Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2022

Summary of Significant Accounting Policies

The accompanying Condensed Consolidated Balance Sheet at December 31, 2021, which was derived from the audited consolidated financial statements at that date, and the unaudited interim condensed consolidated financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in annual consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying condensed consolidated financial statements are presented on a consolidated basis and include the accounts of Holdings and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated. In the opinion of management, the accompanying condensed consolidated financial statements reflect all normal and recurring adjustments necessary to present fairly the Company’s financial position as of June 30, 2022 and the results of its operations and comprehensive income, cash flows and changes in its stockholders’ equity for the three and six months ended June 30, 2022 and 2021. Interim results may not be indicative of full-year performance.

These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements within the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“2021 Annual Report on Form 10-K”). Please refer to that document for a fuller discussion of all significant accounting policies.

Use of Estimates

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

Segment Reporting

The Company operates under the following four operating segments: Real Estate, Mortgage, Marketing Funds and Other. Due to quantitative insignificance, the “Other” operating segment is comprised of operations which do not meet the criteria of a reportable segment.

Revenue Recognition

The Company generates most of its revenue from contracts with customers. The Company’s major streams of revenue are:

●

Continuing franchise fees, which are fixed contractual fees paid monthly by RE/MAX or Motto franchisees or Independent Region sub-franchisors based on the number of RE/MAX agents or Motto franchisees based on the number of open offices.

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Annual dues, which are fees charged directly to RE/MAX agents.

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Broker fees, which are fees on real estate commissions when a RE/MAX agent assists a consumer with buying or selling a home.

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Marketing Funds fees, which are fixed contractual fees paid monthly by franchisees based on the number of RE/MAX agents or Motto franchisees based on the number of offices.

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Franchise sales and other revenue, which consists of fees from initial sales of RE/MAX and Motto franchises, renewals of RE/MAX franchises and master franchise fees, as well as data services subscription revenue, preferred marketing arrangements, technology products and subscription revenue, event-based revenue from education and other programs and mortgage loan processing revenue.

Deferred Revenue and Commissions Related to Franchise Sales

Deferred revenue is primarily driven by Franchise sales and Annual dues, as discussed above, and is included in “Deferred revenue” and “Deferred revenue, net of current portion” on the Consolidated Balance Sheets. Other deferred revenue is primarily related to event-based revenue. The activity consists of the following (in thousands):


	Balance at				Revenue		Balance at
	January 1, 2022		New billings		recognized ^(a)		June 30, 2022
Franchise sales	$	26,043	$	3,884	$	(4,321)	$	25,606
Annual dues		15,020		18,557		(17,936)		15,641
Other		5,044		12,149		(13,440)		3,753
	$	46,107	$	34,590	$	(35,697)	$	45,000

(a)	Revenue recognized related to the beginning balance for Franchise sales and Annual dues were $4.1 million and $11.3 million, respectively, for the six months ended June 30, 2022.

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


			Additions to
	Balance at		contract cost		Expense		Balance at
	January 1, 2022		for new activity		recognized		June 30, 2022
Capitalized contract costs for commissions	$	4,010	$	913	$	(1,026)	$	3,897

Transaction Price Allocated to the Remaining Performance Obligations

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


	Remainder of 2022		2023		2024		2025		2026		2027		Thereafter		Total
Annual dues	$	12,199	$	3,442	$	—	$	—	$	—	$	—	$	—	$	15,641
Franchise sales		3,683		6,385		5,205		3,952		2,556		1,277		2,548		25,606
Total	$	15,882	$	9,827	$	5,205	$	3,952	$	2,556	$	1,277	$	2,548	$	41,247

Disaggregated Revenue

In the following table, segment revenue is disaggregated by Company-Owned or Independent Regions, where applicable, by segment and by geographical area (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
U.S. Company-Owned Regions ^(a)	$	42,733	$	37,613	$	81,887	$	70,159
U.S. Independent Regions ^(a)		1,877		3,730		3,578		7,018
Canada Company-Owned Regions ^(a)		11,434		4,800		21,909		8,354
Canada Independent Regions ^(a)		715		2,364		1,418		4,569
Global		3,193		2,854		6,285		5,495
Fee revenue ^(b)		59,952		51,361		115,077		95,595
Franchise sales and other revenue ^(c)		5,824		4,930		15,436		11,850
Total Real Estate		65,776		56,291		130,513		107,445
U.S. ^(a)		17,641		16,359		35,200		32,541
Canada ^(a)		4,988		1,424		10,001		3,161
Global		280		259		559		485
Total Marketing Funds		22,909		18,042		45,760		36,187
Mortgage ^(d)		3,115		2,410		6,143		4,733
Other ^(d)		372		503		760		1,176
Total	$	92,172	$	77,246	$	183,176	$	149,541

(a)	In July 2021, the Company acquired the operating companies of the North America regions of INTEGRA. Fee revenue from these regions were previously recognized in the U.S. and Canada Independent Regions. See Note 5, Acquisitions, for information related to this transaction.

(b)	Fee revenue includes Continuing franchise fees, Annual dues and Broker fees.

(c)	Franchise sales and other revenue is derived primarily within the U.S.

(d)	Revenue from Mortgage and Other are derived exclusively within the U.S.

Cash, Cash Equivalents and Restricted Cash

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


	June 30,		December 31,
	2022		2021
Cash and cash equivalents	$	118,132	$	126,270
Restricted cash		35,677		32,129
Total cash, cash equivalents and restricted cash	$	153,809	$	158,399

Services Provided to the Marketing Funds by Real Estate

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

Costs charged from Real Estate to the Marketing Funds are as follows (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
Technology − operating	$	3,519	$	3,233	$	7,743	$	6,833
Technology − capital		530		224		1,161		404
Marketing staff and administrative services		1,140		1,189		2,681		2,307
Total	$	5,189	$	4,646	$	11,585	$	9,544

Accounts and Notes Receivable

As of June 30, 2022, and December 31, 2021, the Company had allowances against accounts and notes receivable of $9.1 million and $9.6 million, respectively.

Property and Equipment

As of June 30, 2022, and December 31, 2021, the Company had accumulated depreciation of $10.6 million and $9.4 million, respectively.

Leases

The Company leases corporate offices, a distribution center, billboards and certain equipment. As all franchisees are independently owned and operated; there are no leases recognized for any offices used by the Company’s franchisees. All the Company’s material leases are classified as operating leases. The Company acts as the lessor for sublease agreements on its corporate headquarters, consisting solely of operating leases.

During the first quarter of 2022, the Company subleased a portion of its corporate headquarters. As a result, the Company performed an impairment test on the portion subleased. Based on a comparison of undiscounted cash flows to the right of use (“ROU”) asset, the Company determined that the asset was impaired, driven largely by the difference between the existing lease rate on the Company’s corporate headquarters and the sublease rates received. This resulted in an impairment charge of $3.7 million, which reflects the excess of the ROU asset carrying value over its fair value.

During the second quarter of 2022, the Company terminated its booj office lease, which is owned by an entity controlled by former employees of the Company. As a result, the Company wrote off an ROU asset of $2.7 million and derecognized $1.5 million of lease liability associated with the terminated lease. The Company also recognized a loss on termination of $2.5 million, which included a lease termination payment of $1.3 million.

Foreign Currency Derivatives

The Company is exposed to foreign currency transaction gains and losses related to certain foreign currency denominated asset and liability positions, with the Canadian dollar representing the most significant exposure primarily from an intercompany Canadian loan between RMCO and the new Canadian entity for INTEGRA. The Company uses short duration foreign currency forward contracts, generally with maturities ranging from a few days to a few months, to minimize its exposures related to foreign currency exchange rate fluctuations. None of these contracts are designated as accounting hedges as the underlying currency positions are revalued through “Foreign currency transaction gains (losses)” along with the related derivative contracts.

As of June 30, 2022, the Company had an aggregate U.S. dollar equivalent of $57.5 million notional amount of Canadian dollar forward contracts to hedge these exposures.

New Accounting Pronouncements Not Yet Adopted

Recently Adopted Accounting Pronouncements

None.

New Accounting Pronouncements Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which contains temporary optional expedients and exceptions to the guidance in U.S. GAAP on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”). The new guidance is effective upon issuance and may be adopted on any date on or after March 12, 2020. The relief is temporary and only available until December 31, 2022, when the reference rate replacement activity is expected to have completed. The Company believes the amendments of ASU 2020-04 will not have a significant impact on the Company’s consolidated financial statements and related disclosures as the Company does not currently engage in interest rate hedging of its LIBOR based debt, nor does it believe it has any material contracts tied to LIBOR other than its Senior Secured Credit Facility, as discussed in Note 8, Debt. The Company does not expect any material adverse consequences from this transition.

In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805) - Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which requires entities to recognize and measure contract assets (commissions related to franchise sales) and contract liabilities (deferred revenue) acquired in a business combination in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in an entity recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The new standard is effective on a prospective basis for fiscal years beginning after December 15, 2022, with early adoption permitted. The impact to future acquisitions could be material depending on the significance of future acquisitions. There would be no impact to cash flows.