RE/MAX HOLDINGS, INC., 10-Q filed on 5/6/2016
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2016
Apr. 29, 2016
Class A common stock
Apr. 29, 2016
Class B common stock
Document And Entity Information [Line Items]
 
 
 
Entity Registrant Name
RE/MAX Holdings, Inc. 
 
 
Entity Central Index Key
0001581091 
 
 
Document Period End Date
Mar. 31, 2016 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Document Type
10-Q 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
Q1 
 
 
Amendment Flag
false 
 
 
Trading Symbol
rmax 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
17,645,696 
Consolidated Balance Sheets (USD $)
Mar. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 95,673,000 
$ 110,212,000 
Accounts and notes receivable, current portion, less allowances of $4,637 and $4,483, respectively
17,173,000 
16,769,000 
Assets held for sale
 
354,000 
Other current assets
2,831,000 
4,079,000 
Total current assets
115,677,000 
131,414,000 
Property and equipment, net of accumulated depreciation of $13,179 and $13,183, respectively
2,691,000 
2,395,000 
Goodwill
75,004,000 
71,871,000 
Deferred tax assets, net
108,065,000 
109,365,000 
Other assets, net of current portion
2,213,000 
1,861,000 
Total assets
372,835,000 
383,786,000 
Current liabilities:
 
 
Accounts payable
608,000 
449,000 
Accounts payable to affiliates
130,000 
66,000 
Accrued liabilities
10,960,000 
16,082,000 
Income taxes payable
1,304,000 
451,000 
Tax and other distributions payable to non-controlling unitholders
3,003,000 
 
Deferred revenue and deposits
16,983,000 
16,501,000 
Current portion of debt
14,332,000 
14,805,000 
Current portion of payable pursuant to tax receivable agreements
7,148,000 
8,478,000 
Liabilities held for sale
 
351,000 
Other current liabilities
50,000 
71,000 
Total current liabilities
54,518,000 
57,254,000 
Debt, net of current portion
173,029,000 
185,552,000 
Payable pursuant to tax receivable agreements, net of current portion
91,557,000 
91,557,000 
Deferred tax liabilities, net
131,000 
120,000 
Other liabilities, net of current portion
9,957,000 
9,889,000 
Total liabilities
329,192,000 
344,372,000 
Commitments and contingencies (note 12)
   
   
Stockholders' equity:
 
 
Additional paid-in capital
445,970,000 
445,081,000 
Retained earnings
6,951,000 
4,693,000 
Accumulated other comprehensive income (loss), net of tax
158,000 
(105,000)
Total stockholders' equity
453,081,000 
449,671,000 
Non-controlling interest
(409,438,000)
(410,257,000)
Total stockholders' equity
43,643,000 
39,414,000 
Total liabilities and stockholders' equity
372,835,000 
383,786,000 
Class A common stock
 
 
Stockholders' equity:
 
 
Common stock
2,000 
2,000 
Franchise agreements
 
 
Current assets:
 
 
Franchise agreements, net of accumulated amortization of $103,940 and $100,499, respectively
63,598,000 
61,939,000 
Other intangible assets
 
 
Current assets:
 
 
Franchise agreements, net of accumulated amortization of $103,940 and $100,499, respectively
5,587,000 
4,941,000 
Other intangible assets, net of accumulated amortization of $8,410 and $8,929, respectively
$ 5,587,000 
$ 4,941,000 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2016
Dec. 31, 2015
Accounts and notes receivable, current portion, allowances
$ 4,637 
$ 4,483 
Property and equipment, accumulated depreciation
13,179 
13,183 
Franchise agreements
 
 
Franchise agreements and other intangible assets, accumulated depreciation
103,940 
100,499 
Other intangible assets
 
 
Franchise agreements and other intangible assets, accumulated depreciation
$ 8,410 
$ 8,929 
Class A common stock
 
 
Common stock, par value
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
180,000,000 
180,000,000 
Common stock, shares issued
17,584,351 
17,584,351 
Common stock, shares outstanding
17,584,351 
17,584,351 
Class B common stock
 
 
Common stock, par value
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
1,000 
1,000 
Common stock, shares issued
Common stock, shares outstanding
Consolidated Statements of Income (USD $)
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Revenue:
 
 
Continuing franchise fees
$ 18,907,000 
$ 17,660,000 
Annual dues
7,904,000 
7,802,000 
Broker fees
7,201,000 
6,420,000 
Franchise sales and other franchise revenue
8,793,000 
8,426,000 
Brokerage revenue
112,000 
3,899,000 
Total revenue
42,917,000 
44,207,000 
Operating expenses:
 
 
Selling, operating and administrative expenses
23,232,000 
25,071,000 
Depreciation and amortization
3,721,000 
3,811,000 
Loss on sale or disposition of assets, net
107,000 
2,000 
Total operating expenses
27,060,000 
28,884,000 
Operating income
15,857,000 
15,323,000 
Other expenses, net:
 
 
Interest expense
(2,281,000)
(2,809,000)
Interest income
51,000 
67,000 
Foreign currency transaction gains (losses)
164,000 
(1,421,000)
Loss on early extinguishment of debt
(136,000)
(94,000)
Equity in earnings of investees
 
212,000 
Total other expenses, net
(2,202,000)
(4,045,000)
Income before provision for income taxes
13,655,000 
11,278,000 
Provision for income taxes
(3,259,000)
(2,148,000)
Net income
10,396,000 
9,130,000 
Less: net income attributable to non-controlling interest
5,456,000 
6,379,000 
Net income attributable to RE/MAX Holdings, Inc.
$ 4,940,000 
$ 2,751,000 
Net income attributable to RE/MAX Holdings, Inc. per share
 
 
Basic
$ 0.28 
$ 0.23 
Diluted
$ 0.28 
$ 0.22 
Weighted average shares outstanding
 
 
Weighted average shares outstanding, Diluted
17,584,351 
11,817,605 
Diluted
17,638,667 
12,293,505 
Class A common stock
 
 
Net income attributable to RE/MAX Holdings, Inc. per share
 
 
Basic
$ 0.28 
$ 0.23 
Diluted
$ 0.28 
$ 0.22 
Weighted average shares outstanding
 
 
Weighted average shares outstanding, Diluted
17,584,351 
11,817,605 
Diluted
17,638,667 
12,293,505 
Cash dividends declared per share
$ 0.1500 
$ 1.6250 
Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
Net income
$ 10,396 
$ 9,130 
Change in cumulative translation adjustment
564 
(533)
Other comprehensive income (loss), net of tax
564 
(533)
Comprehensive income
10,960 
8,597 
Less: comprehensive income attributable to non-controlling interest
5,757 
6,059 
Comprehensive income attributable to RE/MAX Holdings, Inc., net of tax
$ 5,203 
$ 2,538 
Condensed Consolidated Statement of Stockholders' Equity (USD $)
Additional paid-in capital
USD ($)
Common Stock
Class A common stock
USD ($)
Common Stock
Class B common stock
Retained earnings
Class A common stock
USD ($)
Retained earnings
USD ($)
Accumulated other comprehensive (loss), net of tax
USD ($)
Non-controlling interest
USD ($)
Class A common stock
USD ($)
Class B common stock
Total
USD ($)
Beginning balance, Value at Dec. 31, 2015
$ 445,081,000 
$ 2,000 
 
 
$ 4,693,000 
$ (105,000)
$ (410,257,000)
 
 
$ 39,414,000 
Beginning balance, Shares at Dec. 31, 2015
 
17,584,351 
 
 
 
 
17,584,351 
 
Net income
 
 
 
 
4,940,000 
 
5,456,000 
 
 
10,396,000 
Distributions paid and payable to non-controlling unitholders
 
 
 
 
 
 
(4,887,000)
 
 
(4,887,000)
Equity-based compensation expense
766,000 
 
 
 
 
 
 
 
 
766,000 
Dividends to Class A common stockholders
 
 
 
2,638,000 
 
 
 
2,638,000 
 
 
Change in accumulated other comprehensive income (loss)
 
 
 
 
 
263,000 
301,000 
 
 
564,000 
Cumulative effect adjustment from change in accounting principle
123,000 
 
 
 
(44,000)
 
(51,000)
 
 
28,000 
Ending balance, Value at Mar. 31, 2016
$ 445,970,000 
$ 2,000 
 
 
$ 6,951,000 
$ 158,000 
$ (409,438,000)
 
 
$ 43,643,000 
Ending balance, Shares at Mar. 31, 2016
 
17,584,351 
 
 
 
 
17,584,351 
 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2016
Mar. 31, 2015
Cash flows from operating activities:
 
 
Net income
$ 10,396 
$ 9,130 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
3,721 
3,811 
Bad debt expense
146 
205 
Loss on sale or disposition of assets, net
107 
Loss on early extinguishment of debt
136 
94 
Equity-based compensation expense
766 
142 
Non-cash interest expense
115 
97 
Deferred income tax expense
1,153 
681 
Changes in operating assets and liabilities:
 
 
Accounts and notes receivable, current portion
(506)
(2,121)
Advances from/to affiliates
47 
326 
Other current and noncurrent assets
1,440 
1,128 
Other current and noncurrent liabilities
(4,122)
479 
Deferred revenue and deposits current portion
423 
1,550 
Payment pursuant to tax receivable agreement
(1,344)
 
Net cash provided by operating activities
12,478 
15,524 
Cash flows from investing activities:
 
 
Purchase of property, equipment and software
(1,389)
(335)
Proceeds from sale of property and equipment
 
10 
Capitalization of trademark costs
(13)
(23)
Acquisitions, net of cash acquired of $131
(8,369)
 
Dispositions
200 
 
Cost to sell assets
(146)
 
Net cash used in investing activities
(9,717)
(348)
Cash flows from financing activities:
 
 
Payments on debt
(13,247)
(7,840)
Capitalized debt amendment costs
 
(555)
Distributions to non-controlling unitholders
(1,884)
(65)
Dividends paid to Class A common stockholders
(2,638)
 
Payments on capital lease obligations
(27)
(71)
Proceeds from exercise of stock options
 
937 
Net cash used in financing activities
(17,796)
(7,594)
Effect of exchange rate changes on cash
496 
(235)
Net (decrease) increase in cash and cash equivalents
(14,539)
7,347 
Cash and cash equivalents, beginning of year
110,212 
107,199 
Cash and cash equivalents, end of period
95,673 
114,546 
Supplemental disclosures of cash flow information:
 
 
Cash paid for interest and debt amendment costs
2,280 
2,712 
Net cash paid for income taxes
1,253 
846 
Schedule of non-cash investing and financing activities:
 
 
Tax and other distributions payable to non-controlling unitholders
3,003 
30,830 
Dividends payable to Class A common stockholders
 
19,383 
Note receivable received as consideration for sale of brokerage operations assets
150 
 
Capital leases for property and equipment
30 
412 
Increase in accounts payable for capitalization of trademark costs and purchases of property, equipment and software
$ 456 
$ 148 
Consolidated Statements of Cash Flows (Paranthetical) (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2016
Operating Cash Flows, Direct Method [Abstract]
 
Cash acquired
$ 131 
Business and Organization
Business and Organization

1. Business and Organization

RE/MAX Holdings, Inc. (“RE/MAX Holdings”) was formed as a Delaware corporation on June 25, 2013 and was capitalized on July 8, 2013. On October 7, 2013, RE/MAX Holdings completed an initial public offering (the “IPO”) of 11,500,000 shares of Class A common stock at a public offering price of $22.00 per share. A portion of the proceeds received by RE/MAX Holdings from the IPO was used to acquire the net business assets of HBN, Inc. (“HBN”) and Tails, Inc. (“Tails”) in the Southwest and Central Atlantic regions of the United States (“U.S.”), respectively, which were subsequently contributed to RMCO, LLC and its consolidated subsidiaries (“RMCO”), and the remaining proceeds were used to purchase common membership units in RMCO. After completion of the IPO, RE/MAX Holdings owned 39.56% of the common membership units in RMCO. During the fourth quarter of 2015, RIHI, Inc. (“RIHI”) redeemed 5,175,000 common units in RMCO in exchange for newly issued shares of RE/MAX Holdings’ Class A common stock on a one-for-one basis. Immediately upon redemption, RIHI sold its 5,175,000 shares of Class A common stock at $36.00 per share, less underwriting discounts and commissions (the “Secondary Offering”). As of March 31, 2016, RE/MAX Holdings owns 58.33% of the common membership units in RMCO. RE/MAX Holdings’ only business is to act as the sole manager of RMCO and, in that capacity, RE/MAX Holdings operates and controls all of the business and affairs of RMCO.  As a result, RE/MAX Holdings consolidates the financial position and results of operations of RMCO. RE/MAX Holdings and its consolidated subsidiaries, including RMCO, are referred to hereinafter as the “Company.” 

The Company is one of the leading franchisors of residential and commercial real estate brokerage services throughout the U.S. and globally. During 2015, the Company operated a small number of real estate brokerage offices in the U.S. As discussed in Note 5, Acquisitions and Dispositions, the Company sold certain operating assets and liabilities of these brokerage offices during 2015 and the first quarter of 2016 and, subsequent thereto, no longer operates any real estate brokerage offices and no longer recognizes brokerage revenue. The Company’s revenue is derived from continuing franchise fees (which consist of fixed contractual fees paid monthly by regional franchise owners and franchisees based on the number of agents in the respective franchised region or office), annual dues from agents, broker fees (which consist of fees paid by regional franchise owners and franchisees for real estate commissions paid by customers when an agent sells a home), franchise sales and other franchise revenue (which consist of fees from initial sales and renewals of franchises, regional franchise fees, preferred marketing arrangements, approved supplier programs and event-based revenue from training and other programs) and brokerage revenue (which consists of fees assessed by the Company’s previously-owned brokerages for services provided to their affiliated real estate agents). The Company, as a franchisor, grants each broker-owner a license to use the RE/MAX brand, trademark, promotional and operating materials and concepts.

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and comprise the condensed consolidated financial statements of the Company and have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements are presented on a consolidated basis and include the accounts of RE/MAX Holdings and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2016 and December 31, 2015, the results of its operations and comprehensive income for the three months ended March 31, 2016 and 2015, changes in its stockholders’ equity for the three months ended March 31, 2016 and results of its cash flows for the three months ended March 31, 2016 and 2015. Interim results may not be indicative of full year performance. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant areas in which management uses assumptions include, among other things, the establishment of the allowance for doubtful trade accounts and notes receivable, the determination of the estimated lives of intangible assets, the estimates for amounts accrued for litigation matters, the estimates of the fair value of reporting units used in the annual assessment of goodwill, the fair value of assets acquired and the amounts due to RIHI and Oberndorf Investments LLC (“Oberndorf”) pursuant to the terms of the tax receivable agreements (“TRAs”) discussed in more detail in Note 3, Non-controlling Interest. Actual results could differ from those estimates.

Reclassifications

Certain items in the accompanying condensed consolidated financial statements as of December 31, 2015 and for the three months ended March 31, 2015 have been reclassified to conform to the 2016 presentation. 

Segment Reporting

Prior to 2016, the Company operated in two reportable segments, (1) Real Estate Franchise Services and (2) Brokerages. The Real Estate Franchise Services reportable segment comprised the operations of the Company’s owned and independent global franchising operations under the RE/MAX brand name, intersegment revenue from the Company’s previously-owned brokerages and corporate-wide professional services expenses. The Brokerages reportable segment contained the operations of the Company’s previously-owned brokerage offices in the U.S., the results of operations of a mortgage brokerage company in which the Company previously-owned a non-controlling interest and reflected the elimination of intersegment revenue and other consolidation entries. During 2015 and the first quarter of 2016, the Company sold its 21 previously-owned brokerage offices in the Washington, D.C., Portland, Oregon and Seattle, Washington metropolitan areas, as discussed in Note 5, Acquisitions and Dispositions. These dispositions resulted in the cessation of operations for the Company’s Brokerages reportable segment. Thus, during the first quarter of 2016, the Company began to operate in one reportable segment, Real Estate Franchise Services. All prior segment information has been reclassified to reflect the Company’s new segment structure.

Principles of Consolidation

RE/MAX Holdings holds an approximate 60% economic interest in RMCO and, as its managing member, RE/MAX Holdings controls RMCO’s operations, management and activities. As a result, RE/MAX Holdings consolidates RMCO and records a non-controlling interest in the accompanying Condensed Consolidated Balance Sheets and records net income attributable to the non-controlling interest and comprehensive income attributable to the non-controlling interest in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income, respectively.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company. The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

 

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies certain aspects of accounting for share-based payment transactions, including income tax consequences, statutory tax withholding requirements, forfeitures and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016.  Early adoption is permitted in any interim or annual reporting period. The standard requires the guidance related to forfeitures and the timing of when excess tax benefits are recognized to be applied using a modified retrospective transition method, the guidance related to the accounting for income taxes to be applied prospectively, and the guidance related to the presentation of excess tax benefits on the statement of cash flows to be applied either prospectively or retrospectively. The Company early adopted ASU 2016-09 in the first quarter of 2016 and elected to account for forfeitures as they occur.  As a result, the Company recorded a cumulative-effect adjustment of $44,000 to “Retained Earnings” in the accompanying Condensed Consolidated Balance Sheets and Statements of Stockholders’ Equity.  Furthermore, the Company elected to apply the retrospective transition method to the amendments related to the presentation of excess tax benefits in the statements of cash flows.  This resulted in an increase in cash flows provided by operating activities of $1,105,000 and a decrease of $1,105,000 in cash flows used in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows for the period ended March 31, 2015.  

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize the assets and liabilities that arise from all leases on the consolidated balance sheets. ASU 2016-02 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual reporting period. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company has not yet determined the effect of the standard on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. ASU 2015-17 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. The standard permits the use of either the retrospective or prospective transition method and permits early adoption as of the beginning of an interim or annual reporting period. The Company elected to early adopt this standard retrospectively in the first quarter of 2016 and the presentation of “Other current assets” and “Deferred tax assets, net” in the accompanying Condensed Consolidated Balance Sheets and related disclosures were impacted by $3,332,000 as of December 31, 2015, but the company’s consolidated results of operations were not affected.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting Measurement-Period Adjustments, which eliminates the requirement for an entity to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is completed. ASU 2015-16 became effective prospectively for the Company on January 1, 2016.  The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, which both clarifies and simplifies content in the FASB Accounting Standards Codification and corrects unintended application of U.S. GAAP. ASU 2015-10 became effective for the Company on January 1, 2016. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures. 

In April 2015, the FASB issued ASU 2015-05, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on fees paid in a cloud computing arrangement and clarifies the accounting for a software license element of a cloud computing arrangement. ASU 2015-05 became effective prospectively for the Company on January 1, 2016.  The adoption of this standard did not have a significant impact on the consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs related to a debt liability as a direct deduction from the debt liability rather than as an asset. ASU 2015-03 is effective retrospectively for the Company on January 1, 2016. The adoption of this standard impacted the presentation of “Debt, net of current portion” in the accompanying Condensed Consolidated Balance Sheets and related disclosures by $1,527,000 as of December 31, 2015, but did not affect the Company’s consolidated results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the guidance in ASU 2014-09 by one year. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarification on identifying performance obligations and accounting for licenses of intellectual property. These standards are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within such annual reporting periods. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial statements and related disclosures.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also provides guidance on the financial statement presentation and disclosures of discontinued operations. ASU 2014-08 became effective prospectively for the Company on January 1, 2015 and none of the dispositions that occurred during 2015 and the first quarter of 2016 qualified as a discontinued operation. See Note 5, Acquisitions and Dispositions, for additional information.

Critical Accounting Judgments and Estimates

There have been no changes in the Company’s critical accounting judgments and estimates from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Company believes that the disclosures herein are adequate so that the information presented is not misleading.  

Non-controlling Interest
Non-controlling Interest

3. Non-controlling Interest

RE/MAX Holdings is the sole managing member of RMCO and subsequent to the IPO, began to operate and control all of the business affairs of RMCO. As a result, RE/MAX Holdings began to consolidate RMCO on October 7, 2013, and because RE/MAX Holdings and RMCO are entities under common control, such consolidation has been reflected for all periods presented.  RE/MAX Holdings owns a 58.33% economic interest in RMCO as of March 31, 2016 and December 31, 2015 and records a non-controlling interest for the remaining 41.67% economic interest in RMCO held by RIHI as of March 31, 2016 and December 31, 2015. RE/MAX Holdings’ only sources of cash flow from operations are distributions from RMCO and management fees received pursuant to the management services agreement between RE/MAX Holdings and RMCO. “Net income attributable to non-controlling interest” in the accompanying Condensed Consolidated Statements of Income represents the portion of earnings attributable to the economic interest in RMCO held by the non-controlling unitholders. As of October 7, 2013, “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets represented the carryover basis of RIHI’s capital account in RMCO. Prospectively, the non-controlling interest will be adjusted to reflect tax and other cash distributions made to, and the income allocated to, the non-controlling unitholders, as well as future redemptions of common units in RMCO pursuant to the Fourth Amended and Restated Limited Liability Company Agreement (“RMCO, LLC Agreement”). The ownership of the common units in RMCO is summarized as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2016

 

2015

 

 

    

Shares

    

Ownership %

    

Shares

    

Ownership %

 

Non-controlling unitholders ownership of common units in RMCO

 

12,559,600

 

41.67

%

12,559,600

 

41.67

%

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

 

17,584,351

 

58.33

%

17,584,351

 

58.33

%

Total common units in RMCO

 

30,143,951

 

100.00

%

30,143,951

 

100.00

%

 

 

The weighted average ownership percentages for the applicable reporting periods are used to calculate the net income attributable to RE/MAX Holdings.  RE/MAX Holdings’ weighted average ownership percentage in RMCO for the three months ended March 31, 2016 and 2015 was 58.33% and 39.99%, respectively.  RE/MAX Holdings’ economic interest in RMCO increased due to the increase in common units from the issuance of shares of Class A common stock as a result of the Secondary Offering described in Note 1, Business and Organization.  A reconciliation of “Net income attributable to RE/MAX Holdings, Inc.” in the accompanying Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2016

    

2015

 

Income before provision for income taxes attributable to RE/MAX Holdings, Inc.

 

$

7,965

 

$

4,510

 

Provision for income taxes attributable to RE/MAX Holdings, Inc.

 

 

(3,025)

 

 

(1,759)

 

Net income attributable to RE/MAX Holdings, Inc.

 

$

4,940

 

$

2,751

 

 

 

A reconciliation of the “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

    

Provision for income taxes attributable to RE/MAX Holdings, Inc. (a)

 

$

(3,025)

 

$

(1,759)

 

Provision for income taxes attributable to entities other than RE/MAX Holdings, Inc. (b)

 

 

(234)

 

 

(389)

 

Provision for income taxes

 

$

(3,259)

 

$

(2,148)

 


(a)

The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes as well as RE/MAX Holdings’ proportionate share of the net assets of RMCO of the taxes imposed directly on RE/MAX, LLC, a wholly-owned subsidiary of RMCO, related to tax liabilities in certain foreign jurisdictions of $335,000 and $262,000 for the three months ended March 31, 2016 and 2015, respectively.

(b)

The provision for income taxes attributable to entities other than RE/MAX Holdings represents taxes imposed directly on RE/MAX, LLC related to tax liabilities in certain foreign jurisdictions that are allocated to the non-controlling interest.

Distributions and Other Payments to Non-controlling Unitholders

Distributions for Taxes

As a limited liability company (treated as a partnership for income tax purposes), RMCO does not incur significant federal, state or local income taxes, as these taxes are primarily the obligations of its members. As authorized by the RMCO, LLC Agreement, RMCO is generally required to distribute cash on a pro-rata basis to its members to the extent necessary to cover each member’s estimated tax liabilities, if any, with respect to their allocable share of RMCO earnings, but only to the extent that any other discretionary distributions from RMCO for the relevant period were otherwise insufficient to enable each member to cover its estimated tax liabilities. RMCO makes such tax distributions to its members based on an estimated tax rate stipulated in the RMCO, LLC Agreement. Distributions for taxes paid or payable to or on behalf of non-controlling unitholders under the RMCO, LLC Agreement were $3,003,000 and $2,076,000 during the three months ended March 31, 2016 and 2015, respectively, and are recorded in “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity and the paid portion is reported in “Distributions paid to non-controlling unitholders” in the accompanying Condensed Consolidated Statements of Cash Flows. Upon completion of its tax returns with respect to the prior year, RMCO may make other discretionary true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the prior year.

Other Discretionary Distributions 

Discretionary cash distributions may also be made to non-controlling unitholders based on their ownership percentage in RMCO as determined in accordance with the RMCO, LLC Agreement.  The Company expects that future cash distributions will be made to non-controlling unitholders pro-rata on a quarterly basis equal to the dividend payments to the stockholders of the Company’s Class A common stock, or otherwise on a discretionary basis as determined to be necessary or appropriate by the Company. During the three months ended March 31, 2016, the Company made other distributions to non-controlling unitholders of $1,884,000, which is recorded in “Non-controlling interest” in the accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statement of Stockholders’ Equity and reported in “Distributions paid to non-controlling unitholders” in the accompanying Condensed Consolidated Statements of Cash Flows.

On May 5, 2016, the Company declared a distribution to non-controlling unitholders of $1,884,000, which is payable on June 2, 2016.  No other distributions were paid to non-controlling unitholders during the three months ended March 31, 2016 and 2015.   

Payments Pursuant to the Tax Receivable Agreements

At the time of the IPO, RE/MAX Holdings entered into separate TRAs with RMCO’s historical owners, RIHI and Weston Presidio V., L.P. (“Weston Presidio”). During the second quarter of 2015, Weston Presidio assigned, transferred and conveyed to Oberndorf all of its rights, title and interest in and to, and all of its liabilities and obligations under, the TRA dated as of October 7, 2013 by and between RE/MAX Holdings and Weston Presidio. In connection therewith, the Company entered into a joinder to the TRA on May 29, 2015 with Western Presidio and Oberndorf (the “Joinder Agreement”). Neither the assignment and transfer nor the Joinder Agreement impacted the financial position, results of operations or cash flows of the Company. 

As of March 31, 2016, the Company reflected a liability of $98,705,000, representing the payments due to RIHI and Oberndorf, under the terms of the TRAs (see current and non-current portion of “Payable pursuant to tax receivable agreements” in the accompanying Condensed Consolidated Balance Sheets). 

As of March 31, 2016, the Company estimates that amounts payable pursuant to the TRAs within the next 12-month period will be approximately $7,148,000, of which $2,570,000 is related to RE/MAX Holdings’ 2014 federal and state tax returns and the remainder is related to RE/MAX Holdings’ 2015 federal and state tax returns. To determine the current amount of the payments due to RIHI and Oberndorf, the Company estimated the amount of taxable income that RE/MAX Holdings generated during 2015 and 2014 and the amount of the specified deductions subject to the TRAs which were realized by RE/MAX Holdings in its 2015 and 2014 federal and state tax returns. This amount was then used as a basis for determining the Company’s increase in estimated tax cash savings as a result of such deductions on which a current TRA obligation became due (i.e. payable within 12 months of the Company’s year-end). These calculations are performed pursuant to the terms of the TRAs. The Company paid $1,344,000 and $0 pursuant to the terms of the TRAs during the three months ended March 31, 2016 and 2015, respectively.

The timing and amount of the payments to be made under the TRAs are subject to certain contingencies, including RE/MAX Holdings having sufficient taxable income to utilize all of the tax benefits defined in the TRAs. If the Company elects to terminate the TRAs early, the Company would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the TRAs, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits.

 

Obligations pursuant to the TRAs are obligations of RE/MAX Holdings. They do not impact the non-controlling interest. These obligations are not income tax obligations and have no impact on the “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income. In general, items of income, gain, loss and deduction are allocated on the basis of the members’ ownership interests pursuant to the RMCO, LLC Agreement after taking into consideration all relevant sections of the Internal Revenue Code.

Earnings Per Share and Dividends
Earnings Per Share and Dividends

4. Earnings Per Share and Dividends

Earnings Per Share

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted EPS measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The treasury stock method is used to determine the dilutive potential of stock options and restricted stock units.

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except share and per share information):

 

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except share and per share information):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Numerator

 

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

 

$

4,940

 

$

2,751

 

Denominator for basic net income per share of Class A common stock

 

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,584,351

 

 

11,817,605

 

Denominator for diluted net income per share of Class A common stock

 

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,584,351

 

 

11,817,605

 

Add dilutive effect of the following:

 

 

 

 

 

 

 

Stock options

 

 

15,635

 

 

458,992

 

Restricted stock units

 

 

38,681

 

 

16,908

 

Weighted average shares of Class A common stock outstanding, diluted

 

 

17,638,667

 

 

12,293,505

 

Earnings per share of Class A common stock

 

 

 

 

 

 

 

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

 

$

0.28

 

$

0.23

 

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

 

$

0.28

 

$

0.22

 

 

The one share of Class B common stock outstanding does not share in the earnings of RE/MAX Holdings and is therefore not a participating security. Accordingly, basic and diluted net income per share of Class B common stock has not been presented.

 

 

Dividends

During the three months ended March 31, 2016, the Company’s Board of Directors declared a quarterly dividend of $0.15 per share on all outstanding shares of Class A common stock, or $2,638,000 in total dividends, which along with a corresponding distribution to non-controlling unitholders of $1,884,000, was paid on March 23, 2016.  During the three months ended March 31, 2015, the Company’s Board of Directors declared a quarterly dividend of $0.125 per share on all outstanding shares of Class A common stock, or $1,500,000 in total dividends, which along with a corresponding distribution to non-controlling unitholders of $2,217,000, was paid on April 8, 2015.  Additionally, during the three months ended March 31, 2015, the Company’s Board of Directors declared a special dividend of $1.50 per share on all outstanding shares of Class A common stock, or $17,883,000 in total dividends, which along with a corresponding distribution to non-controlling unitholders of $26,602,000, was paid on April 8, 2015.  On May 5, 2016, the Company’s Board of Directors declared a quarterly dividend of $0.15 per share on all outstanding shares of Class A common stock, which is payable on June 2, 2016 to shareholders of record at the close of business on May 19, 2016

Acquisitions and Dispositions
Acquisitions and Dispositions

5. Acquisitions and Dispositions

Acquisitions

Acquisition of RE/MAX of New York, Inc.

On February 22, 2016, RE/MAX, LLC acquired certain assets of RE/MAX of New York, Inc. (“RE/MAX of New York”), including the regional franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of New York. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used $8,500,000 in cash generated from operations to fund the acquisition. The assets acquired constitute a business and were accounted for using the fair value acquisition method. The total purchase price was allocated to the assets acquired based on their estimated fair values. The excess of the total purchase price over the preliminary fair value of the identifiable assets acquired was recorded as goodwill. The goodwill recognized for RE/MAX of New York is attributable to expected synergies and projected long term revenue growth. All of the goodwill recognized is tax deductible.  

Purchase Price Allocation

The following table summarizes the preliminary estimated fair value of the assets acquired at the acquisition date (in thousands):

 

 

 

 

Cash and cash equivalents

$

131

Franchise agreements

 

5,100

Other assets

 

350

Goodwill

 

2,919

Total purchase price

$

8,500

The regional franchise agreements acquired were preliminarily valued using an income approach and are being amortized over the remaining contractual term of approximately eleven years using the straight-line method. The preliminary estimated fair value of the assets acquired is subject to adjustments based on the Company’s final assessment of the fair values of the franchise agreements and other assets, which are the acquired assets with the highest likelihood of changing upon finalization of the valuation process. 

 

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of RE/MAX of New York had occurred on January 1, 2015. The historical financial information has been adjusted to give effect to events that are (1) directly attributed to the acquisition, (2) factually supportable and (3) expected to have a continuing impact on the combined results, including additional amortization expense associated with the valuation of the acquired franchise agreement. This unaudited pro forma information should not be relied upon as necessarily being indicative of the historical results that would have been obtained if the acquisition had actually occurred on that date, nor of the results that may be obtained in the future.

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31, 

 

2016

    

2015

 

(In thousands, except per share amounts)

Total revenue

$

43,224

 

$

44,632

Net income attributable to RE/MAX Holdings, Inc.

$

5,054

 

$

2,810

Basic earnings per common share

$

0.29

 

$

0.24

Diluted earnings per common share

$

0.29

 

$

0.23

Dispositions

Disposition of STC Northwest, LLC d/b/a RE/MAX Northwest Realtors

On January 20, 2016, the Company sold certain operating assets and liabilities related to three owned brokerage offices located in the U.S., of STC Northwest, LLC d/b/a RE/MAX Northwest Realtors, a wholly owned subsidiary of the Company. The Company recognized a loss on the sale of the assets and the liabilities transferred of approximately $90,000 during the first quarter of 2016, which is reflected in “Loss on sale or disposition of assets, net” in the accompanying Condensed Consolidated Statements of Income. In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue.

Disposition of Sacajawea, LLC d/b/a RE/MAX Equity Group

On December 31, 2015, the Company sold certain operating assets and liabilities related to 12 owned brokerage offices located in the U.S., of Sacajawea, LLC d/b/a RE/MAX Equity Group, a wholly owned subsidiary of the Company. The Company recognized a gain on the sale of the assets of approximately $2,794,000 during the fourth quarter of 2015, which is reflected in “(Gain) loss on sale or disposition of assets, net” in the Consolidated Statements of Income included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue.

Disposition of RB2B, LLC d/b/a RE/MAX 100

On April 10, 2015, the Company sold certain operating assets and liabilities related to six owned brokerage offices located in the U.S., of RB2B, LLC d/b/a RE/MAX 100, a wholly owned subsidiary of the Company. The Company recognized a gain on the sale of the assets and the liabilities transferred of $615,000 during the second quarter of 2015, which is reflected in “(Gain) loss on sale or disposition of assets, net” in the Consolidated Statements of Income included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.  In connection with this sale, the Company transferred separate office franchise agreements to the purchaser, under which the Company will receive ongoing monthly continuing franchise fees, broker fees and franchise sales revenue.

Subsequent Events

Acquisition of RE/MAX of Alaska, Inc.

On April 1, 2016, RE/MAX, LLC acquired certain assets of RE/MAX of Alaska, Inc. (“RE/MAX of Alaska”), including the regional franchise agreements issued by the Company permitting the sale of RE/MAX franchises in the state of Alaska. RE/MAX, LLC acquired these assets in order to expand its owned and operated regional franchising operations. The Company used $1,500,000 in cash generated from operations to fund the acquisition. The assets acquired constitute a business that will be accounted for using the fair value acquisition method. The total purchase price will be allocated to the assets acquired and liabilities assumed based on their estimated fair values. Due to the timing of this acquisition, the Company has not completed a preliminary purchase price allocation.

Intangible Assets and Goodwill
Intangible Assets and Goodwill

6. Intangible Assets and Goodwill

The following table provides the components of the Company’s intangible assets, other than goodwill (in thousands, except weighted average amortization period in years):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Weighted

    

 

    

 

    

 

    

 

    

 

    

 

 

 

 

Average

 

As of March 31, 2016

 

As of December 31, 2015

 

 

 

Amortization

 

Initial

 

Accumulated

 

Net

 

Initial

 

Accumulated

 

Net

 

 

 

Period

 

Cost

 

Amortization

 

Balance

 

Cost

 

Amortization

 

Balance

 

Franchise agreements

 

12.7

 

$

167,538

 

$

(103,940)

 

$

63,598

 

$

162,438

 

$

(100,499)

 

$

61,939

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software (a)

 

4.7

 

$

10,984

 

$

(6,767)

 

$

4,217

 

$

10,885

 

$

(7,325)

 

$

3,560

 

Trademarks

 

14.4

 

 

3,013

 

 

(1,643)

 

 

1,370

 

 

2,985

 

 

(1,604)

 

 

1,381

 

Total other intangible assets

 

8.2

 

$

13,997

 

$

(8,410)

 

$

5,587

 

$

13,870

 

$

(8,929)

 

$

4,941

 


(a)

As of March 31, 2016 and December 31, 2015, capitalized software development costs of $3,856,000 and $3,165,000, respectively, were recorded in “Other intangible assets” in the accompanying Condensed Consolidated Balance Sheets. As of these dates, the associated information technology infrastructure projects were not complete and ready for their intended use and thus were not subject to amortization.

 

Amortization expense for the three months ended March 31, 2016 and 2015 was $3,514,000 and $3,549,000, respectively.

The estimated future amortization of intangible assets, other than goodwill is as follows (in thousands):

 

 

 

 

 

 

 

As of March 31:

    

 

 

 

Remainder of 2016

 

$

11,264

 

2017

    

 

11,806

 

2018

 

 

7,937

 

2019

 

 

7,648

 

2020

 

 

6,757

 

Thereafter

 

 

23,773

 

 

 

$

69,185

 

 

During 2015, the Company performed its annual assessment of goodwill, and the fair values of the Company’s reporting units significantly exceeded their respective carrying values. No interim indicators of impairment have been identified. The following table presents changes to goodwill for the three months ended March 31, 2016 (in thousands):

 

 

 

 

 

 

 

Balance, January 1, 2016

    

$

71,871

 

Goodwill recognized in acquisition

 

 

2,919

 

Effect of changes in foreign currency exchange rates

 

 

214

 

Balance, March 31, 2016

 

$

75,004

 

 

Accrued Liabilities
Accrued Liabilities

7. Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

 

2016

 

2015

 

Accrued payroll and related employee costs (a)

 

$

4,895

 

$

8,040

 

Accrued property taxes

 

 

997

 

 

1,594

 

Accrued professional fees

 

 

999

 

 

981

 

Lease-related accruals

 

 

352

 

 

354

 

Other (b)

 

 

3,717

 

 

5,113

 

 

 

$

10,960

 

$

16,082

 

 


 

(a)

Accrued payroll and related employee costs include $1,602,000 and $1,009,000 of accrued severance and benefits expenses as of March 31, 2016 and December 31, 2015, respectively, related to the separation of the Company’s former Chief Financial Officer and Chief Operating Officer on March 31, 2016, former President on August 19, 2015 and former Chief Executive Officer on December 31, 2014, as discussed in Note 11, Leadership Changes and Restructuring Activities.  

(b)

Other accrued liabilities include $3,251,000 as of December 31, 2015 in connection with the December 28, 2015 judgment resulting from the litigation matter concerning the Company’s acquisition of the net assets of HBN, which was paid on February 2, 2016, as discussed in Note 12, Commitments and Contingencies.

Debt
Debt

8. Debt

Debt consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

 

2016

 

2015

 

2013 Senior Secured Credit Facility, principal of $487 payable quarterly, matures in July 2020

    

$

189,388

 

$

202,635

 

Less unamortized debt issuance costs

 

 

(1,358)

 

 

(1,527)

 

Less unamortized debt discount

 

 

(669)

 

 

(751)

 

Less current portion

 

 

(14,332)

 

 

(14,805)

 

 

 

$

173,029

 

$

185,552

 

 

Maturities of debt are as follows (in thousands):

 

 

 

 

 

 

As of March 31:

 

 

 

Remainder of 2016

$

1,461

 

2017

 

14,332

 

2018

 

1,947

 

2019

 

1,947

 

2020

 

169,701

 

 

$

189,388

 

On July 31, 2013, the Company entered into a new credit agreement with several lenders and administered by a bank, referred to herein as the “2013 Senior Secured Credit Facility.” The 2013 Senior Secured Credit Facility consists of a $230,000,000 term loan facility and a $10,000,000 revolving loan facility. The proceeds provided by the term loan facility were used to refinance and repay existing indebtedness and for working capital, capital expenditures and general corporate purposes.

On March 11, 2015, the 2013 Senior Secured Credit Facility was amended, providing for an increase to the maximum applicable margin for both London Interbank Offered Rate (“LIBOR”) and Alternate Base Rate (“ABR”) loans by 0.25%, and a modification of certain liquidity covenants in order to increase the amounts the Company may distribute in the form of dividends to its non-controlling unitholders and stockholders of its Class A common stock, referred to herein as the “First Amendment.” Interest rates with respect to the amended term loan facility and revolving loan facility are based, at the Company’s option, on (a) adjusted LIBOR, provided that LIBOR shall be no less than 1% plus a maximum applicable margin of 3.25% or (b) ABR, provided that ABR shall be no less than 2%, which is equal to the greater of (1) JPMorgan Chase Bank, N.A.’s prime rate; (2) the Federal Funds Effective Rate plus 0.5% or (3) calculated Eurodollar Rate for a one month interest period plus 1%, plus a maximum applicable margin of 2.25%.  The applicable margin is subject to quarterly adjustments based on the Company’s total leverage ratio as defined in the 2013 Senior Secured Credit Facility. In connection with the First Amendment, the Company incurred costs of $1,086,000 during the three months ended March 31, 2015, of which $555,000 was recorded as an unamortized debt discount and are being amortized over the remaining term of the 2013 Senior Secured Credit Facility and the remaining $531,000 was expensed as incurred.

The Company is required to make principal payments out of excess cash flow, as defined in the 2013 Senior Secured Credit Facility, as well as from the proceeds of certain asset sales, proceeds from the issuance of indebtedness and from insurance recoveries. The Company made an excess cash flow prepayment of $12,727,000 on March 31, 2016. As of March 31, 2016, mandatory principal payments of approximately $487,000 are due quarterly until the facility matures on July 31, 2020 and will be reduced pro-rata by the amount of any excess cash flow principal prepayments made. During the three months ended March 31, 2015, the Company made an excess cash flow prepayment of $7,320,000. The Company accounted for the mandatory principal excess cash flow prepayments as early extinguishments of debt and recorded a loss of $136,000 and $94,000 during the three months ended March 31, 2016 and 2015, respectively, related to unamortized debt discount and issuance costs. The Company may make optional prepayments on the term loan facility at any time; however, no such optional prepayments were made during the three months ended March 31, 2016 or 2015.

The estimated fair value of the Company’s debt as of March 31, 2016 and December 31, 2015 represents the amount that would be paid to transfer or redeem the debt in an orderly transaction between market participants at those dates and maximizes the use of observable inputs. The fair value of the Company’s debt was estimated using a market approach based on the amount at the measurement date that the Company would pay to enter into the identical liability, since quoted prices for the Company’s debt instruments are not available. As a result, the Company has classified the fair value of the 2013 Senior Secured Credit Facility as Level 2 of the fair value hierarchy. The carrying amounts of the 2013 Senior Secured Credit Facility are included in the accompanying Condensed Consolidated Balance Sheets in “Current portion of debt” and “Debt, net of current portion.” The following table summarizes the carrying value and fair value of the 2013 Senior Secured Credit Facility as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2016

 

2015

 

 

    

Carrying Amounts

    

Estimated Fair Value

    

Carrying Amounts

    

Estimated Fair Value

 

2013 Senior Secured Credit Facility

    

$

187,361

 

$

188,820

 

$

200,357

 

$

198,583

 

The Company had no borrowings drawn on the revolving loan facility during the three months ended March 31, 2016 or 2015 and had $10,000,000 available under the revolving loan facility as of March 31, 2016. The Company must pay a quarterly commitment fee equal to 0.5% on the average daily amount of the unused portion of the revolving loan facility.

Income Taxes
Income Taxes

9. Income Taxes

RE/MAX Holdings is subject to U.S. federal and state income taxation on its allocable portion of the income of RMCO.  The “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income for the three months ended March 31, 2016 and 2015 is based on an estimate of the Company’s annualized effective income tax rate. The Company’s effective tax rate includes a rate benefit attributable to the fact that the Company’s subsidiaries operate as a series of limited liability companies which are not themselves subject to federal income tax. Accordingly, the portion of the Company’s subsidiaries earnings attributable to the non-controlling interest are subject to tax when reported as a component of the non-controlling interests’ taxable income. The “Provision for income taxes” is comprised of a provision for income taxes attributable to RE/MAX Holdings and to entities other than RE/MAX Holdings. The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes and RE/MAX Holdings’ proportionate share of RMCO’s net income. The provision for income taxes attributable to entities other than RE/MAX Holdings represents taxes imposed directly on RE/MAX, LLC related to tax liabilities in certain foreign jurisdictions that are allocated to the non-controlling interest.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. As of March 31, 2016, the Company does not believe it has any significant uncertain tax positions.

The Company and its subsidiaries file, or will file, income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. RMCO is not subject to federal income taxes as it is a flow-through entity, however, RMCO is still required to file an annual U.S. Return of Partnership Income. The Company was notified on January 6, 2016 that RMCO’s 2013 U.S. Return of Partnership Income was selected for examination by the Internal Revenue Service and the audit commenced in April 2016. With respect to state and local jurisdictions and countries outside of the U.S., the Company and its subsidiaries are typically subject to examination for three to four years after the income tax returns have been filed.

Equity-Based Compensation
Equity-Based Compensation

10. Equity-Based Compensation

On September 30, 2013, the Company’s Board of Directors adopted the RE/MAX Holdings, Inc. 2013 Omnibus Incentive Plan (the “2013 Incentive Plan”) that provides for the grant of incentive stock options to the Company’s employees, and for the grant of shares of RE/MAX Holdings’ Class A common stock, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalent rights, cash-based awards and any combination thereof to employees, directors and consultants of the Company.

On February 23, 2016, RE/MAX Holdings granted an aggregate of 75,057 restricted stock units at a value of $33.18 per unit to certain employees, which vest in three equal installments, on March 1, 2017, March 1, 2018 and March 1, 2019, and an aggregate of 12,663 restricted stock units at a value of $33.18 per unit to its directors, excluding David Liniger, the Company’s Chief Executive Officer, Chairman and Co-Founder, and Gail Liniger, the Company’s Vice Chair and Co-Founder, which vest on March 1, 2017. The grant-date fair value of $33.18 per unit equaled the closing price of RE/MAX Holdings’ Class A common stock on February 23, 2016. 

On March 11, 2015, RE/MAX Holdings granted an aggregate of 74,893 restricted stock units at a value of $32.45 per unit to certain employees, which vest in three equal installments, on April 1, 2016, April 1, 2017 and April 1, 2018, and an aggregate of 10,787 restricted stock units at a value of $32.45 per unit to its directors, excluding David Liniger, the Company’s Chief Executive Officer, Chairman and Co-Founder, and Gail Liniger, the Company’s Vice Chair and Co-Founder, which vest on April 1, 2016. The grant-date fair value of $32.45 per unit equaled the closing price of RE/MAX Holdings’ Class A common stock on March 11, 2015.  

For the three months ended March 31, 2016 and 2015, the Company recognized equity-based compensation expense of $766,000 and $142,000, respectively, in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income resulting from the aforementioned restricted stock units granted. 

The following table summarizes equity-based compensation activity related to restricted stock units and stock options as of and for the three months ended March 31, 2016:  

 

 

 

 

 

 

 

 

 

    

Restricted Stock

    

Stock

 

 

 

Units

 

Options

 

Balance, January 1, 2016

 

96,765

 

28,057

 

Granted

 

87,720

 

 —

 

Exercised

 

 —

 

 —

 

Forfeited

 

 —

 

 —

 

Cancelled

 

 —

 

 —

 

Balance, March 31, 2016

 

184,485

 

28,057

 

 

 

            

 

            

 

As of March 31, 2016

 

 

 

 

 

Vested

 

 —

 

28,057

 

Unvested

 

184,485

 

 —

 

 

At March 31, 2016, there were 2,151,182 additional shares available for the Company to grant under the 2013 Incentive Plan.

Leadership Changes and Restructuring Activities
Leadership Changes and Restructuring Activities

11. Leadership Changes and Restructuring Activities

On January 7, 2016, the Company’s former Chief Financial Officer and Chief Operating Officer entered into a separation and transition agreement (the “Separation and Transition Agreement”) pursuant to which he served as Co-Chief Financial Officer from January 15, 2016 through March 31, 2016 and separated from the Company effective March 31, 2016.  Subject to the terms of the Separation and Transition Agreement, the Company is required to provide severance and other related benefits through April 2016.  In April 2016, the Company made a lump sum severance payment of $575,000  and 12,109 unvested restricted stock units vested on an accelerated timeline pursuant to the terms of the Separation and Transition Agreement. The Company recorded a liability, measured at its estimated fair value, for payments that will be made under the Separation and Transition Agreement, with a corresponding charge to “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income. The Company incurred a total cost of $1,043,000, including $331,000 of equity-based compensation expense, during the three months ended March 31, 2016 related to this separation.  As of March 31, 2016, the short-term portion of the liability was $583,000 and is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. 

On May 4, 2015, the Company’s former President entered into a retirement agreement with the Company (the “Retirement Agreement”) pursuant to which he retired on August 19, 2015. Subject to the terms of the Retirement Agreement, the Company is required to provide retirement benefits over a 24-month period, beginning in September 2015. The Company recorded a liability, measured at its estimated fair value, for payments that will be made under the Retirement Agreement, with a corresponding charge to “Selling, operating and administrative expenses.” The Company incurred a total cost of $877,000, including $216,000 of equity-based compensation expense, during year ended December 31, 2015 related to this retirement. As of March 31, 2016 and December 31, 2015, the short-term portion of the liability was $253,000 and $250,000, respectively, and is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets.  As of March 31, 2016 and December 31, 2015, the long-term portion of the liability was $109,000 and $175,000, respectively, and is included in “Other liabilities, net of current portion” in the accompanying Condensed Consolidated Balance Sheets.

On December 31, 2014, the Company’s former Chief Executive Officer retired and pursuant to the terms of the Separation and Release of Claims Agreement (the “Separation Agreement”), the Company is required to provide severance and other related benefits over a 36-month period, beginning in October 2015. The Company recorded a liability, measured at its estimated fair value, for payments that will be made under the Separation Agreement, with a corresponding charge to “Selling, general and administrative expenses.” The Company will incur a total cost of $3,581,000, including $1,007,000 of equity-based compensation expense. As of March 31, 2016 and December 31, 2015, the short-term portion of the liability was $766,000 and $759,000, respectively, and is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets. As of March 31, 2016 and December 31, 2015, the long-term portion of the liability was $589,000 and $789,000, respectively, and is included in “Other liabilities, net of current portion” in the accompanying Condensed Consolidated Balance Sheets.

The Company’s total severance and other related expenses were $1,043,000 and $451,000 for the three months ended March 31, 2016 and 2015, respectively, which is included in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income. 

The following table presents a rollforward of the estimated fair value liability established for the aforementioned severance and other related costs from January 1, 2016 to March 31, 2016 (in thousands):

 

 

 

 

 

 

 

Balance, January 1, 2016

    

$

2,021

 

Severance and other related expenses

 

 

1,043

 

Accretion

 

 

19

 

Cash payments

 

 

(452)

 

Non-cash adjustment (a)

 

 

(331)

 

Balance, March 31, 2016

 

$

2,300

 

 


(a) For the three months ended March 31, 2016, the non-cash adjustment represents the non-cash equity-based compensation expense recorded for the accelerated vesting of 12,109 restricted stock units on April 9, 2016 pursuant to the terms of the Separation and Transition Agreement. 

Commitments and Contingencies
Commitments and Contingencies

12. Commitments and Contingencies

Commitments

The Company leases offices and equipment under non-cancelable operating leases, subject to certain provisions for renewal options and escalation clauses.

Contingencies

In connection with the sale of the assets and liabilities related to the Company’s previously-owned brokerages as described in Note 5, Acquisitions and Dispositions, the Company entered into three Assignment and Assumption of Lease Agreements (the “Assignment Agreements”) pursuant to which the Company assigned its obligations under and rights, title and interest in 21 leases to the respective purchasers. For certain leases, the Company remains secondarily liable for future lease payments over approximately the next 64-month period under the respective lease agreements and accordingly, as of March 31, 2016, the Company has outstanding lease guarantees of $8,522,000. This amount represents the maximum potential amount of future payments under the respective lease guarantees. In the event of default by the purchaser, the indemnity and default clauses in the Assignment Agreements govern the Company’s ability to pursue and recover damages incurred, if any, against the purchaser. As of March 31, 2016, the likelihood of default by the purchaser on one of the Assignment Agreements was deemed to be reasonably possible and as such, the Company recognized a loss of $243,000 in “Loss on sale or disposition of assets, net” in the accompanying Condensed Consolidated Statements of Income during the three months ended March 31, 2016. As of March 31, 2016, the short-term portion of the liability was $47,000 and is included in “Accrued liabilities” in the accompanying Condensed Consolidated Balance Sheets and the long-term portion of the liability was $188,000 and is included in “Other liabilities, net of current portion” in the accompanying Condensed Consolidated Balance Sheets.

Litigation

The Company is subject to litigation claims arising in the ordinary course of business. The Company believes that it has adequately accrued for legal matters as appropriate. The Company records litigation accruals for legal matters which are both probable and estimable and for related legal costs as incurred. The Company does not reduce these liabilities for potential insurance or third-party recoveries and any insurance recoveries are recorded in “Accounts and notes receivable, current portion” in the accompanying Condensed Consolidated Balance Sheets with a corresponding reduction to “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income.

In connection with the IPO effective October 7, 2013, RE/MAX Holdings acquired the net assets, excluding cash, of HBN and Tails for consideration paid of $7,130,000 and $20,175,000, respectively. Regarding the acquisition of the net assets of HBN, several shareholders of HBN (the “Defendants”) dissented from the transaction and demanded payment for their shares in excess of consideration paid. Pursuant to the dissenters’ rights statute in the State of Colorado, HBN petitioned the District Court of Denver County, Colorado (the “Court”) to determine the fair value of HBN.  The Court rendered a decision on December 28, 2015 and concluded that the fair value of HBN on October 7, 2013 was higher than the amount paid. Accordingly, the Court awarded the Defendants $3,153,000, which represents the amount of the Defendants’ share of HBN’s fair value as determined by the Court in excess of the consideration paid, as well as accrued interest from October 7, 2013 through the date of judgment. In addition, the Court’s decision provides for the payment of certain costs incurred in connection with the litigation and additional interest from the judgment date until the payment date.  As a result of this conclusion, the Company recorded an accrual of $3,251,000 as of December 31, 2015, which was paid on February 2, 2016. 

 

In connection with the Company’s acquisition of the net assets of Tails, several shareholders of Tails challenged the terms of the transaction and filed a shareholder action entitled Robert B. Fisher, Carla L. Fisher, Bradley G. Rhodes and James D. Schwartz v. Tails, Inc. in the Circuit Court of Henrico County, Virginia ("Tails I"). The Court dismissed Tails I on December 23, 2013. The shareholders appealed that decision. On January 8, 2015, the Virginia Supreme Court affirmed the lower court's dismissal of Tails I.  On March 7, 2016, the same shareholders filed a shareholder derivative complaint and complaint for individual claims entitled Robert B. Fisher, Carla L. Fisher, Bradley G. Rhodes and James D. Schwartz v. Gail Liniger, Dave Liniger, Bruce Benham, RE/MAX Holdings, Inc. and Tails Holdco, Inc. in Denver District Court ("Tails II"). The Tails II defendants intend to vigorously defend their positions that the final judgment in the Tails I action bars the Tails II action and that the consideration paid for the net assets of Tails was the fair value. The Company believes a range for the potential impact to its financial position and results of operation is not determinable as of March 31, 2016.  Accordingly, the Company currently has not recorded an accrual in the accompanying Condensed Consolidated Balance Sheets.  

Except for the ongoing litigation concerning the acquisition of the net assets of Tails, management of the Company believes other such litigation matters involving a reasonably possible chance of loss will not, individually or in the aggregate, result in a material adverse effect on the Company's financial condition, results of operations and cash flows.

 

Related-Party Transactions
Related-Party Transactions

13. Related-Party Transactions

The Company’s previously-owned real estate brokerage operations paid advertising fees to regional and national advertising funds, which promote the RE/MAX brand. These advertising funds are corporations owned by a majority stockholder of RIHI, who is also the Company’s Chief Executive Officer, Chairman and Co-Founder, as trustee for RE/MAX agents. This individual does not receive any compensation from these corporations, as all funds received by the corporations are required to be spent on advertising for the respective regions. During the three months ended March 31, 2016 and 2015, the Company’s previously-owned real estate brokerage operations paid $11,000 and $282,000, respectively, to these advertising funds.  These payments are included in “Selling, operating and administrative expenses” in the accompanying Condensed Consolidated Statements of Income.

The majority stockholders of RIHI, including the Company’s current Chief Executive Officer, Chairman and Co-Founder have made and continue to make a golf course they own available to the Company for business purposes. During the three months ended March 31, 2016 and 2015, the Company used the golf course for business purposes at no charge.

The Company provides services, such as accounting, legal, marketing, technology, human resources and public relations services, to certain affiliated entities, and it allows these companies to share its leased office space. During the three months ended March 31, 2016 and 2015, the total amounts allocated for services rendered and rent for office space provided on behalf of affiliated entities were $431,000 and $416,000, respectively. Such amounts are generally paid within 30 days and no such amounts were outstanding at March 31, 2016 or December 31, 2015.  In addition, affiliated regional franchisors have current outstanding continuing franchise fees, broker fees and franchise sales revenue amounts due from the Company of $130,000 and $66,000 as of March 31, 2016 and December 31, 2015, respectively.  Such amounts are included in “Accounts payable to affiliates” in the accompanying Condensed Consolidated Balance Sheets.

 

 

 

Summary of Significant Accounting Policies (Policies)

Basis of Presentation

The accompanying condensed consolidated financial statements are unaudited and comprise the condensed consolidated financial statements of the Company and have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) and with Article 10 of Regulation S-X. In compliance with those instructions, certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements are presented on a consolidated basis and include the accounts of RE/MAX Holdings and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of March 31, 2016 and December 31, 2015, the results of its operations and comprehensive income for the three months ended March 31, 2016 and 2015, changes in its stockholders’ equity for the three months ended March 31, 2016 and results of its cash flows for the three months ended March 31, 2016 and 2015. Interim results may not be indicative of full year performance. These condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant areas in which management uses assumptions include, among other things, the establishment of the allowance for doubtful trade accounts and notes receivable, the determination of the estimated lives of intangible assets, the estimates for amounts accrued for litigation matters, the estimates of the fair value of reporting units used in the annual assessment of goodwill, the fair value of assets acquired and the amounts due to RIHI and Oberndorf Investments LLC (“Oberndorf”) pursuant to the terms of the tax receivable agreements (“TRAs”) discussed in more detail in Note 3, Non-controlling Interest. Actual results could differ from those estimates.

Reclassifications

Certain items in the accompanying condensed consolidated financial statements as of December 31, 2015 and for the three months ended March 31, 2015 have been reclassified to conform to the 2016 presentation. 

Segment Reporting

Prior to 2016, the Company operated in two reportable segments, (1) Real Estate Franchise Services and (2) Brokerages. The Real Estate Franchise Services reportable segment comprised the operations of the Company’s owned and independent global franchising operations under the RE/MAX brand name, intersegment revenue from the Company’s previously-owned brokerages and corporate-wide professional services expenses. The Brokerages reportable segment contained the operations of the Company’s previously-owned brokerage offices in the U.S., the results of operations of a mortgage brokerage company in which the Company previously-owned a non-controlling interest and reflected the elimination of intersegment revenue and other consolidation entries. During 2015 and the first quarter of 2016, the Company sold its 21 previously-owned brokerage offices in the Washington, D.C., Portland, Oregon and Seattle, Washington metropolitan areas, as discussed in Note 5, Acquisitions and Dispositions. These dispositions resulted in the cessation of operations for the Company’s Brokerages reportable segment. Thus, during the first quarter of 2016, the Company began to operate in one reportable segment, Real Estate Franchise Services. All prior segment information has been reclassified to reflect the Company’s new segment structure.

Principles of Consolidation

RE/MAX Holdings holds an approximate 60% economic interest in RMCO and, as its managing member, RE/MAX Holdings controls RMCO’s operations, management and activities. As a result, RE/MAX Holdings consolidates RMCO and records a non-controlling interest in the accompanying Condensed Consolidated Balance Sheets and records net income attributable to the non-controlling interest and comprehensive income attributable to the non-controlling interest in the accompanying Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income, respectively.

Recent Accounting Pronouncements

Under the Jumpstart Our Business Startups Act (“JOBS Act”), the Company meets the definition of an emerging growth company. The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

 

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies certain aspects of accounting for share-based payment transactions, including income tax consequences, statutory tax withholding requirements, forfeitures and classification in the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016.  Early adoption is permitted in any interim or annual reporting period. The standard requires the guidance related to forfeitures and the timing of when excess tax benefits are recognized to be applied using a modified retrospective transition method, the guidance related to the accounting for income taxes to be applied prospectively, and the guidance related to the presentation of excess tax benefits on the statement of cash flows to be applied either prospectively or retrospectively. The Company early adopted ASU 2016-09 in the first quarter of 2016 and elected to account for forfeitures as they occur.  As a result, the Company recorded a cumulative-effect adjustment of $44,000 to “Retained Earnings” in the accompanying Condensed Consolidated Balance Sheets and Statements of Stockholders’ Equity.  Furthermore, the Company elected to apply the retrospective transition method to the amendments related to the presentation of excess tax benefits in the statements of cash flows.  This resulted in an increase in cash flows provided by operating activities of $1,105,000 and a decrease of $1,105,000 in cash flows used in financing activities in the accompanying Condensed Consolidated Statements of Cash Flows for the period ended March 31, 2015.  

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize the assets and liabilities that arise from all leases on the consolidated balance sheets. ASU 2016-02 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual reporting period. The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company has not yet determined the effect of the standard on its consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, which requires that deferred tax assets and liabilities be classified as non-current in a classified balance sheet. ASU 2015-17 is effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2016. The standard permits the use of either the retrospective or prospective transition method and permits early adoption as of the beginning of an interim or annual reporting period. The Company elected to early adopt this standard retrospectively in the first quarter of 2016 and the presentation of “Other current assets” and “Deferred tax assets, net” in the accompanying Condensed Consolidated Balance Sheets and related disclosures were impacted by $3,332,000 as of December 31, 2015, but the company’s consolidated results of operations were not affected.

In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting Measurement-Period Adjustments, which eliminates the requirement for an entity to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is completed. ASU 2015-16 became effective prospectively for the Company on January 1, 2016.  The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures.

In June 2015, the FASB issued ASU 2015-10, Technical Corrections and Improvements, which both clarifies and simplifies content in the FASB Accounting Standards Codification and corrects unintended application of U.S. GAAP. ASU 2015-10 became effective for the Company on January 1, 2016. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements and related disclosures. 

In April 2015, the FASB issued ASU 2015-05, IntangiblesGoodwill and OtherInternal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on fees paid in a cloud computing arrangement and clarifies the accounting for a software license element of a cloud computing arrangement. ASU 2015-05 became effective prospectively for the Company on January 1, 2016.  The adoption of this standard did not have a significant impact on the consolidated financial statements and related disclosures.

In April 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires an entity to present debt issuance costs related to a debt liability as a direct deduction from the debt liability rather than as an asset. ASU 2015-03 is effective retrospectively for the Company on January 1, 2016. The adoption of this standard impacted the presentation of “Debt, net of current portion” in the accompanying Condensed Consolidated Balance Sheets and related disclosures by $1,527,000 as of December 31, 2015, but did not affect the Company’s consolidated results of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of the guidance in ASU 2014-09 by one year. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides clarification on identifying performance obligations and accounting for licenses of intellectual property. These standards are effective for fiscal years, and interim reporting periods within those years, beginning after December 15, 2017. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within such annual reporting periods. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the effect of the standard on its consolidated financial statements and related disclosures.

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also provides guidance on the financial statement presentation and disclosures of discontinued operations. ASU 2014-08 became effective prospectively for the Company on January 1, 2015 and none of the dispositions that occurred during 2015 and the first quarter of 2016 qualified as a discontinued operation. See Note 5, Acquisitions and Dispositions, for additional information.

Critical Accounting Judgments and Estimates

There have been no changes in the Company’s critical accounting judgments and estimates from those that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The Company believes that the disclosures herein are adequate so that the information presented is not misleading.

Non-controlling Interest (Tables)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2016

 

2015

 

 

    

Shares

    

Ownership %

    

Shares

    

Ownership %

 

Non-controlling unitholders ownership of common units in RMCO

 

12,559,600

 

41.67

%

12,559,600

 

41.67

%

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

 

17,584,351

 

58.33

%

17,584,351

 

58.33

%

Total common units in RMCO

 

30,143,951

 

100.00

%

30,143,951

 

100.00

%

 

 

The weighted average ownership percentages for the applicable reporting periods are used to calculate the net income attributable to RE/MAX Holdings.  RE/MAX Holdings’ weighted average ownership percentage in RMCO for the three months ended March 31, 2016 and 2015 was 58.33% and 39.99%, respectively.  RE/MAX Holdings’ economic interest in RMCO increased due to the increase in common units from the issuance of shares of Class A common stock as a result of the Secondary Offering described in Note 1, Business and Organization.  A reconciliation of “Net income attributable to RE/MAX Holdings, Inc.” in the accompanying Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

Three Months Ended

 

 

 

March 31, 

 

 

 

2016

    

2015

 

Income before provision for income taxes attributable to RE/MAX Holdings, Inc.

 

$

7,965

 

$

4,510

 

Provision for income taxes attributable to RE/MAX Holdings, Inc.

 

 

(3,025)

 

 

(1,759)

 

Net income attributable to RE/MAX Holdings, Inc.

 

$

4,940

 

$

2,751

 

 

A reconciliation of the “Provision for income taxes” in the accompanying Condensed Consolidated Statements of Income for the periods indicated is detailed as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

    

Provision for income taxes attributable to RE/MAX Holdings, Inc. (a)

 

$

(3,025)

 

$

(1,759)

 

Provision for income taxes attributable to entities other than RE/MAX Holdings, Inc. (b)

 

 

(234)

 

 

(389)

 

Provision for income taxes

 

$

(3,259)

 

$

(2,148)

 


(a)

The provision for income taxes attributable to RE/MAX Holdings includes all U.S. federal and state income taxes as well as RE/MAX Holdings’ proportionate share of the net assets of RMCO of the taxes imposed directly on RE/MAX, LLC, a wholly-owned subsidiary of RMCO, related to tax liabilities in certain foreign jurisdictions of $335,000 and $262,000 for the three months ended March 31, 2016 and 2015, respectively.

(b)

The provision for income taxes attributable to entities other than RE/MAX Holdings represents taxes imposed directly on RE/MAX, LLC related to tax liabilities in certain foreign jurisdictions that are allocated to the non-controlling interest.

Earnings Per Share and Dividends (Tables)
Reconciliation of Numerator and Denominator used in Basic and Diluted EPS Calculations

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations (in thousands, except share and per share information):

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2016

    

2015

 

Numerator

 

 

 

 

 

 

 

Net income attributable to RE/MAX Holdings, Inc.

 

$

4,940

 

$

2,751

 

Denominator for basic net income per share of Class A common stock

 

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,584,351

 

 

11,817,605

 

Denominator for diluted net income per share of Class A common stock

 

 

 

 

 

 

 

Weighted average shares of Class A common stock outstanding

 

 

17,584,351

 

 

11,817,605

 

Add dilutive effect of the following:

 

 

 

 

 

 

 

Stock options

 

 

15,635

 

 

458,992

 

Restricted stock units

 

 

38,681

 

 

16,908

 

Weighted average shares of Class A common stock outstanding, diluted

 

 

17,638,667

 

 

12,293,505

 

Earnings per share of Class A common stock

 

 

 

 

 

 

 

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

 

$

0.28

 

$

0.23

 

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

 

$

0.28

 

$

0.22

 

 

Acquisitions and Dispositions (Tables)

The following table summarizes the preliminary estimated fair value of the assets acquired at the acquisition date (in thousands):

 

 

 

 

Cash and cash equivalents

$

131

Franchise agreements

 

5,100

Other assets

 

350

Goodwill

 

2,919

Total purchase price

$

8,500

 

 

 

 

 

 

 

 

Three Months Ended

 

March 31, 

 

2016

    

2015

 

(In thousands, except per share amounts)

Total revenue

$

43,224

 

$

44,632

Net income attributable to RE/MAX Holdings, Inc.

$

5,054

 

$

2,810

Basic earnings per common share

$

0.29

 

$

0.24

Diluted earnings per common share

$

0.29

 

$

0.23

 

Intangible Assets and Goodwill (Tables)

The following table provides the components of the Company’s intangible assets, other than goodwill (in thousands, except weighted average amortization period in years):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Weighted

    

 

    

 

    

 

    

 

    

 

    

 

 

 

 

Average

 

As of March 31, 2016

 

As of December 31, 2015

 

 

 

Amortization

 

Initial

 

Accumulated

 

Net

 

Initial

 

Accumulated

 

Net

 

 

 

Period

 

Cost

 

Amortization

 

Balance

 

Cost

 

Amortization

 

Balance

 

Franchise agreements

 

12.7

 

$

167,538

 

$

(103,940)

 

$

63,598

 

$

162,438

 

$

(100,499)

 

$

61,939

 

Other intangible assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Software (a)

 

4.7

 

$

10,984

 

$

(6,767)

 

$

4,217

 

$

10,885

 

$

(7,325)

 

$

3,560

 

Trademarks

 

14.4

 

 

3,013

 

 

(1,643)

 

 

1,370

 

 

2,985

 

 

(1,604)

 

 

1,381

 

Total other intangible assets

 

8.2

 

$

13,997

 

$

(8,410)

 

$

5,587

 

$

13,870

 

$

(8,929)

 

$

4,941

 


(a)

As of March 31, 2016 and December 31, 2015, capitalized software development costs of $3,856,000 and $3,165,000, respectively, were recorded in “Other intangible assets” in the accompanying Condensed Consolidated Balance Sheets. As of these dates, the associated information technology infrastructure projects were not complete and ready for their intended use and thus were not subject to amortization.

 

The estimated future amortization of intangible assets, other than goodwill is as follows (in thousands):

 

 

 

 

 

 

 

As of March 31:

    

 

 

 

Remainder of 2016

 

$

11,264

 

2017

    

 

11,806

 

2018

 

 

7,937

 

2019

 

 

7,648

 

2020

 

 

6,757

 

Thereafter

 

 

23,773

 

 

 

$

69,185

 

 

 

 

 

 

 

 

 

Balance, January 1, 2016

    

$

71,871

 

Goodwill recognized in acquisition

 

 

2,919

 

Effect of changes in foreign currency exchange rates

 

 

214

 

Balance, March 31, 2016

 

$

75,004

 

 

Accrued Liabilities (Tables)
Schedule of Accrued Liabilities

Accrued liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

 

2016

 

2015

 

Accrued payroll and related employee costs (a)

 

$

4,895

 

$

8,040

 

Accrued property taxes

 

 

997

 

 

1,594

 

Accrued professional fees

 

 

999

 

 

981

 

Lease-related accruals

 

 

352

 

 

354

 

Other (b)

 

 

3,717

 

 

5,113

 

 

 

$

10,960

 

$

16,082

 

 

Debt (Tables)

Debt consists of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

    

March 31, 

 

December 31, 

 

 

 

2016

 

2015

 

2013 Senior Secured Credit Facility, principal of $487 payable quarterly, matures in July 2020

    

$

189,388

 

$

202,635

 

Less unamortized debt issuance costs

 

 

(1,358)

 

 

(1,527)

 

Less unamortized debt discount

 

 

(669)

 

 

(751)

 

Less current portion

 

 

(14,332)

 

 

(14,805)

 

 

 

$

173,029

 

$

185,552

 

 

Maturities of debt are as follows (in thousands):

 

 

 

 

 

 

As of March 31:

 

 

 

Remainder of 2016

$

1,461

 

2017

 

14,332

 

2018

 

1,947

 

2019

 

1,947

 

2020

 

169,701

 

 

$

189,388

 

 

The following table summarizes the carrying value and fair value of the 2013 Senior Secured Credit Facility as of March 31, 2016 and December 31, 2015 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

2016

 

2015

 

 

    

Carrying Amounts

    

Estimated Fair Value

    

Carrying Amounts

    

Estimated Fair Value

 

2013 Senior Secured Credit Facility

    

$

187,361

 

$

188,820

 

$

200,357

 

$

198,583

 

 

Equity-Based Compensation (Tables)
Summary of Equity-Based Compensation Activity

 

 

 

 

 

 

 

    

Restricted Stock

    

Stock

 

 

 

Units

 

Options

 

Balance, January 1, 2016

 

96,765

 

28,057

 

Granted

 

87,720

 

 —

 

Exercised

 

 —

 

 —

 

Forfeited

 

 —

 

 —

 

Cancelled

 

 —