operates under the following four operating segments: Real Estate, Mortgage, Marketing Funds and booj. Due to quantitative insignificance, the booj operating segment does not meet the criteria of a reportable segment and is included in “Other”. Mortgage does not meet the quantitative significance test; however, management has chosen to report results for the segment as it believes it will be a key driver of future 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):
24
The following table presents a reconciliation of Adjusted EBITDA by segment to income (loss) before provision for income taxes (in thousands):
(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. |
25
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements (“financial statements”) and accompanying notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and accompanying notes included in our most recent Annual Report on Form 10-K/A for the year ended December 31, 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 (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: agent count; franchise sales; the impact of the 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.
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 2020 Amendment No. 1 to Annual Report on Form 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. (“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. We franchise real estate brokerages globally under the RE/MAX brand (“RE/MAX”) and mortgage brokerages in the U.S. under the Motto Mortgage brand (“Motto”). We also sell ancillary products and services, primarily technology, to our franchise networks and, in certain instances, we sell those offerings outside our franchise networks. We organize our business based on the services we provide in Real Estate, Mortgage and our collective franchise marketing operations, known as the Marketing Funds. RE/MAX and Motto are 100% franchised—we do not own any of the brokerages 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 strength of the RE/MAX and Motto brands. We support our franchisees in growing their brokerages, although, they fund the cost of 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 franchising model, yielding high margins and significant cash flow.
Acquisition
On July 21, 2021, we acquired the operating 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
26
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 value differential of more than 19,000 agents (approximately 12,000 in Canada and 7,000 in the U.S.).
Financial and Operational Highlights – Three Months Ended September 30, 2021
(Compared to the three months ended September 30, 2020, 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 4.6% to 140,936 agents. |
● | U.S. and Canada combined agent count increased 2.2% to 85,656 agents. |
● | Total open Motto Mortgage offices increased 32.3% to 176 offices. |
(a) | We define organic revenue growth as revenue growth from continuing operations excluding Marketing Funds, revenue from acquisitions, and foreign currency movements. We define revenue from acquisitions as the incremental revenue generated from the date of an acquisition to its first anniversary (excluding Marketing Funds revenue related to acquisitions where applicable). |
We achieved record financial results in the 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 growth included contributions from many facets of our business, including: the INTEGRA 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 more 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 equity-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 the current market rate.
We also added more than 6,000 net new agents compared to the third quarter of 2020, including significant growth in Canada alongside strong growth globally, partially offset by a slight decline in U.S. agent count.
For a detailed discussion of the impacts of COVID-19 on our results in 2020, please see our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2020.
27
Selected Operating and Financial Highlights
The following tables summarize several key performance indicators and our results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, |
|
||||||
|
|
2021 |
|
2020 |
|
# |
|
% |
|
Total agent count growth |
|
4.6 |
% |
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
|
|
|
|
|
|
|
|
Motto open offices (2) |
|
176 |
|
133 |
|
43 |
|
32.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
||||||
|
|
2021 |
|
2020 |
|
# |
|
% |
|
RE/MAX franchise sales (1) |
|
688 |
|
633 |
|
55 |
|
8.7 |
% |
Motto franchise sales (2) |
|
42 |
|
47 |
|
(5) |
|
(10.6) |
% |
(1) | Includes franchise sales in the U.S., Canada and global regions. |
(2) | Excludes virtual offices and Branchises. |
(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. |
28
Results of Operations
Comparison of the Three Months Ended September 30, 2021 and 2020
Revenue
A summary of the components of our revenue is 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, 2021 by $0.4 million and is expected to negatively impact the full year 2021 by approximately $2.0 million, as compared to the prior year.
29
Operating Expenses
A summary of the components of our operating expenses is as 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 |
% |
|
|
|
|
|
(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 consists 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 Marketing Funds, including travel and entertainment costs, and costs associated with our annual conventions in the U.S. and other events and technology services.
Total Selling, operating and administrative expenses increased as follows:
● | Personnel costs increased primarily due to higher equity-based compensation expense, including from recent acquisitions (see Note 11, Equity-Based Compensation) and increased headcount largely from acquisitions. Personnel costs were also higher due to costs associated with acquiring and integrating new companies (primarily severance) and the elimination of the corporate bonus and the suspension of the 401(k) match in the prior year. |
● | Professional fees increased primarily due to an increase in acquisition related expenses, primarily related to advisor, legal, accounting and tax fees from acquiring INTEGRA. |
● | Other selling, operating and administrative expenses increased primarily due to increased investments in technology, higher travel and events expenses and higher acquisition related expenses, partially offset by lower bad debt expense driven by improved collections. |
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 related to our acquisitions and placing internally developed software into service. 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.
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 acquisition of INTEGRA. The loss represents the fair value of the difference between the historical contractual rates paid by INTEGRA and the current market rate. The loss is recorded in “Settlement and impairment charges” in the accompanying Condensed Consolidated Statements of Income (Loss). See Note 5, Acquisitions for additional information about our acquisition.
Impairment Charge - Goodwill
During the third quarter of 2021, we identified impairment indicators associated with the First reporting unit in the Real Estate segment, primarily lower than expected adoption rates of the technology, resulting in downward revisions to long-term forecasts which is a significant input in the fair value of the reporting unit. Therefore, we performed an interim impairment test as of August 31, 2021 on the goodwill of the First reporting unit and recorded a 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 2, Summary of Significant Accounting Policies for additional information about our leases.
Other Expenses, Net
A summary of the components of our Other 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, 2021 and 2020, respectively, primarily driven by the $40.5 million loss on contract settlement that has no tax provision (see Note 10, Income Taxes for 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 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 Holdings and the non-controlling interest and see Note 10, Income Taxes for additional information.
31
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 $35.0 million for the three months ended September 30, 2021, an increase of $4.6 million from the comparable prior year period. Adjusted EBITDA increased primarily due to contributions from the INTEGRA acquisition, fewer agent recruiting initiatives in the current year and higher Broker fees revenue, partially offset by higher personnel costs due to headcount increases and the elimination of the corporate bonus and the suspension of the 401(k) match in the prior year.
Comparison of the Nine Months Ended September 30, 2021 and 2020
Revenue
A summary of the components of our revenue is 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, 2021 by $1.7 million.
32
Operating Expenses
A summary of the components of our operating expenses is as 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 |
% |
|
|
|
|
|
(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 consists 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 Marketing Funds, including travel and entertainment costs, and costs associated with our annual conventions in the U.S. and other events and technology services.
Total Selling, operating and administrative expenses increased as follows:
● | Personnel costs increased primarily due to higher equity-based compensation expense, largely from acquisitions in the prior year and including $5.5 million driven by the acceleration of certain awards (see Note 11, Equity-Based Compensation). In addition, increased headcount largely from acquisitions and higher personnel costs due to the elimination of the corporate bonus in the prior year also contributed to the increase. |
● | Professional fees increased primarily due to an increase in acquisition related expenses, primarily related to advisor, legal, accounting and tax fees from acquiring INTEGRA. Legal fees also increased including fees related to the Moehrl-related suits (See section titled “Legal Proceedings,” set forth in Part II, Item 1 of this Quarterly Report on Form 10-Q). |
● | Other selling, operating and administrative expenses increased primarily due to increased investments in technology, new costs associated with acquisitions, higher travel and events expenses and acquisition related expenses, partially offset by lower bad debt expense driven by improved collections and lower expenses for our annual agent conference. |
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 related to our acquisitions and placing internally developed software into service. Prior year amounts have been adjusted to reflect the immaterial
33
correction of amortization for certain acquired Independent Regions. See Note 13, Immaterial Corrections to Prior Period Financial Statements for additional information.
Settlement and Impairment Charges
See the discussion of the Results of Operations for the three months ended September 30, 2021 and 2020 for a discussion of the impairment charges.
Other Expenses, Net
A summary of the components of our Other 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, 2021 and 2020, 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 the settlement of uncertain tax positions (see Note 10, Income Taxes for 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 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 Holdings and the non-controlling interest and see Note 10, Income Taxes for additional information.
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 $88.6 million for the nine months ended September 30, 2021, an increase of $19.8 million from the comparable prior year period. Adjusted EBITDA increased primarily due to higher 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 acquisitions, partially offset by higher personnel costs due to the elimination of the corporate bonus in the prior year and 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: gain or loss on sale or disposition of assets, settlement and impairment charges, equity-based compensation expense, acquisition-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 other non-recurring items.
As 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; |
● | 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 pursuant to the Tax Receivable Agreements (“TRAs”); |
● | 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 (loss) is set forth in the following table (in thousands):
(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) | 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 is affected by the growth of our agent base and 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 several factors including agents in the RE/MAX 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; |
(v) | principal payments and related interest payments on our Senior Secured Credit Facility; |
(vi) | dividend payments to stockholders of our Class A common stock; |
(vii) | distributions and other payments to non-controlling unitholders pursuant to the terms of RMCO’s limited liability company operating agreement (“the RMCO, LLC Agreement”); |
36
(viii) | corporate tax payments paid by the Company; and |
(ix) | payments to the TRA parties pursuant to the TRAs. |
We have satisfied these needs primarily through our existing cash balances, cash generated by our operations and funds available under our 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
RMCO and RE/MAX, LLC, a wholly owned subsidiary of RMCO, have a credit agreement with JPMorgan Chase Bank, N.A., as administrative agent, and various lenders party thereto (the “Senior Secured Credit Facility”). On July 21, 2021, we amended and restated our Senior Secured Credit Facility to fund the acquisition of INTEGRA and refinance our existing facility. The revised facility provides for 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 may 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 (or a higher amount subject to the terms and conditions of the Senior Secured Credit Facility), subject to lender participation.
The 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 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% of Excess Cash Flow (or “ECF” as defined in the Senior Secured Credit Facility) at the end of the applicable fiscal year if RE/MAX, LLC’s Total Leverage Ratio (or “TLR” as defined in the Senior Secured Credit Facility) is in excess of 4.25:1. If the TLR as of the last 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 the TLR as of the last day of such fiscal year is less than 3.75:1, no repayment from ECF is required.
The Senior Secured Credit Facility is guaranteed by RMCO and is secured by a lien on substantially all of the assets of RE/MAX, LLC and other operating companies.
The 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 Senior Secured Credit Facility.
Borrowings 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) 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, 2021, the interest rate on the term loan facility was 3.0%.
A commitment fee of 0.5% per annum (subject to reductions) accrues on the amount of unutilized revolving line of credit.
As of September 30, 2021, we had $453.0 million of term loans outstanding, net of an unamortized discount and issuance costs, and no revolving loans outstanding under our Senior Secured Credit Facility.
Sources and Uses of Cash
As of September 30, 2021 and December 31, 2020, we had $119.4 million and $101.4 million, respectively, of cash and cash equivalents, of which approximately $6.0 million and $4.2 million, respectively, were denominated in foreign currencies.
37
The following table summarizes our cash flows from operating, investing, and financing activities (in thousands):
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, 2021 the change in cash (used in) provided by investing activities was primarily the result of the INTEGRA acquisition and work completed on our corporate headquarters refresh and higher capitalizable investments in technology as compared to the prior year.
Financing Activities
During the nine months ended September 30, 2021 the change in cash provided by (used in) financing activities was primarily due to net cash received from the increase in our term loan, partially offset by an increase in payments related to tax withholding for vested share-based compensation.
Capital Allocation 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 facility and incremental facilities under our 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.
Acquisitions
As part of our growth strategy, we may pursue acquisitions of 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, revenue streams, or otherwise complement our existing operations. We may fund any such growth with various sources of capital including existing cash balances and cash flow from operations, as well as proceeds from debt financings including under existing credit facilities or new arrangements raised in the public capital markets.
Capital Expenditures
The total aggregate amount for purchases of property and equipment and capitalization of developed software was $12.1 million and $4.6 million during the nine months ended September 30, 2021 and 2020, respectively. These amounts primarily relate to spend on our corporate headquarters refresh and investments in technology. In order to expand our 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 affiliates in our networks. Total capital expenditures for 2021 are expected to be 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.
38
Return of Capital
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 $0.23 per share on all outstanding shares of Class A common stock during the first three quarters of 2021. On November 3, 2021, our Board of Directors declared a quarterly cash dividend of $0.23 per share on all outstanding shares of Class A common stock, which is payable on December 1, 2021 to stockholders of record at the close of business on November 17, 2021. Future capital allocation decisions with respect to return of capital either in the form of additional future dividends, and, if declared, the amount of any such future dividend, or potentially in the form of share buybacks, will be subject to our actual future earnings and capital requirements and any amounts authorized will be at the discretion of our Board of Directors.
Distributions and Other Payments to Non-controlling Unitholders by RMCO
Distributions and other payments pursuant to the RMCO, LLC Agreement and TRAs were comprised of the following (in thousands):
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Nine Months Ended |
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September 30, |
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2021 |
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2020 |
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Distributions and other payments pursuant to the RMCO, LLC Agreement: |
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|
|
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|
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Pro rata distributions to RIHI as a result of distributions to RE/MAX Holdings in order to satisfy its estimated tax liabilities |
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$ |
2,113 |
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$ |
2,277 |
Dividend distributions |
|
|
8,667 |
|
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8,289 |
Total distributions to RIHI |
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|
10,780 |
|
|
10,566 |
Payments pursuant to the TRAs |
|
|
— |
|
|
— |
Total distributions to RIHI and TRA payments |
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$ |
10,780 |
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$ |
10,566 |
Commitments and Contingencies
See Note 12, Commitments and Contingencies to the accompanying unaudited condensed consolidated financial statements for additional information.
Off Balance Sheet Arrangements
We have no material off balance sheet arrangements as of September 30, 2021.
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/A for which there were no material changes, included:
● | Motto Goodwill |
● | First Goodwill |
● | Purchase Accounting for Acquisitions |
● | Deferred Tax Assets and TRA Liability |
● | General Litigation Matters |
New Accounting Pronouncements
There have been no new accounting pronouncements not yet effective that we believe have a significant impact, or potential significant impact, to our consolidated financial statements. See Note 2, Summary of Significant Accounting Policies to the accompanying unaudited condensed consolidated financial statements for additional information.
39
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 credit risks, as well as risks relating to changes in the general economic conditions in the countries where we conduct business. We use derivative instruments to mitigate the impact of certain of our market risk exposures. We do not 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 Senior Secured Credit Facility which bear interest at variable rates. At September 30, 2021, $458.9 million in term loans were outstanding under our Senior Secured Credit Facility. 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 Senior Secured Credit Facility is currently based on LIBOR, subject to a floor of 0.50%, plus an applicable margin of 2.50%. As of September 30, 2021, the interest rate was 3.0%. If LIBOR rises such that our rate is above the floor, then each hypothetical 0.25% increase would result in additional annual interest expense of $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 110 countries and territories. Fluctuations in exchange rates of the U.S. dollar against foreign currencies can result, and have resulted, in fluctuations in (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. To mitigate a portion of this risk related to (b), we enter into short-term foreign 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, 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 operating income of approximately $0.3 million and $0.9 million, respectively, related to currency risk (a) above.
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, 2021
40
our disclosure controls and procedures were not effective due to a material weakness in our internal control over financial reporting described below.
Notwithstanding the material weakness, management believes the 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 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 our annual or interim financial statements will not be prevented or detected on a timely basis.
As 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 market 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 ineffective risk assessment process to sufficiently identify and assess all financial reporting risks related to purchase accounting for acquisitions of previous Independent Regions and resulted in errors in purchase accounting for certain of the acquisitions. These errors resulted in immaterial misstatements to our consolidated financial statements for the periods presented that were corrected in prior periods as discussed in Note 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 of financial reporting was not effective as of September 30, 2021.
To remediate the material weakness in internal control over financial reporting, we will augment our risk assessment process related to accounting for acquisitions and implement additional controls in connection with the acquisition of Independent Regions. These additional controls will then be tested in order to validate that the material weakness has been remediated.
Changes in Internal Control over Financial Reporting
Except as related to the material weakness 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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in litigation, claims and other proceedings relating to the conduct of our 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. Often 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 any currently pending litigation will have a material adverse effect on our business, financial condition or operations, there are inherent uncertainties in litigation and other claims and regulatory proceedings and such pending matters could result in unexpected expenses and liabilities and might materially adversely affect our business, financial condition or operations, including our reputation.
41
Item 1A. Risk Factors
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/A, as updated by our 2021 second quarter Form 10-Q. There have been no material changes to the risk factors as disclosed in our 2020 Annual Report, as updated by our 2021 second quarter Form 10-Q.
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.
Item 5. Other Information
None.
42
Item 6. Exhibits
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Exhibit No. |
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Exhibit Description |
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Form |
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File
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Date of
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Exhibit
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Filed
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2.1 |
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8-K |
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001-36101 |
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6/3/2021 |
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2.1 |
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3.1 |
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10-Q |
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001-36101 |
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11/14/2013 |
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3.1 |
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3.2 |
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8-K |
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001-36101 |
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2/22/2018 |
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3.1 |
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4.1 |
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Form of RE/MAX Holdings, Inc.’s Class A common stock certificate. |
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S-1 |
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333-190699 |
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9/27/2013 |
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4.1 |
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10.1 |
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8-K |
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001-36101 |
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7/21/2021 |
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10.1 |
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10.2 |
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X |
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31.1 |
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X |
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31.2 |
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X |
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32.1 |
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X |
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101.INS |
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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. |
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101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
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X |
43
† Indicates a management contract or compensatory plan or arrangement.
44
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.
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RE/MAX Holdings, Inc. (Registrant) |
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Date: |
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December 21, 2021 |
By: |
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/s/ Adam M. Contos |
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Adam M. Contos |
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Director and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: |
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December 21, 2021 |
By: |
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/s/ Karri R. Callahan |
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Karri R. Callahan Chief Financial Officer (Principal Financial Officer) |
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Date: |
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December 21, 2021 |
By: |
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/s/ Brett A. Ritchie |
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Brett A. Ritchie Chief Accounting Officer (Principal Accounting Officer) |
45
Exhibit 10.2
RE/MAX HOLDINGS, INC. 2013 OMNIBUS INCENTIVE PLAN
NOTICE OF Restricted Stock Unit AWARD
Grantee’s Name:
You (the “Grantee”) have been granted an award of Restricted Stock Units (the “Award”), subject to the terms and conditions of this Notice of Restricted Stock Unit Award (the “Notice”), the RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan, as amended from time to time (the “Plan”) and the Restricted Stock Unit Agreement (the “Agreement”) attached hereto, as follows. Unless otherwise provided herein, the terms in this Notice shall have the same meaning as those defined in the Plan.
Award Number:
Date of Award:
Total Number of Restricted Stock Units Awarded (the “Units”):
Vesting Schedule:
Subject to the Grantee’s Continuous Service and other limitations set forth in this Notice, the Agreement and the Plan, the Units will “vest” in accordance with the following schedule (the “Vesting Schedule”):
[_____]
In the event of a Corporate Transaction or a Change in Control in connection with which the Award is not assumed or converted into an equivalent award by the acquiring or successor entity (or a Parent thereof), the Units, to the extent outstanding and unvested, shall automatically become fully vested immediately prior to the effective date of such Corporate Transaction or Change in Control.
In the event of a Corporate Transaction or a Change in Control in connection with which the Award is assumed or converted into an equivalent award by the acquiring or successor entity (or a Parent thereof), if the Grantee’s Continuous Service is terminated by such entity (or an Affiliate thereof) without Cause during the 24-month period following such Corporate Transaction or Change in Control, the assumed or converted award shall automatically become fully vested on the day of such termination. For this purpose, “Cause” means, with respect to the termination by such entity (or an Affiliate thereof) of the Grantee’s Continuous Service, that such termination is for “Cause” as such term (or word of like import) is expressly defined in a then-effective written agreement between the Grantee and such entity (or an Affiliate thereof), or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Administrator, the Grantee’s: (i) performance of any act or failure to perform any act in bad faith and to the detriment of such entity (or an Affiliate thereof); (ii) dishonesty, intentional misconduct or material breach of any agreement with such entity (or an Affiliate thereof); or (iii) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person.
In the event of the Grantee’s change in status from Employee to Consultant or Director, the determination of whether such change in status results in a termination of Continuous Service will be determined in accordance with Section 409A of the Code.
For purposes of this Notice and the Agreement, the term “vest” shall mean, with respect to any Units, that such Units are no longer subject to forfeiture to the Company. If the Grantee would become vested in a fraction of a Unit, such Unit shall not vest until the Grantee becomes vested in the entire Unit.
Except as otherwise provided above, vesting shall cease upon the date the Grantee terminates Continuous Service for any reason, excluding death or Disability. In the event the Grantee terminates Continuous Service for any reason, excluding death or Disability, any unvested Units held by the Grantee immediately upon such termination of the Grantee’s Continuous Service shall be forfeited and deemed reconveyed to the Company and the Company shall thereafter be the legal and beneficial owner of such reconveyed Units and shall have all rights and interest in or related thereto without further action by the Grantee.
If the Grantee’s Continuous Service terminates due to the Grantee’s death or Disability, all unvested Units shall immediately become vested as of the date of such termination of Continuous Service.
IN WITNESS WHEREOF, the Company and the Grantee have executed this Notice and agree that the Award is to be governed by the terms and conditions of this Notice, the Plan, and the Agreement.
RE/MAX Holdings, Inc.,
a Delaware corporation
By:
[Name]
[Title]
[Date]
THE GRANTEE ACKNOWLEDGES AND AGREES THAT THE UNITS SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THE GRANTEE’S CONTINUOUS SERVICE OR AS OTHERWISE SPECIFICALLY PROVIDED HEREIN (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE GRANTEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS NOTICE, THE AGREEMENT, NOR IN THE PLAN, SHALL CONFER UPON THE GRANTEE ANY RIGHT WITH RESPECT TO CONTINUATION OF THE GRANTEE’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANY WAY WITH THE GRANTEE’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE GRANTEE’S CONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. THE GRANTEE ACKNOWLEDGES THAT UNLESS THE GRANTEE HAS A WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY TO THE CONTRARY, THE GRANTEE’S STATUS IS AT WILL.
2
Grantee Acknowledges and Agrees:
The Grantee acknowledges receipt of a copy of the Plan and the Agreement and represents that he or she is familiar with the terms and provisions thereof, and hereby accepts the Award subject to all of the terms and provisions hereof and thereof. The Grantee has reviewed this Notice, the Agreement and the Plan in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice and fully understands all provisions of this Notice, the Agreement and the Plan. The Grantee further agrees and acknowledges that this Award is a non-elective arrangement pursuant to Section 409A of the Code.
The Grantee further acknowledges that, from time to time, the Company may be in a “blackout period” and/or subject to applicable federal securities laws that could subject the Grantee to liability for engaging in any transaction involving the sale of the Company’s Shares. The Grantee further acknowledges and agrees that, prior to the sale of any Shares acquired under this Award, it is the Grantee’s responsibility to determine whether or not such sale of Shares will subject the Grantee to liability under insider trading rules or other applicable federal securities laws.
The Grantee understands that the Award is subject to the Grantee’s consent to access this Notice, the Agreement, the Plan and the Plan prospectus (collectively, the “Plan Documents”) in electronic form on the Company’s intranet or the website of the Company’s designated brokerage firm, if applicable. By signing below (or providing an electronic signature by clicking below) and accepting the grant of the Award, the Grantee: (i) consents to access electronic copies (instead of receiving paper copies) of the Plan Documents via the Company’s intranet or the website of the Company’s designated brokerage firm, if applicable; (ii) represents that the Grantee has access to the Company’s intranet or the website of the Company’s designated brokerage firm, if applicable; (iii) acknowledges receipt of electronic copies, or that the Grantee is already in possession of paper copies, of the Plan Documents; and (iv) acknowledges that the Grantee is familiar with and accepts the Award subject to the terms and provisions of the Plan Documents.
If Grantee does not sign this grant within 90 days of the Award Date, the Award shall be deemed rejected by the Grantee and Grantee shall have no right to the Award or the Units.
The Company may, in its sole discretion, decide to deliver any Plan Documents by electronic means or request the Grantee’s consent to participate in the Plan by electronic means. The Grantee hereby consents to receive such documents by electronic delivery and agrees to participate in the Plan through an on-line or electronic system established and maintained by the Company or a third party designated by the Company.
3
The Grantee hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan and the Agreement shall be resolved by the Administrator in accordance with Section 8 of the Agreement. The Grantee further agrees to the venue and jurisdiction selection in accordance with Section 9 of the Agreement. The Grantee further agrees to notify the Company upon any change in his or her residence address indicated in this Notice.
Date: _______________
4
Name:
Award Number:
RE/MAX HOLDINGS, INC. 2013 OMNIBUS INCENTIVE PLAN
RESTRICTED STOCK UNIT AGREEMENT
Notwithstanding the foregoing, the Company or a Related Entity also may satisfy any Tax Withholding Obligation by offsetting any amounts (including, but not limited to, salary, bonus and severance payments) payable to the Grantee by the Company and/or a Related Entity. Furthermore, in the event of any determination that the Company has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the Award, the Grantee agrees to pay the Company the amount of such deficiency in cash within five (5) days after receiving a written demand from the Company to do so, whether or not the Grantee is an employee of the Company at that time.
2
3
END OF AGREEMENT
4
Exhibit 31.1
Certification
I, Adam M. Contos, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of RE/MAX Holdings, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and |
d. | Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: December 21, 2021 |
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/s/ Adam M. Contos |
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Adam M. Contos |
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Director and Chief Executive Officer |
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(Principal Executive Officer) |
Exhibit 31.2
Certification
I, Karri R. Callahan certify that:
1. | I have reviewed this quarterly report on Form 10-Q of RE/MAX Holdings, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this quarterly report based on such evaluation; and |
d. | Disclosed in this quarterly report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
5. | The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
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Date: December 21, 2021 |
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/s/ Karri R. Callahan |
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Karri R. Callahan |
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Chief Financial Officer |
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(Principal Financial Officer) |
Exhibit 32.1
Certification
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of RE/MAX Holdings, Inc., a Delaware corporation (the "Company"), does hereby certify, to such officer's knowledge, that:
The Quarterly Report on Form 10-Q for the period ended September 30, 2021 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company as of September 30, 2021 and December 31, 2020, and for the three and nine months ended September 30, 2021 and 2020.
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Date: December 21, 2021 |
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/s/ Adam M. Contos |
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Adam M. Contos |
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Director and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: December 21, 2021 |
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/s/ Karri R. Callahan |
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Karri R. Callahan |
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Chief Financial Officer |
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(Principal Financial Officer) |
The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-Q or as a separate disclosure document.