UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM

10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended

~~June 30, 2019~~ March 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number:

001-36155

MARCUS & MILLICHAP, INC.

(Exact name of registrant as specified in its Charter)


Delaware		35-2478370
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer
~~Incorporation or Organization)~~		Identification No.)

23975 Park Sorrento, Suite 400 Calabasas, California		91302
(Address of Principal Executive Offices)		(Zip Code)

(818)

212-2250

(Registrant’s telephone number, including area code)

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


Title of each class	~~Trading~~ ~~Symbol(s)~~	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	~~MMI~~	MMI	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes

☒

☐

Indicate by checkmark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter time period that the registrant was required to submit such files). Yes

☒

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a

non-accelerated

filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule

12b-2

of the Exchange Act.


Large accelerated filer	~~Large accelerated~~☒	Accelerated filer	☒	~~Accelerated filer~~	☐

Non-accelerated filer	☐	Smaller reporting company	☐

Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule

12b-2

of the Exchange Act). Yes

☐

☒

Number of shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding as of ~~August 1, 2019~~May 4, 2020 was ~~39,090,861~~39,273,941 shares.

Table of Contents

MARCUS & MILLICHAP, INC.

TABLE OF CONTENTS

~~PART I. FINANCIAL INFORMATION~~


PART I. FINANCIAL INFORMATION	~~Page~~

Item 1. Financial Statements		Page

Condensed Consolidated Balance Sheets at ~~June 30, 2019~~March 31, 2020 (Unaudited) and December 31, ~~2018~~2019		3

Condensed Consolidated Statements of Net and Comprehensive Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (Unaudited)		4
~~Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (Unaudited)~~		5
~~Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (Unaudited)~~		7
~~Notes to Condensed Consolidated Financial Statements (Unaudited)~~		8

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019 (Unaudited)		5

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (Unaudited)		6

Notes to Condensed Consolidated Financial Statements (Unaudited)		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~		37
~~Item 4. Controls and Procedures~~27		38

~~PART II. OTHER INFORMATION~~Item 3. Quantitative and Qualitative Disclosures About Market Risk		38

Item 4. Controls and Procedures		39

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		39 40

Item 1A. Risk Factors		39 40

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		39
~~Item 3. Defaults Upon Senior Securities~~		39
~~Item 4. Mine Safety Disclosures~~40		39
~~Item 5. Other Information~~		39
~~Item 6. Exhibits~~		40

~~SIGNATURES~~Item 3. Defaults Upon Senior Securities		41

Item 4. Mine Safety Disclosures		41

Item 5. Other Information		41

Item 6. Exhibits		41

SIGNATURES		42

Table of Contents

PART I. FINANCIAL INFORMATION

~~Item 1.~~

~~Financial Statements~~

Item 1. Financial Statements

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for shares and par value)

June 30, 2019
(Unaudited)

December 31,
2018

Assets

Current assets:

Cash and cash equivalents
$
206,758
$
214,683

Commissions receivable

5,768

4,948

Prepaid expenses

9,593

7,904

Income tax receivable

4,762

—

Marketable securities,
available-for-sale

118,909

137,436

Other assets, net

6,233

6,368

Total current assets

352,023

371,339

Prepaid rent

—

13,892

Property and equipment, net

20,854

19,550

Operating lease
right-of-use
assets, net

93,090

—

Marketable securities,
available-for-sale

80,329

83,209

Assets held in rabbi trust

9,119

8,268

Deferred tax assets, net

18,525

22,959

Goodwill and other intangible assets, net

14,889

15,385

Other assets

50,845

31,778

Total assets
$
639,674
$
566,380

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable and other liabilities
$
11,115
$
11,035

Notes payable to former stockholders

6,564

1,087

Deferred compensation and commissions

31,638

47,910

Income tax payable

—

4,486

Operating lease liabilities

17,400

—

Accrued bonuses and other employee related expenses

14,050

28,338

Total current liabilities

80,767

92,856

Deferred compensation and commissions

38,964

49,887

Notes payable to former stockholders

—

6,564

Operating lease liabilities

67,429

—

Deferred rent and other liabilities

2,001

7,499

Total liabilities

189,161

156,806

Commitments and contingencies

—

—


Stockholders’ equity:

Preferred stock, $
0.0001
par value:

Authorized shares –
25,000,000
; issued and outstanding shares – none at June 30, 2019 and December 31, 2018, respectively

—

—

Common stock, $
0.0001
par value:

Authorized shares –
150,000,000
; issued and outstanding shares –
39,090,861
and
38,814,464
at June 30, 2019 and December 31, 2018, respectively

4

4

Additional
paid-in
capital

100,098

97,458

Stock notes receivable from employees

(4
)
(4
)
Retained earnings

348,258

311,341

Accumulated other comprehensive income

2,157

775

Total stockholders’ equity

450,513

409,574

Total liabilities and stockholders’ equity
$
639,674
$
566,380


	March 31, 2020 (Unaudited)			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	189,760		$	232,670
Commissions receivable, net		3,600			5,003
Prepaid expenses		9,072			10,676
Income tax receivable		929			4,999
Marketable debt securities, available-for-sale (includes amortized cost and an allowance for credit losses of $143,115 and $0, respectively, at March 31, 2020)		143,864			150,752
Advances and loans, net		1,969			2,882
Other assets		2,871			3,185

Total current assets		352,065			410,167
Property and equipment, net		23,173			22,643
Operating lease right-of-use assets, net		88,454			90,535
Marketable debt securities, available-for-sale (includes amortized cost and an allowance for credit losses of $44,954 and $0, respectively, at March 31, 2020)		45,210			60,809
Assets held in rabbi trust		7,992			9,452
Deferred tax assets, net		20,959			22,122
Goodwill and other intangible assets, net		31,254			22,312
Advances and loans, net		96,857			66,647
Other assets		4,365			4,347

Total assets	$	670,329		$	709,034

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other liabilities	$	10,642		$	10,790
Notes payable to former stockholders		6,564			6,564
Deferred compensation and commissions		25,253			44,301
Operating lease liabilities		17,715			17,762
Accrued bonuses and other employee related expenses		5,339			22,388

Total current liabilities		65,513			101,805
Deferred compensation and commissions		28,220			45,628
Operating lease liabilities		61,677			63,155
Other liabilities		5,627			3,539

Total liabilities		161,037			214,127

Commitments and contingencies		—			—
Stockholders’ equity:
Preferred stock, $0.0001 par value:
Authorized shares – 25,000,000; issued and outstanding shares – NaN at March 31, 2020 and December 31, 2019, respectively		—			—
Common stock, $0.0001 par value:
Authorized shares – 150,000,000; issued and outstanding shares – 39,272,429 and 39,153,195 at March 31, 2020 and December 31, 2019, respectively		4			4
Additional paid-in capital		105,601			104,658
Stock notes receivable from employees		(4	)		(4	)
Retained earnings		401,308			388,271
Accumulated other comprehensive income		2,383			1,978

Total stockholders’ equity		509,292			494,907

Total liabilities and stockholders’ equity	$	670,329		$	709,034

See accompanying notes to condensed consolidated financial statements.

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF NET AND COMPREHENSIVE INCOME

(in thousands, except per share amounts)

(Unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Revenues:

Real estate brokerage commissions
$

188,680
$

181,640
$

333,617
$

344,165

Financing fees

17,742

15,563

31,474

25,287

Other revenues

3,171

2,199

5,209

4,491

Total revenues

209,593

199,402

370,300

373,943

Operating expenses:

Cost of services

127,847

119,869

219,535

221,518

Selling, general and administrative expense

52,836

49,080

101,754

97,133

Depreciation and amortization expense

1,932

1,503

3,764

2,878

Total operating expenses

182,615

170,452

325,053

321,529

Operating income

26,978

28,950

45,247

52,414

Other income (expense), net

3,119

1,724

6,494

2,933

Interest expense

(340
)
(352
)
(689
)
(712
)

Income before provision for income taxes

29,757

30,322

51,052

54,635

Provision for income taxes

8,478

8,155

14,135

14,457

Net income

21,279

22,167

36,917

40,178

Other comprehensive income (loss):

Marketable securities,
available-for-sale:

Change in unrealized gains (losses)

856

(172
)
1,714

(664
)
Less: reclassification adjustment for net (gains) losses included in other income (expense), net

(9
)
8

(18
)
8

Net change, net of tax of $
283
, $
(57)
, $
571
and $
(221)
for the three and six months ended June 30, 2019 and 2018, respectively

847

(164
)
1,696

(656
)
Foreign currency translation (loss) gain, net of tax of $
0
for each of the three and six months ended June 30, 2019 and 2018

(216
)
34

(314
)
73

Total other comprehensive income (loss)

631

(130
)
1,382

(583
)

Comprehensive income
$
21,910
$
22,037
$
38,299
$
39,595

Earnings per share:

Basic
$
0.54
$
0.57
$
0.94
$
1.03

Diluted
$
0.54
$
0.56
$
0.93
$
1.02

Weighted average common shares outstanding:

Basic

39,395

39,154

39,353

39,124

Diluted

39,527

39,385

39,524

39,298


	Three Months Ended March 31,
	2020			2019
Revenues:
Real estate brokerage commissions	$	171,829		$	144,937
Financing fees		15,351			13,732
Other revenues		3,537			2,038

Total revenues		190,717			160,707

Operating expenses:
Cost of services		113,757			91,688
Selling, general and administrative expense		54,860			48,918
Depreciation and amortization expense		2,464			1,832

Total operating expenses		171,081			142,438

Operating income		19,636			18,269
Other (expense) income, net		(366	)		3,375
Interest expense		(283	)		(349	)

Income before provision for income taxes		18,987			21,295
Provision for income taxes		5,917			5,657

Net income		13,070			15,638

Other comprehensive (loss) income:
Marketable debt securities, available-for-sale:
Change in unrealized (losses) gains		(497	)		858
Less: reclassification adjustment for net losses (gains) included in other (expense) income, net		11			(9	)

Net change, net of tax of $(168) and $288 for the three months ended March 31, 2020 and 2019, respectively		(486	)		849
Foreign currency translation gain (loss), net of tax of $0 for each of the three months ended March 31, 2020 and 2019		891			(98	)

Total other comprehensive income		405			751

Comprehensive income	$	13,475		$	16,389

Earnings per share:
Basic	$	0.33		$	0.40
Diluted	$	0.33		$	0.40
Weighted average common shares outstanding:
Basic		39,541			39,311
Diluted		39,646			39,515

See accompanying notes to condensed consolidated financial statements.

Table of Contents

MARCUS & MILLICHAP, Inc.

CONDENSED Consolidated StatementS of Stockholders’ Equity

(in thousands, except for shares)

(Unaudited)


	Three Months Ended March 31, 2020
	Preferred Stock				Common Stock					Additional Paid-In Capital			Stock Notes Receivable From Employees			Retained Earnings			Accumulated Other Comprehensive Income		Total
	Preferred Stock				Common Stock
	Shares		Amount			Shares			Amount
Balance at December 31, 2019		—	$	—		39,153,195		$	4	$	104,658		$	(4	)	$	388,271		$	1,978	$	494,907
Cumulative effect of a change in accounting principle, net of tax		—		—		—			—		—			—			(33	)		—		(33	)

Balance at January 1, 2020, as adjusted		—		—		39,153,195			4		104,658			(4	)		388,238			1,978		494,874
Net and comprehensive income		—		—		—			—		—			—			13,070			405		13,475
Stock-based award activity
Stock-based compensation		—		—		—			—		2,632			—			—			—		2,632
Issuance of common stock for vesting of restricted stock units		—		—		170,106			—		—			—			—			—		—
Shares withheld related to net share settlement of stock-based awards		—		—		(50,872	)		—		(1,689	)		—			—			—		(1,689	)

Balance as of March 31, 2020		—	$	—		39,272,429		$	4	$	105,601		$	(4	)	$	401,308		$	2,383	$	509,292

Three Months Ended June 30, 2019

Preferred Stock

Common Stock

Additional
Paid-In

Stock Notes
Receivable
From

Retained

Accumulated
Other
Comprehensive

Shares

Amount

Shares

Amount

Capital

Employees

Earnings

Income

Total

Balance at March 31, 2019

—
$
—

39,042,434
$
4
$
97,587
$
(4
) $

326,979
$
1,526
$

426,092

Net and comprehensive income

—

—

—

—

—

—

21,279

631

21,910

Stock-based award activity

Stock-based compensation

—

—

—

—

2,585

—

—

—

2,585

Shares issued pursuant to employee stock purchase
plan

—

—

11,022

—

338

—

—

—

338

Issuance of common stock
for vesting of restricted
stock units

—

—

40,823

—

—

—

—

—

—

Issuance of common stock
for unvested restricted
stock awards

—

—

10,542

—

—

—

—

—

—

Shares withheld related to net share settlement of stock-based awards

—

—

(13,960
)
—

(412
)
—

—

—

(412
)

Balance as of June 30, 2019

—
$
—

39,090,861
$
4
$
100,098
$
(4
) $
348,258
$
2,157
$
450,513


	Three Months Ended March 31, 20 19
	Preferred Stock				Common Stock					Additional Paid-In Capital			Stock Notes Receivable From Employees			Retained Earnings		Accumulated Other Comprehensive Income		Total
	Preferred Stock				Common Stock
	Shares		Amount			Shares			Amount
Balance at December 31, 2018		—	$	—		38,814,464		$	4	$	97,458		$	(4	)	$	311,341	$	775	$	409,574
Net and comprehensive income		—		—		—			—		—			—			15,638		751		16,389
Stock-based award activity
Stock-based compensation		—		—		—			—		2,341			—			—		—		2,341
Issuance of common stock for vesting of restricted stock units		—		—		284,396			—		—			—			—		—		—
Shares withheld related to net share settlement of stock-based awards		—		—		(56,426	)		—		(2,212	)		—			—		—		(2,212	)

Balance as of March 31, 2019		—	$	—		39,042,434		$	4	$	97,587		$	(4	)	$	326,979	$	1,526	$	426,092

See accompanying notes to condensed consolidated financial statements.

Three Months Ended June 30, 2018

Preferred Stock

Common Stock

Additional
Paid-In

Stock Notes
Receivable
From

Retained

Accumulated
Other
Comprehensive

Shares

Amount

Shares

Amount

Capital

Employees

Earnings

Income (Loss)

Total

Balance at March 31, 2018

—
   $
—

38,578,834
$
4
$
90,840
$
(4
) $

242,095
$
474
$

333,409

Net and comprehensive income

—

—

—

—

—

—

22,167

(130
)
22,037

Stock-based award activity

Stock-based compensation

—

—

—

—

3,159

—

—

—

3,159

Shares issued pursuant to
employee stock purchase plan

—

—

13,028

—

356

—

—

—

356

Issuance of common stock
for

vesting of restricted stock units

—

—

21,810

—

—

—

—

—

—

Issuance of common stock for unvested restricted stock awards

—

—

12,852

—

—

—

—

—

—

Shares withheld related to net share settlement of stock-based awards

—

—

(4,812
)
—

(64
)
—

—

—

(64
)

Balance as of June 30, 2018

—
$
—

38,621,712
$
4
$
94,291
$
(4
) $
264,262
$
344
$
358,897

Table of Contents

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS

(in thousands)

(Unaudited)


	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities
Net income	$	13,070		$	15,638
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization expense		2,464			1,832
Amortization of right-of-use assets		5,500			5,081
Credit loss recovery		(120	)		(104	)
Stock-based compensation		2,632			2,341
Deferred taxes, net		1,345			2,243
Unrealized f oreign exchange lo ss		1,024			—
Net realized (gains) losses on marketable debt securities, available-for-sale		(53	)		12
Other non-cash items		485			28
Changes in operating assets and liabilities:
Commissions receivable		1,350			(1,171	)
Prepaid expenses		1,576			(929	)
Advances and loans		(29,441	)		(6,663	)
Other assets		(100	)		(2,149	)
Accounts payable and other liabilities		(923	)		2,067
Income tax receivable/payable		4,070			3,117
Accrued bonuses and other employee related expenses		(17,035	)		(20,060	)
Deferred compensation and commissions		(33,898	)		(35,838	)
Operating lease liabilities		(4,477	)		(4,110	)
Other liabilities		(262	)		67

Net cash used in operating activities		(52,793	)		(38,598	)

Cash flows from investing activities
Acquisition, net of cash received		(6,000	)		—
Purchases of marketable debt securities, available-for-sale		(28,919	)		(30,117	)
Proceeds from sales and maturities of marketable debt securities, available-for-sale		50,623			55,833
Issuances of employee notes receivable		(211	)		—
Payments received on employee notes receivable		1			1
Purchase of property and equipment		(2,397	)		(1,644	)

Net cash provided by investing activities		13,097			24,073

Cash flows from financing activities
Taxes paid related to net share settlement of stock-based awards		(1,689	)		(2,212	)
Principal payments on stock appreciation rights liability		(1,251	)		186

Net cash used in financing activities		(2,940	)		(2,026	)

Effect of currency exchange rate changes on cash and cash equivalents		(274	)		—

Net decrease in cash and cash equivalents		(42,910	)		(16,551	)
Cash and cash equivalents at beginning of period		232,670			214,683

Cash and cash equivalents at end of period	$	189,760		$	198,132

Supplemental disclosures of cash flow information
Interest paid during the period	$	845		$	1,751

Income taxes paid, net	$	503		$	296

See accompanying notes to condensed consolidated financial statements.

Table of Contents

~~MARCUS & MILLICHAP, Inc.~~

~~CONDENSED Consolidated StatementS of Stockholders’ Equity~~

~~(continued)~~

~~(in thousands, except for shares)~~

~~(Unaudited)~~

Six Months Ended June 30, 2019

Preferred Stock

Common Stock

Additional
Paid-In

Stock Notes
Receivable
From

Retained

Accumulated
Other
Comprehensive

Shares

Amount

Shares

Amount

Capital

Employees

Earnings

Income

Total

Balance at December 31, 2018

—
$
  —

38,814,464
$
4
$
97,458
$
(4
) $
311,341
$
775
$
409,574

Net and comprehensive income

—

—

—

—

—

—

36,917

1,382

38,299

Stock-based award activity

Stock-based compensation

—

—

—

—

4,926

—

—

—

4,926

Shares issued pursuant to employee stock purchase
plan

—

—

11,022

—

338

—

—

—

338

Issuance of common stock for vesting of restricted
stock units

—

—

325,219

—

—

—

—

—

—

Issuance of common stock for unvested restricted
stock awards

—

—

10,542

—

—

—

—

—

—

Shares withheld related to net share settlement of stock-based awards

—

—

(70,386
)
—

(2,624
)
—

—

—

(2,624
)

Balance as of June 30, 2019

—
$
—

39,090,861
$
4
$

100,098
$
(4
) $
348,258
$
2,157
$

450,513

Six Months Ended June 30, 2018

Preferred Stock

Common Stock

Additional
Paid-In

Stock Notes
Receivable
From

Retained

Accumulated
Other
Comprehensive

Shares

Amount

Shares

Amount

Capital

Employees

Earnings

Income (Loss)

Total

Balance at December 31, 2017

—
$
—

38,374,011
$
4
$

89,877
$
(4
) $

224,071
$
940
$

314,888

Cumulative effect of a change in accounting principle

—

—

—

—

—

—

13

(13
)
—

Balance at January 1, 2018, as adjusted

—

—

38,374,011

4

89,877

(4
)
224,084

927

314,888

Net and comprehensive income

—

—

—

—

—

—

40,178

(583
)
39,595

Stock-based award activity

Stock-based compensation

—

—

—

—

5,772

—

—

—

5,772

Shares issued pursuant to employee stock purchase plan

—

—

13,028

—

356

—

—

—

356

Issuance of common stock for vesting of restricted stock units

—

—

274,740

—

—

—

—

—

—

Issuance of common stock for unvested restricted stock awards

—

—

12,852

—

—

—

—

—

—

Shares withheld related to net share settlement of stock-based awards

—

—

(52,919
)
—

(1,714
)
—

—

—

(1,714
)

Balance as of June 30, 2018

—
$
  —

38,621,712
$
4
$
94,291
$
(4
) $
264,262
$
344
$
358,897

~~See accompanying notes to condensed consolidated financial statements.~~

MARCUS & MILLICHAP, INC.

~~CONDENSED~~

~~CONSOLIDATED STATEMENTS~~

~~CASH FLOWS~~

Cash flows from operating activities

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

Depreciation and amortization expense

Amortization of

right-of-use

assets

Recovery of bad debt expense

Stock-based compensation

Net realized gains on marketable securities,

available-for-sale

Other

non-cash

items

Changes in operating assets and liabilities:

Commissions receivable

Accounts payable and other liabilities

Income tax receivable/payable

Accrued bonuses and other employee related expenses

Deferred compensation and commissions

Operating lease liabilities

Deferred rent and other liabilities

Net cash (used in) provided by operating activities

Cash flows from investing activities

Acquisition, net of cash received

Purchases of marketable securities,

available-for-sale

Proceeds from sales and maturities of marketable securities,

available-for-sale

Issuances of employee notes receivable

Payments received on employee notes receivable

Purchase of property and equipment

Net cash provided by (used in) investing activities

Cash flows from financing activities

Taxes paid related to net share settlement of stock-based awards

Proceeds from issuance of shares pursuant to employee stock purchase plan

Principal payments on notes payable to former stockholders

Principal payments on stock appreciation rights liability

Net cash used in financing activities

Net (decrease) increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Supplemental disclosures of cash flow information

Interest paid during the period

Income taxes paid, net

~~See accompanying notes to condensed consolidated financial statements.~~

~~MARCUS & MILLICHAP, INC.~~

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Description of Business

Marcus & Millichap, Inc., (the “Company”, “Marcus & Millichap”, or “MMI”), a Delaware corporation, is a brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. As of ~~June 30, 2019,~~March 31, 2020, MMI ~~operated 80~~operates 82 offices in the United States and Canada through its wholly-owned subsidiaries, including the operations of Marcus & Millichap Capital Corporation.

Reorganization and Initial Public Offering

MMI was formed in June 2013 in preparation for Marcus & Millichap Company (“MMC”) to

spin-off

its majority owned subsidiary, Marcus & Millichap Real Estate Investment Services, Inc. (“MMREIS”). Prior to the initial public offering (“IPO”) of MMI, all of the preferred and common stockholders of MMREIS (including MMC and employees of MMREIS) contributed all of their outstanding shares to MMI, in exchange for new MMI common stock. As a result, MMREIS became a wholly-owned subsidiary of MMI. Thereafter, MMC distributed 80.0% of the shares of MMI common stock to MMC’s shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness of MMC. MMI completed its IPO on

~~October 30,~~i

n November 2013

Basis of Presentation

The financial information presented in the accompanying unaudited condensed consolidated financial statements, has been prepared in accordance with rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form

10-Q

and Article

10-01

of Regulation

S-X.

Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial position, results of operations and cash flows for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, ~~2018~~2019 included in the Company’s Annual Report on Form

10-K

filed on March ~~1, 2019~~2, 2020 with the SEC. The results of the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, ~~2019,~~2020, for other interim periods or future years.

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

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

The Company follows U.S. GAAP for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of the Company’s operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing (including mortgage ~~servicing rights revenue)~~servicing) and consulting and advisory services. Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute the Company’s only operating segment for financial reporting purposes.

Certain prior-period amounts in the condensed consolidated balance sheet and statement of cash flows, Note 137 – ~~“Income Taxes”~~“Selected Balance Sheet Data” and Note 10 – “Fair Value Measurements” have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported condensed consolidated results of ~~operations or any totals or subtotals therein.~~operations.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2.	Accounting Policies and Recent Accounting Pronouncements

Accounting Policies

The complete list of the Company’s accounting policies is included in the Company’s Annual ~~Report~~Report on Form

10-K

filed on March ~~1, 2019~~2, 2020 with the SEC. The following are updated, or new accounting ~~policies.~~policies related to the adoption of the credit losses standard.

~~Leases~~

Cash and Cash Equivalents

The Company ~~utilizes operating leases~~considers cash equivalents to include short-term, highly liquid investments with maturities of three months or less when purchased. Portions of the balance of cash and cash equivalents were held in financial institutions, various money market funds with fixed and floating net asset values and short-term commercial paper. Money market funds have floating net asset values and may be subject to gating or liquidity fees. The Company assesses short-term commercial papers for ~~all~~impairment in connection with investments in marketable debt securities,

available-for-sale.

The likelihood of realizing material losses from cash and cash equivalents, including the excess of cash balances over federally insured limits, is remote.

Commissions Receivable, Net

Commissions receivable, net consists of commissions earned on brokerage and financing transactions for which payment has not yet been received. The Company evaluates the need for an allowance for credit losses based on consideration of historical experience, current conditions and forecasts of future economic conditions. The majority of commissions receivable are settled within 10 days after the close of escrow. The allowance for credit losses for commissions receivable was 0t material as of March 31, 2020 and December 31, 2019.

Advances and Loans, Net

Advances and loans, net includes amounts advanced and loans due from the Company’s investment sales and financing professionals.

In order to attract and retain highly skilled professionals, from time to time, the Company advances funds to its ~~facilities~~investment sales and ~~autos.~~financing professionals. The advances are typically in the form of forgivable loans that have terms that are generally between 5 and 10 years. The principal amount of a forgivable loan and accrued interest are forgiven over the term of the loan, so long as the investment sales and financing professionals continue to be a service provider with the Company, or upon achieving contractual performance criteria. Amounts forgiven are charged to selling, general and administrative expense at the time the amounts are forgiven. If the investment sales and financing professional’s relationship with the Company is terminated before the amount advanced is forgiven, the unforgiven amount becomes due and payable. The Company evaluates the need for an allowance for credit losses based on amounts advanced and expected forgiveness, in consideration of historical experience, current conditions and forecasts of future economic conditions. Estimated credit losses, net of any reversals, are charged to credit loss expense included in selling, general and administrative expense. Amounts are generally written off when amounts are determined to be no longer collectable. Accrued interest, when applicable, has historically been immaterial.

The Company, from time to time, enters into various agreements with certain of its investment sales and financing professionals whereby these individuals receive loans. The notes receivable along with stated interest, are typically collected from future commissions or repaid based on the terms stipulated in the respective agreements that are generally between 1 and 7 years . The Company evaluates the need for an allowance for credit losses for the loans based on historical experience, current conditions and reasonable and forecasts of future economic conditions. Estimated credit losses, net of any reversals, are charged to credit loss expense included in selling, general and administrative expense. Amounts are generally written off when amounts are determined to be no longer collectable.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Investments in Marketable Debt Securities,

Available-for-Sale

The Company maintains a portfolio of investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt, asset-backed securities (“ABS”) and other. The Company considers its investments in marketable debt securities to be

available-for-sale,

and accordingly are recorded at their fair values. The Company determines ~~if an arrangement is a lease~~the appropriate classification of investments in marketable debt securities at ~~inception.~~

~~Right-of-use~~

~~assets (“ROU assets”) represent~~ the ~~Company’s right to use an underlying asset for~~time of purchase. Interest along with accretion and amortization of purchase premiums and discounts from the ~~lease term~~purchase date through the estimated maturity date, including consideration of variable maturities and ~~lease liabilities represent the Company’s~~ contractual ~~obligation to make lease payments under the lease. Operating leases~~call provisions, are included in ~~operating lease ROU assets,~~

~~non-current,~~

~~and operating lease liabilities current and~~

~~non-current~~

~~captions~~other (expense) income, net in the condensed consolidated ~~balance sheets.~~statements of net and comprehensive income. The Company typically invests in highly-rated debt securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires substantially all investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities.

~~Operating lease ROU~~The Company reviews quarterly its investment portfolio of all securities in an unrealized loss position to determine if an impairment charge or credit reserve is required. The Company excludes accrued interest from both the fair value and the amortized cost basis of marketable debt securities,

available-for-sale,

for the purposes of identifying and measuring an impairment. An investment is impaired if the fair value is less than its amortized cost basis. Impairment relating to credit losses is recorded through a reduction in the amortized cost of the security or an allowance for credit losses and credit loss expense (included in selling, general and administrative expense), limited by the amount that the fair value is less than the amortized cost basis. Impairment that has not been recorded as a credit loss is recorded through other comprehensive income (loss), net of applicable taxes. The Company made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables. The Company evaluates

write-off

of accrued interest receivable by the major security-type level at the time credit loss exists for the underlying security.

Determining whether a credit loss exists requires a high degree of judgment and the Company considers both qualitative and quantitative factors in making its determination. The Company evaluates its intent to sell, or whether the Company will more likely than not be required to sell, the security before recovery of its amortized cost basis. For all securities in an unrealized loss position, the Company evaluates, among other items, the extent and length of time the fair market value of a security is less than its amortized cost, time to maturity, duration, seniority, the financial condition of the issuer including credit ratings, any changes thereto and relative default rates, leverage ratios, availability of liquidity to make principle and interest payments, performance indicators of the underlying assets, analyst reports and ~~liabilities are recognized on~~recommendations and changes in base and market interest rates. If qualitative and quantitative analysis is sufficient to conclude that an impairment related to credit losses does not exist, the ~~commencement date based on~~Company typically does not perform further quantitative analysis to estimate the present value of lease payments over the lease term. Lease agreements may contain periods of free rent or reduced rent, predetermined fixed increases in the minimum rent and renewal or termination options, all impacting the determination of the lease term and lease paymentscash flows expected to be ~~used in calculating~~collected from the lease liability. Certain facility leases provide for rental escalations related to increases in the lessors’ direct operating expenses. The Company uses the implicit rate in the lease when determinable. As mostdebt security. Estimates of expected future cash flows are the Company’s ~~leases do not have a determinable implicit rate, the Company uses a derived incremental borrowing rate~~best estimate based on borrowing options under its credit agreement. The Company applies a spread over treasury rates for the indicated term of the lease based on the information available on the commencement date of the lease. The Company typically leases general purpose

~~built-out~~

office space, which reverts to the lessor upon termination of the lease. Any payments for completed improvements, determined to be owed by the lessor, net of incentives received, are recorded as an increase to the ROU assetpast events, current conditions and ~~considered in the determination of the lease cost.~~

~~The Company has lease agreements with lease and~~

~~non-lease~~

components, which are accounted for as a single lease component. Lease cost is recognized on a straight-line basis over the lease term. Variable lease payments consist of common area costs, insurance, taxes, utilities, parkingreasonable and ~~other lease related costs, which are determined principally based on billings from landlords.~~supportable economic forecasts.

~~Concentration~~Concentrations of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, ~~due from independent contractors (included under other assets, net current and other assets~~

~~non-current),~~

investments in marketable debt securities,

available-for-sale,

security deposits (included under other assets,

non-current)

and commissions ~~receivable.~~receivable, net. Cash and cash equivalents are placed with high-credit quality financial institutions and invested in high-credit quality money market funds and commercial paper. Concentrations of marketable debt securities,

available-for-sale

are limited by the approved investment policy.

To reduce its credit risk, the Company monitors the credit standing of the financial institutions ~~and~~ money market funds that represent amounts recorded as cash and cash equivalents. The Company historically has not experienced any significant losses related to cash and cash equivalents.

The Company derives its revenues from a broad range of real estate investors, owners, and users in the United States and Canada, none of which individually represents a significant concentration of credit risk. The Company maintains allowances, as needed, for estimated credit losses based on management’s assessment of the likelihood of collection. For the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, no~~0 transaction represented 10% or more of total revenues. Further, while one or more transactions may represent 10% or more of commissions receivable at any reporting date, amounts due are typically collected within 10 days of settlement and, therefore, do not expose the Company to significant credit risk.

During the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company’s Canadian operations represented ~~less than~~approximately 2% and 1% of total ~~revenues.~~revenues, respectively.

During the three ~~and six~~ months ended ~~June 30,~~March 31, 2020, 1 office represented 10% or more of total revenues. During the three months ended March 31, 2019, ~~and 2018, no~~0 office represented 10% or more of total revenues.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

Adopted

In ~~February~~June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

~~2016-02,~~

~~Leases~~

, to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company adopted the new standard effective January 1, 2019, which resulted in the recognition of ROU assets and lease liabilities for operating leases. Upon adoption, the Company, in determining ROU assets, also considered currently recorded amounts related to differences in straight line lease expense and cash lease payments and prepaid rent. ROU assets and operating lease obligations in connection with adoption of the new lease standard were $76.7 million. At adoption date, the Company reclassified deferred rent in the amount of $5.6 million (the noncurrent portion was included in defered rent and other liabilities, and the current portion was included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets) and prepaid rent in the amount of $13.4 million to ROU assets. The Company also reclassified prepaid rent in the amount of $462,000 to other assets, current.

The adoption of the new standard had a material impact on the Company’s condensed consolidated balance sheet, but did not have a material impact on the Company’s condensed consolidated statements of net and comprehensive income.

The Company elected available practical expedients permitted under the guidance, which among other items, allow the Company to (i) carry forward its historical lease classification, (ii) not reassess leases for the definition of “lease” under the new standard, (iii) utilize a discount rate as of the effective date and (iv) not record leases that expired or were terminated prior to the effective date.

~~The Company made an accounting policy election to account for lease and~~

~~non-lease~~

~~components as a single lease component.~~

~~The Company implemented internal controls and key system functionality to enable the preparation of the required financial information.~~

~~In March 2017, the FASB issued ASU No.~~

~~2017-08,~~

~~Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities~~

~~(“ASU~~

~~2017-08”).~~

~~The Company adopted the new standard effective January 1, 2019. ASU~~

~~2017-08~~

~~shortens the amortization period of a callable security that was acquired at a premium to the earliest call date of that security instead of the contractual life of the security. The adoption of ASU~~

~~2017-08~~

~~did not have a material effect on the Company’s condensed consolidated financial statements.~~

~~Pending Adoption~~

~~In June 2016, the FASB issued ASU No.~~

2016-13,

Financial ~~Instruments -~~ Instruments—Credit Losses

(“ASU

2016-13”).

~~ASU~~

~~2016-13~~

~~is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the~~The new standard ~~will be effective on January 1, 2020. Under ASU~~

~~2016-13,~~

requires the ~~Company will be required to~~ use of an expected-loss model for ~~its~~financial assets measured at amortized cost and marketable debt securities,

available-for

sale, which requires that identified credit losses be presented as an allowance rather than as an impairment write-down. Reversals of credit losses (in situations in which the estimate of credit losses declines) is permitted in the reporting period that the change occurs. ~~Current~~Previously, U.S. GAAP ~~prohibits~~prohibited reflecting any reversals of impairment losses. At June 30, 2019, the Company had $199.2 million in marketable securities, available for sale which would be subject to this new standard. As of June 30, 2019, these marketable securities, available for sale have an average credit rating of AA+ and no impairment write-downs have been recorded.charges. The Company ~~is currently evaluating~~adopted the ~~impact of this~~ new standard on ~~its investment policy~~January 1, 2020 using the modified-retrospective transition method for assets measured at amortized cost other than marketable debt securities,

available-for-sale,

which was adopted using a prospective transition approach as required by the new standard. On the adoption date, the Company recorded a cumulative-effect adjustment related to an allowance for credit losses related to commissions receivable and ~~investments~~advances and ~~does~~loans, net of tax in the amount of $33,000 with the offset to retained earnings as of the beginning of the period presented after adoption. The adoption of ASU

2016-13

did not ~~expect the standard to~~ have a material impact on ~~its condensed consolidated financial statements at adoption or in subsequent periods.~~ the Company’s investment policy and impairment model for marketable debt securities,

available-for-sale.

The Company ~~does not plan~~elected the practical expedient to ~~early adopt ASU~~

~~2016-13.~~

~~In August 2018, the FASB issued ASU No.~~

~~2018-13,~~

~~Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement~~

~~(“ASU~~

~~2018-13”).~~

~~ASU~~

~~2018-13~~

~~is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective on January 1, 2020. ASU~~

~~2018-13~~

~~modifies prior disclosure requirements for fair value measurement. ASU~~

~~2018-13~~

~~removes certain disclosure requirements related to~~exclude accrued interest from both the fair value ~~hierarchy, such as removing~~and the ~~requirement to disclose~~amortized cost basis of marketable debt securities,

available-for-sale,

for the ~~amount~~purposes of identifying and reasons for transfers between Level 1 and Level 2, modifies existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements for recurring and nonrecurring fair value measurements, such as disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. As of June 30, 2019, the Company had contingent consideration liability of $2.9 million measured as Level 3. The Company is currently evaluating the impact of this new standard and does not expect ASU

~~2018-13~~

~~to have a material effect on its condensed consolidated financial statements.~~

~~Table of Contents~~

~~MARCUS & MILLICHAP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

measuring an impairment.

In August 2018, the FASB issued ASU No.

2018-15,

Internal-Use Software (Subtopic 350-40) - —Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

(“ASU

2018-15”).

~~ASU~~

~~2018-15~~

~~is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective on January 1, 2020.~~ ASU

2018-15

aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain

internal-use

software (and hosting arrangements that include an internal use software license), by permitting a customer in a cloud computing arrangement that is a service contract to capitalize certain implementation costs as if the arrangement was an

internal-use

software project. The Company adopted the new standard effective January 1, 2020 using the prospective method. The adoption of ASU

2018-15

did not have a material effect on the Company’s condensed consolidated financial statements.

Pending Adoption

In December 2019, the FASB issued ASU No.

2019-12,

Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

(“ASU

2019-12”).

ASU

2019-12

is effective for reporting periods beginning after December 15, 2020 with early adoption permitted. For the Company, the new standard will be effective on January 1, 2021. ASU

2019-12

simplifies the accounting for income taxes by eliminating certain exceptions including the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities related to outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes such as

step-up

in tax basis for goodwill and interim recognition of enactment of tax laws or rate changes. The Company is currently evaluating the impact of this new standard and does not expect ASU

~~2018-15~~2019-12

to have a material effect on its condensed consolidated financial statements.

In March 2020, the FASB issued ASU No.

2020-04,

Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting

(“ASU

2020-04”).

ASU

2020-04

provides temporary optional exceptions to the guidance in U.S. GAAP on contract modifications to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate. ASU

2020-04

is effective for all entities upon issuance and may be applied prospectively to contract modifications through December 31, 2022. The guidance applies to the Company’s Credit Agreement (see Note 15 – “Commitments and Contingencies”), which references LIBOR, and will generally allow it to account for and present a modification as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. As of March 31, 2020, the Company has not drawn funds from the credit facility. The Company continues to evaluate the impact of this new standard and does not expect ASU

2020-04

to have a material effect on its condensed consolidated financial statements.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.	Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):


	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Computer software and hardware equipment	$	22,960		$	20,427		$	27,191		$	25,252
Furniture, fixtures, and equipment		22,816			24,227			23,375			23,468
Less: accumulated depreciation and amortization		(24,922	)		(25,104	)		(27,393	)		(26,077	)

	$	20,854		$	19,550		$	23,173		$	22,643

During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company

wrote-off

approximately ~~$3.1 million~~$191,000 and ~~$0.8 million,~~$233,000, respectively, of fully depreciated computer software and hardware equipment and furniture, fixtures and equipment.

As of ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ property and equipment additions incurred but not yet paid included in accounts payable and other liabilities were ~~$466,000~~$259,000 and ~~$398,000,~~$473,000, respectively.

The Company evaluates its fixed assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of March 31, 2020, the Company considered the novel coronavirus

(“COVID-19”)

pandemic as a triggering event and evaluated its fixed assets for impairment testing. The Company concluded that as of March 31, 2020, there was

impairment of its property and equipment.

4.	Operating Leases

The Company has operating leases for all of its facilities and autos. As of ~~June 30,~~March 31, 2020 and December 31, 2019, operating lease ~~ROU~~

right-of-use

(“ROU”) assets were ~~$103.3~~$114.5 million and $111.1 million, respectively, and the related accumulated amortization was ~~$10.2 million.~~

$26.0 million and $20.6 million, respectively.

The operating lease cost, included in selling, general and administrative expense in the condensed consolidated statement of net and comprehensive income, consisted of the following (in thousands):


							Three Months Ended March 31,
	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019			2020			2019
Operating lease cost:
Lease cost (1)	$	6,106		$	12,015		$	6,263		$	5,909
Variable lease cost (2)		1,284			2,490			1,396			1,206
Sublease income		(43	)		(131	)		(77	)		(88	)

	$	7,347		$	14,374		$	7,582		$	7,027

(1)	Includes short-term lease cost and ROU asset amortization.

(2)	Primarily relates to common area maintenance, property taxes, insurance, ~~utilities~~utilities and parking.

Maturities of lease liabilities by ~~fiscal~~ year consisted of the following (in thousands):

June 30, 2019

Remainder of 2019
$
10,242

2020

20,469

2021

17,842

2022

13,820

2023

10,741

Thereafter

21,237

Total future minimum lease payments

94,351

Less imputed interest

(9,522
)

Present value of operating lease liabilities
$
84,829


	March 31, 2020
Remainder of 2020	$	15,952
2021		19,294
2022		15,342
2023		12,065
2024		9,887
Thereafter		14,838

Total future minimum lease payments		87,378
Less imputed interest		(7,986	)

Present value of operating lease liabilities	$	79,392

Supplemental cash flow information and noncash activity related to the operating leases consisted of the following (in thousands):

Operating cash flow information:

Cash paid for amounts included in the measurement of operating lease liabilities

ROU assets obtained in exchange for operating lease liabilities

Tenant improvements owned by lessor related to ROU assets

(1)

Operating cash flow information:

Cash paid for amounts included in the measurement of operating lease liabilities

ROU assets obtained in exchange for operating lease liabilities

Tenant improvements owned by lessor related to ROU assets

(1)

Other information related to the operating leases consisted of the following:

~~Weighted average remaining operating lease term~~

~~Weighted average discount rate~~

Weighted average remaining operating lease term

Weighted average discount rate

Prior to the adoption of the new leases standard (as previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018), future minimum lease payments under non-cancelable operating leases for office facilities and autos with terms in excess of one year consisted of the following (in thousands):

December 31,
2018

2019
$
19,649

2020

19,287

2021

16,833

2022

12,368

2023

8,805

Thereafter

10,452

$
87,394

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.	Investments in Marketable Debt Securities

Amortized cost, allowance for credit losses, gross unrealized gains/losses in accumulated other comprehensive income (loss) and fair value of marketable debt securities,

available-for-sale,

by type of security consisted of the following (in thousands):


	June 30, 2019									December 31, 2018									March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
U.S. treasuries	$	95,607	$	143	$	—		$	95,750	$	121,252	$	7	$	(79	)	$	121,180	$	113,885	$	—	$	835	$	—		$	114,720
U.S. government sponsored entities		—		—		—			—		3,512		—		(7	)		3,505		9,128		—		9		—			9,137
Corporate debt securities		23,137		26		(4	)		23,159		11,962		—		(11	)		11,951
Asset-backed securities and other		—		—		—			—		806		—		(6	)		800
Corporate debt																				19,801		—		5		(95	)		19,711
ABS and other																				301		—		—		(5	)		296

																			$	143,115	$	—	$	849	$	(100	)	$	143,864
	$	118,744	$	169	$	(4	)	$	118,909	$	137,532	$	7	$	(103	)	$	137,436
Long-term investments:
U.S. treasuries	$	37,139	$	393	$	(1	)	$	37,531	$	44,997	$	128	$	(115	)	$	45,010	$	10,015	$	—	$	495	$	—		$	10,510
U.S. government sponsored entities		1,478		—		(18	)		1,460		1,569		—		(62	)		1,507		1,299		—		29		—			1,328
Corporate debt securities		32,967		826		(5	)		33,788		32,467		3		(633	)		31,837
Asset-backed securities and other		7,464		91		(5	)		7,550		4,889		12		(46	)		4,855
Corporate debt																				25,633		—		634		(661	)		25,606
ABS and other																				8,007		—		44		(285	)		7,766

	$	79,048	$	1,310	$	(29	)	$	80,329	$	83,922	$	143	$	(856	)	$	83,209	$	44,954	$	—	$	1,202	$	(946	)	$	45,210


	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
U.S. treasuries	$	124,389	$	196	$	(5	)	$	124,580
U.S. government sponsored entities		—		—		—			—
Corporate debt		26,128		44		—			26,172

	$	150,517	$	240	$	(5	)	$	150,752

Long-term investments:
U.S. treasuries	$	24,188	$	235	$	—		$	24,423
U.S. government sponsored entities		1,353		3		(1	)		1,355
Corporate debt		25,447		1,027		(3	)		26,471
ABS and other		8,480		93		(13	)		8,560

	$	59,468	$	1,358	$	(17	)	$	60,809

The ~~amortized cost and fair value of the~~ Company’s investments in

available-for-sale

debt securities that have been in a continuous unrealized loss position, for which an allowance for credit losses has not been recorded, by type of security consisted of the following (in thousands):

June 30, 2019

December 31, 2018

Unrealized
Loss

Fair Value

Unrealized
Loss

Fair Value

Less than 12 months
$
(7
) $
9,825
$
(576
) $
127,326

12 months or longer
$
(26
) $
4,045
$
(383
) $
30,609


	March 31, 2020
	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Corporate debt	$	17,553	$	(756	)	$	—	$	—	$	17,553	$	(756	)
ABS and other		6,207		(290	)		—		—		6,207		(290	)

	$	23,760	$	(1,046	)	$	—	$	—	$	23,760	$	(1,046	)

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

	December 31, 2019
	Less than 12 months					12 months or greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
U.S. treasuries	$	39,823	$	(5	)	$	—	$	—		$	39,823	$	(5	)
U.S. government sponsored entities		—		—			566		(1	)		566		(1	)
Corporate debt		6,029		(3	)		—		—			6,029		(3	)
ABS and other		1,971		(13	)		—		—			1,971		(13	)

	$	47,823	$	(21	)	$	566	$	(1	)	$	48,389	$	(22	)

Gross realized gains and gross realized losses from the sales of the ~~Company��s~~Company’s

available-for-sale

debt securities consisted of the following (in thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Gross realized gains
(1)
$
24
$
12
$
59
$
12

Gross realized losses
(1)
$
—
$
—
$
(47
) $
—

	Three Months Ended March 31,
	2020		2019
Gross realized gains (1)	$	53	$	35
Gross realized losses (1)	$	—	$	(47	)

(1)	Recorded in other (expense) income, ~~(expense),~~ net in the condensed consolidated statements of net and comprehensive income. The cost basis of securities sold were determined based on the specific identification method.

The Company invests its excess cash in a diversified portfolio of fixed and variable rate debt securities to meet current and future cash flow needs. All investments are made in accordance with the Company’s approved investment policy. As of March 31, 2020, the portfolio had an average credit rating of AA+ and weighted term to final maturity of 1.8 years, with 54 securities in the portfolio with an unrealized loss aggregating $1.0 million, or 0.6% of amortized cost, and an average credit rating of A.

As of ~~June 30, 2019,~~March 31, 2020, the Company ~~considers the declines in market value of its marketable securities, available-for-sale to be temporary in nature~~performed an impairment analysis and ~~does not consider any of its investments other-than-temporarily impaired.~~determined an allowance for credit losses was 0t required. The Company ~~has no current~~determined that it did not have an intent to sell and it iswas not more likely than not that the Company ~~will~~would be required to sell ~~these investments before recovery of their amortized cost basis, which may be at maturity.~~any security based on its current liquidity position, or to maintain compliance with its investment policy, specifically as it relates to minimum credit ratings. The Company ~~may sell certain~~evaluated the securities with an unrealized loss considering severity of ~~its marketable securities, available-for-sale prior to their stated maturities for strategic reasons including, but not limited to, anticipated~~loss, credit ratings, specific credit events during the period since acquisition, overall likelihood of default, market sector, potential impact from the current economic situation and a review of an issuer’s liquidity and ~~capital requirements, anticipated~~financial strength, as needed. The Company concluded that it would receive all scheduled interest and principle payments. The Company, therefore, determined qualitatively that the unrealized loss was related to changes in interest rates and other market factors and that no allowance for credit ~~deterioration, duration management or when a security no longer meets the criteria of the Company’s investment policy.~~

~~Table of Contents~~

~~MARCUS & MILLICHAP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~losses was required.

Amortized cost and fair value of marketable debt securities,

available-for-sale,

by contractual maturity consisted of the following (in thousands, except weighted average data):


	June 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	118,744	$	118,909	$	137,532	$	137,436	$	143,115	$	143,864	$	150,517	$	150,752
Due after one year through five years		58,273		59,002		61,875		61,846		28,923		29,204		41,123		41,794
Due after five years through ten years		15,941		16,451		17,310		16,747		10,840		10,960		12,813		13,467
Due after ten years		4,834		4,876		4,737		4,616		5,191		5,046		5,532		5,548

	$	197,792	$	199,238	$	221,454	$	220,645	$	188,069	$	189,074	$	209,985	$	211,561

Weighted average contractual maturity		1.9 years				1.8 years						1.8 years				1.7 years

Actual maturities may differ from contractual maturities because certain ~~borrowers~~issuers have the right to prepay certain obligations with or without prepayment penalties.

6.	Acquisitions, Goodwill and Other Intangible Assets

Through acquisitions, the Company expanded its network of its real estate sales professionals and provided further diversification to its real estate brokerage services.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Acquisitions are accounted for as a business combination, and the results are included in the condensed consolidated financial statements beginning on the acquisition date. The aggregate consideration generally includes: (i) cash paid at closing and (ii) the fair value of contingent and deferred consideration using a probability-weighted, discounted cash flow estimate on achieving certain financial metrics or service and time requirements. Contingent and deferred consideration are included in accounts payable and other liabilities and other liabilities captions in the condensed consolidated balance sheets.

The goodwill recorded as part of the acquisitions primarily arises from the acquired assembled workforce and commercial sales platform. The Company expects all of the goodwill to be tax deductible, with the

tax-deductible

amount of goodwill related to the contingent and deferred consideration to be determined once the cash payments are made to settle any contingent and deferred consideration. The goodwill resulting from acquisitions is allocated to the Company’s 1 reporting unit.

Goodwill and intangible assets, net consisted of the following (in thousands):

June 30, 2019

December 31, 2018

Gross
Carrying
Amount

Accumulated
Amortization

Net Book
Value

Gross
Carrying
Amount

Accumulated
Amortization

Net Book
Value

Goodwill and intangible assets:

Goodwill
(1)
$
11,459
$
—
$
11,459
$
11,459
$
—
$
11,459

Intangible assets
(1)

4,240

(810
)
3,430

4,240

(314
)
3,926

$
15,699
$
(810
) $
14,889
$
15,699
$
(314
) $
15,385


	March 31, 2020							December 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Goodwill and intangible assets:
Goodwill (1)	$	19,062	$	—		$	19,062	$	15,072	$	—		$	15,072
Intangible assets (2)		14,851		(2,659	)		12,192		9,050		(1,810	)		7,240

	$	33,913	$	(2,659	)	$	31,254	$	24,122	$	(1,810	)	$	22,312

(1)	Represents additions from acquisitions.

(2)	Total weighted average amortization period was 5.00 years and 4.37 years as of March 31, 2020 and December 31, 2019, respectively.

The changes in the carrying amount of goodwill consisted of the following (in thousands):


	Three Months Ended March 31,
	2020		2019
Beginning balance	$	15,072	$	11,459
Additions from acquisitions		3,990		—
Impairment losses		—		—

Ending balance	$	19,062	$	11,459

Estimated amortization expense for intangible assets by year for the next five years and thereafter consisted of the following (in thousands):


	June 30, 2019		March 31, 2020
Remainder of 2019	$	410
2020		817
Remainder of 2020			$	2,589
2021		734		2,594
2022		638		2,212
2023		508		2,209
2024				1,622
Thereafter		323		966

	$	3,430	$	12,192

The Company evaluates goodwill and intangible assets for impairment annually in the fourth quarter. In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. As of March 31, 2020, the Company considered the

COVID-19

pandemic as a triggering event and evaluated its goodwill and intangible

14assets for impairment testing. The Company considered the impact from the

COVID-19

induced economic slowdown and current projected recovery timeframes and their impact on goodwill and intangible assets. The Company concluded that as of March 31, 2020, there was no impairment of its goodwill and intangible assets.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7.	Selected Balance Sheet Data

Advances and Loans, Net

Allowance for credit losses for advances and loans consisted of the following (in thousands):


	Three Months Ended March 31,
	2020			2019
Beginning balance	$	512		$	514
Credit loss recovery		(120	)		(104	)
Write-offs		(2	)		(3	)

Ending balance	$	390		$	407

Other Assets

Other assets consisted of the following (in thousands):


	Current				Non-Current				Current				Non-Current
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Mortgage servicing rights (“MSRs”), net of amortization	$	—	$	—	$	2,099	$	2,209	$	—	$	—	$	1,950	$	2,002
Due from independent contractors, net (1) (2)		2,288		3,831		46,328		27,157
Security deposits		—		—		1,301		1,196		—		—		1,391		1,345
Employee notes receivable (3)		151		156		264		370
Employee notes receivable (1)										166		65		432		323
Customer trust accounts and other		3,794		2,381		853		846		2,705		3,120		592		677

	$	6,233	$	6,368	$	50,845	$	31,778	$	2,871	$	3,185	$	4,365	$	4,347

(1)	Represents amounts advanced, notes receivable and other receivables due from the Company’s investment sales and financing professionals. The notes receivable along with interest are typically collected from future commissions and are generally due in ~~one~~ ~~to five years.~~

~~(2)~~

Includes allowance for doubtful accounts related to current receivables of $398 and $514 as of June 30, 2019 and December 31, 2018, respectively. The Company recorded a provision for bad debt expense of $91 and $77 and

~~wrote-off~~

~~$100 and $4 of these receivables for the three months ended June 30, 2019 and 2018, respectively. The Company recorded a recovery for bad debt expense of $(13) and $(29) and~~

~~wrote-off~~

$103 and $55 of these receivables for the six months ended June 30, 2019 and 2018, respectively. Any cash receipts on notes are applied first to unpaid principal balance prior to any income being recognized.

~~(3)~~

Reduction of accrued bonuses and other employee related expenses in settlement of employee notes receivable were ~~$60~~$0 and ~~$192~~$60 for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. See Note 9 – “Related-Party Transactions” for additional information.

MSRs

The net change in the carrying value of MSRs consisted of the following (in thousands):


							Three Months Ended March 31,
	June 30, 2019			December 31, 2018			2020			2019
Beginning balance	$	2,209		$	—		$	2,002		$	2,209
Additions from acquisition		—			2,121			—			—
Additions		165			391			77			129
Amortization		(275	)		(303	)		(129	)		(135	)

Ending balance	$	2,099		$	2,209		$	1,950		$	2,203

The portfolio of loans serviced by the Company aggregated ~~$1.5 billion and~~ $1.6 billion asfor each of ~~June 30, 2019~~the periods ended March 31, 2020 and December 31, ~~2018,~~2019, respectively. See Note 10 – “Fair Value Measurements” for additional information on MSRs.

In connection with ~~MSRs~~MSR activities, the Company holds funds in escrow for the benefit of the lenders. These funds, which totaled ~~$2.5~~$3.5 million and ~~$2.1~~$2.6 million as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, and the offsetting obligations are not presented in the Company’s condensed consolidated financial statements as they do not represent assets and liabilities of the Company. ~~Revenue from the fees on such accounts is included in financing revenue in the condensed consolidated statements~~

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Deferred Compensation and Commissions

Deferred compensation and commissions consisted of the following (in thousands):


	Current				Non-Current				Current				Non-Current
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019		March 31, 2020		December 31, 2019
Stock appreciation rights (“SARs”) liability (1)	$	1,969	$	1,810	$	17,856	$	19,299	$	2,162	$	2,080	$	16,138	$	18,122
Commissions payable to investment sales and financing professionals		28,218		44,812		13,939		23,983		21,159		40,235		6,391		20,818
Deferred compensation liability (1)		1,451		1,288		7,169		6,605		1,553		1,553		5,691		6,688
Other										379		433		—		—

	$	31,638	$	47,910	$	38,964	$	49,887	$	25,253	$	44,301	$	28,220	$	45,628

(1)

The SARs and deferred compensation liability become subject to payout as a result of a participant no longer being considered as a service provider. As a result of the retirement of certain participants, estimated amounts to be paid to the participants within the next twelve months have been classified as current.

~~MARCUS & MILLICHAP, INC.~~

Prior to the IPO, certain employees of the Company were granted SARs under a stock-based compensation program assumed by MMC. In connection with the IPO, the SARs agreements were revised, the MMC liability of $20.0 million for the SARs was frozen as of

March 31, 2013

, and was transferred to MMI through a capital distribution. The SARs liability will be settled with each participant in

ten

annual installments in January of each year upon retirement or termination from service, or in full upon consummation of a change in control of the Company.

Under the revised agreements, MMI is required to accrue interest on the outstanding balance beginning on

January 1, 2014

at a rate based on the

10-year

treasury note, plus 2%. The rate resets annually. The rates at January 1, 2020 and 2019 were 3.920% and ~~2018 were~~ 4.684% ~~and 4.409%~~, respectively. MMI recorded interest expense related to this liability of ~~$226,000~~$178,000 and ~~$224,000~~$226,000 for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $452,000 and $449,000 for the six months ended June 30, 2019 and 2018,~~ respectively.

Estimated payouts within the next twelve months for participants that have separated from service have been classified as current. During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company made total payments of $2.1 million and $1.7 million, ~~(consisting~~consisting of principal and accumulated ~~interest) and $1.5 million, respectively (consisting of accumulated interest).~~interest, respectively.

Certain investment sales professionals have the ability to earn additional commissions after meeting certain annual revenue thresholds. These commissions are recognized as cost of services in the period in which they are earned as they relate to specific transactions closed. The Company has the ability to defer payment of certain commissions, at its election, for up to three years. Commissions payable that are not expected to be paid within twelve months are classified as long-term.

Deferred Compensation Liability

A select group of management is eligible to participate in the Marcus & Millichap Deferred Compensation Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan is a

non-qualified

deferred compensation plan that is intended to comply with Section 409A of the Internal Revenue Code and permits participants to defer compensation up to the limits set forth in the Deferred Compensation Plan. Amounts are paid out generally when the participant is no longer a service provider; however, an

in-service

payout election is available to participants. Participants may elect to receive payouts as a lump sum or quarterly over a two to fifteen-year period. The Company elected to fund the Deferred Compensation Plan through company owned variable life insurance policies. The Deferred Compensation Plan is managed by a third-party institutional fund manager, and the deferred compensation and investment earnings are held as a Company asset in a rabbi trust, which is recorded in assets held in rabbi trust in the accompanying condensed consolidated balance sheets. The assets in the trust are restricted unless the Company becomes insolvent, in which case the trust assets are subject to the claims of the Company’s creditors. The Company may also, in its sole and absolute discretion, elect to withdraw at any time a portion of the trust assets by an amount by which the fair market value of the trust assets exceeds 110% of the aggregate deferred compensation liability represented by the participants’ accounts. Estimated payouts within the next twelve months for participants that have separated from service or elected in service payout have been classified as current. During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company made total payments to participants of ~~$786,000~~$358,000 and ~~$387,000,~~$315,000, respectively.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The assets held in the rabbi trust are carried at the cash surrender value of the variable life insurance policies, which represents its fair value. The net change in the carrying value of the assets held in the rabbi trust and the net change in the carrying value of the deferred compensation liability, each exclusive of additional contributions, distributions and trust expenses consisted of the following (in thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Increase in the carrying value of the assets held in the rabbi trust
(1)
$
225
$
176
$
928
$
190

Increase in the net carrying value of the deferred compensation obligation
(2)
$
227
$
188
$
912
$
188


	Three Months Ended March 31,
	2020			2019
(Decrease) increase in the carrying value of the assets held in the rabbi trust (1)	$	(1,388	)	$	703

(Decrease) increase in the net carrying value of the deferred compensation obligation (2)	$	(1,273	)	$	685

(1)	Recorded in other (expense) income, ~~(expense),~~ net in the condensed consolidated statements of net and comprehensive income.

(2)	Recorded in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income.

~~MARCUS & MILLICHAP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Deferred Rent and~~ Other Liabilities

~~Deferred rent and other~~Other liabilities consisted of the following (in thousands):

Non-Current

June 30,
2019

December 31,
2018

Deferred rent
(1)
$
—
$
5,445

Contingent consideration and other
(2)

2,001

2,054

$
2,001
$
7,499


	Non-Current
	March 31, 2020		December 31, 2019
Deferred consideration and other (1) (2)	$	3,129	$	830
Contingent consideration (1) (2)		2,498		2,709

	$	5,627	$	3,539

(1)	The ~~Company does not have~~current portions of deferred ~~rent~~consideration in the amounts of $1,783 and $560 as of March 31, 2020 and December 31, 2019, ~~due to adoption of~~respectively, are included in accounts payable and other liabilities in the ~~new lease standard on January 1, 2019.~~

~~(2)~~

condensed consolidated balance sheets. The current portions of contingent consideration in the amounts of ~~$853~~$664 and ~~$821~~$678 as of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, are included in accounts payable and other liabilities in the condensed consolidated balance sheets.

(2)	Deferred consideration in the aggregate amount of $1,401 was reclassified from contingent consideration during the three months ended March 31, 2020 and of this amount, $560 and $841 pertained to the current and non-current portions, respectively.

8.	Notes Payable to Former Stockholders

In conjunction with the

spin-off

and IPO, notes payable to certain former stockholders of MMREIS were issued in settlement of restricted stock and SARs awards that were redeemed by MMREIS upon the termination of employment by the former stockholders ~~(the “Notes”~~(“the Notes”). Such Notes had been previously assumed by MMC and were transferred to the Company. The Notes are unsecured and bear interest at 5% with annual principal and interest installments with a final principal payment ~~due during~~in the ~~second quarter~~amount of ~~2020~~.$6.6 million paid in April 2020.

9.	Related-Party Transactions

Shared and Transition Services

Certain services are provided to the Company under a Transition Services Agreement (“TSA”) between MMC and the Company. The TSA is intended to provide certain services until the Company acquires the services separately. Under the TSA, the Company incurred net costs during the three months ended ~~June 30,~~March 31, 2020 and 2019 of $26,000 and ~~2018 of $32,000 and $55,000, respectively, and during the six months ended June 30, 2019 and 2018 of $75,000 and $127,000,~~$43,000, respectively. These amounts are included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income.

Brokerage and Financing Services with the Subsidiaries of MMC

MMC has wholly or majority owned subsidiaries that buy and sell commercial real estate properties. The Company performs certain brokerage and financing services related to transactions of the subsidiaries of MMC. For the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company earned real estate brokerage commissions and financing fees of ~~$1.9 million~~$766,000 and ~~$560,000,~~$882,000, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of ~~$1.1 million~~$453,000 and $321,000, respectively, related to these revenues. For the six months ended June 30, 2019 and 2018, the Company earned real estate brokerage commissions and financing fees of $2.8 million and $3.1 million, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of $1.6 million and $1.8 million,$522,000, respectively, related to these revenues.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Operating Lease with ~~MMC~~MMCC

The Company has an operating lease with MMC for a single-story office building located in Palo Alto, California, which expires on

May 31, ~~2022~~

.2022. The related operating lease cost was $333,000 for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018 was $333,000 and $255,000, respectively, and for the six months ended June 30, 2019 and 2018 was $666,000 and $508,000,~~ respectively. Operating lease cost is included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income. See Note 4 – “Operating Leases” for additional information.

Accounts Payable and Other Liabilities with MMC

As of ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018,~~2019, accounts payable and other liabilities with MMC totaling ~~$92,000~~$86,000 and ~~$101,000,~~$88,000, respectively, remain unpaid and are included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets.

~~MARCUS & MILLICHAP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Other

The Company makes advances to

non-executive

employees from

time-to-time.

At ~~June 30, 2019~~March 31, 2020, and December 31, ~~2018,~~2019, the aggregate principal amount for employee notes receivable was ~~$415,000~~$598,000 and ~~$526,000,~~$388,000, respectively, which is included in other assets (current and

non-current),

in the accompanying condensed consolidated balance sheets. See Note 7 – “Selected Balance Sheet Data” for additional information.

As of ~~June 30, 2019,~~March 31, 2020, George M. Marcus, the Company’s founder and

Co-Chairman,

beneficially owned approximately 40% of the Company’s issued and outstanding common stock, including shares owned by Phoenix Investments Holdings, LLC and the Marcus Family Foundation II.

U.S. GAAP defines the fair value of a financial instrument as the amount that would be received from the sale of an asset in an orderly transaction between market participants at the measurement date. The Company is responsible for the determination of ~~the value of the investments carried at~~ fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to provide and validate the values utilized.

The degree of judgment used in measuring the fair value of financial instruments is generally inversely correlated with the level of observable valuation inputs. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment.

Assets recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of the three “levels” based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:

Recurring Fair Value Measurements

The Company values its investments including commercial paper and floating ~~NAV~~net asset value money market funds recorded in cash and cash equivalents, investments in marketable debt securities,

available-for-sale,

assets held in the ~~Rabbi Trust, acquired MSR contracts~~rabbi trust, deferred compensation liability and contingent consideration at fair value on a recurring basis. Fair values for investments included in cash and cash equivalents and marketable debt securities,

available-for-sale

were determined for each individual security in the investment portfolio and all these securities are ~~Levels~~Level 1 or 2 measurements as appropriate.

Fair values for assets held in the ~~Rabbi Trust~~rabbi trust and related deferred compensation liability were determined based on the cash surrender value of the company owned variable life insurance policies and underlying investments in the trust, and are Level 2 and Level 1 measurements, respectively.

MARCUS & MILLICHAP, I

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT

Contingent consideration in connection with acquisitions, is carried at fair value and determined on a

contract-by-contract

basis, calculated using a probability weighted discounted cash ~~flows~~flow model based on the probability of achieving EBITDA and other performance and service requirements, and is a Level 3 measurement. During the three months ended March 31, 2020, the Company considered the economic impact of

COVID-19

and current and future interest rates in its determination of fair value for the contingent consideration. The Company ~~values MSRs at fair value upon acquisition~~is uncertain to the extent of ~~a servicing contract. MSRs do not trade~~the volatility in ~~an active, open market with readily observable prices, and are a Level 3 measurement.~~the unobservable inputs in the foreseeable future.

~~Table of Contents~~

~~MARCUS & MILLICHAP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Assets and liabilities carried at fair value on a recurring basis consisted of the following (in thousands):

June 30, 2019

December 31, 2018

Fair Value

Level 1

Level 2

Level 3

Fair Value

Level 1

Level 2

Level 3

Assets:

Assets held in rabbi trust
$
9,119
$
—
$
9,119
$
—
$
8,268
$
—
$
8,268
$
—

Cash equivalents
(1)
:

Commercial paper and other
$
1,496
$
—
$
1,496
$
—
$
1,599
$
1,599
$
—
$
—

Money market funds

171,663

171,663

—

—

163,126

163,126

—

—

$
173,159
$
171,663
$
1,496
$
—
$
164,725
$
164,725
$
—
$
—

Marketable securities,
available-for-sale:

Short-term investments:

U.S. treasuries
$
95,750
$
95,750
$
—
$
—
$
121,180
$
121,180
$
—
$
—

U.S. government sponsored entities

—

—

—

—

3,505

—

3,505

—

Corporate debt securities

23,159

—

23,159

—

11,951

—

11,951

—

Asset-backed securities and other

—

—

—

—

800

—

800

—

$
118,909
$
95,750
$
23,159
$
—
$
137,436
$
121,180
$
16,256
$
—

Long-term investments:

U.S. treasuries
$
37,531
$
37,531
$
—
$
—
$
45,010
$
45,010
$
—
$
—

U.S. government sponsored entities

1,460

—

1,460

—

1,507

—

1,507

—

Corporate debt securities

33,788

—

33,788

—

31,837

—

31,837

—

Asset-backed securities and other

7,550

—

7,550

—

4,855

—

4,855

—

$
80,329
$
37,531
$
42,798
$
—
$
83,209
$
45,010
$
38,199
$
—

Liabilities:

Contingent consideration
(2)
$
2,859
$
—
$
—
$
2,859
$
2,875
$
—
$
—
$
2,875

Deferred compensation liability
$
8,620
$
8,620
$
—
$
—
$
7,893
$
7,893
$
—
$
—


	March 31, 2020								December 31, 2019
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:
Assets held in rabbi trust	$	7,992	$	—	$	7,992	$	—	$	9,452	$	—	$	9,452	$	—

Cash equivalents (1) :
Commercial paper and other	$	9,498	$	—	$	9,498	$	—	$	5,087	$	—	$	5,087	$	—
Money market funds		146,769		146,769		—		—		185,513		185,513		—		—

	$	156,267	$	146,769	$	9,498	$	—	$	190,600	$	185,513	$	5,087	$	—

Marketable debt securities, available-for-sale:
Short-term investments:
U.S. treasuries	$	114,720	$	114,720	$	—	$	—	$	124,580	$	124,580	$	—	$	—
U.S. government sponsored entities		9,137		—		9,137		—		—		—		—		—
Corporate debt		19,711		—		19,711		—		26,172		—		26,172		—
ABS and other		296		—		296		—		—		—		—		—

	$	143,864	$	114,720	$	29,144	$	—	$	150,752	$	124,580	$	26,172	$	—

Long-term investments:
U.S. treasuries	$	10,510	$	10,510	$	—	$	—	$	24,423	$	24,423	$	—	$	—
U.S. government sponsored entities		1,328		—		1,328		—		1,355		—		1,355		—
Corporate debt		25,606		—		25,606		—		26,471		—		26,471		—
ABS and other		7,766		—		7,766		—		8,560		—		8,560		—

	$	45,210	$	10,510	$	34,700	$	—	$	60,809	$	24,423	$	36,386	$	—

Liabilities:
Contingent consideration	$	3,162	$	—	$	—	$	3,162	$	3,387	$	—	$	—	$	3,387

Deferred compensation liability	$	7,244	$	7,244	$	—	$	—	$	8,241	$	8,241	$	—	$	—

(1)	Included in cash and cash equivalents on the accompanying condensed consolidated balance sheets.

There were 0 transfers in or out of Level 3 during the three months ended March 31, 2020 and 2019.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT

As of March 31, 2020 and December 31, 2019, contingent consideration has a maximum undiscounted payment of $7.0 million and $7.3 million, respectively. Assuming the achievement of the applicable performance criteria and/or service and time requirements, the Company anticipates these

earn-out

payments will be made over the next one to seven-year period. Changes in fair value are included in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income. A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):


	Three Months Ended March 31,
	2020			2019
Beginning balance (1)	$	3,387		$	2,875
Contingent consideration in connection with acquisitions (2)		—			—
Change in fair value of contingent consideration		(225	)		48
Payments of contingent consideration		—			—

Ending balance	$	3,162		$	2,923

(1)	~~Included in cash and cash equivalents on~~Beginning balance for 2020 reflects the ~~accompanying condensed consolidated balance sheets.~~

~~(2)~~

~~Assuming the achievement~~reclassification of ~~the applicable performance criteria, the Company anticipates these~~

~~earn-out~~

~~payments will be made over the next~~ ~~three~~ to ~~seven-year~~ ~~period.~~

~~A reconciliation of~~$1,401 from contingent consideration ~~measured at fair value on a recurring basis consisted of the following (in thousands):~~

related to deferred consideration. See Note 7 – “Selected Balance Sheet Data – Other Liabilities” for additional information.

June 30,
2019

December 31,
2018

Beginning balance
$
2,875
$
—

Contingent consideration in connection with acquisitions

—

2,674

Change in fair value of contingent consideration

(16
)
201

Payments of contingent consideration

—

—

Ending balance
$
2,859
$
2,875

(2)	Contingent consideration in connections with acquisitions represents a noncash investing activity.

~~There were no transfers~~

Quantitative information about the valuation technique and significant unobservable inputs used in ~~or out~~the valuation of ~~Level 1, Level 2 and~~the Company’s Level 3 ~~during~~financial liabilities measured at fair value on a recurring basis consisted of the ~~six months ended June 30, 2019.~~following (dollars in thousands):

Fair Value at

March 31, 2020

Valuation Technique

Unobservable inputs

Range (Weighted Average)

(1)

Contingent consideration

3,162

Discounted cash flow

Expected life of cash flows

0.2-5.5

years (2.1 years)

Discount rate

6.7%-6.9%

(6.8%)

Probability of achievement

33.0%-100.0%

(74.0%)

Fair Value at

December 31, 2019

Valuation Technique

Unobservable inputs

Range (Weighted Average)

(1)

Contingent consideration

3,387

Discounted cash flow

Expected life of cash flows

0.4-5.8

years (2.4 years)

Discount rate

3.6%-4.9%

(4.1%)

Probability of achievement

33.0%-100.0%

(74.3%)

~~Table of Contents~~

~~MARCUS & MILLICHAP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

(1)	Unobservable inputs were weighted by the relative fair value of the instruments.

Nonrecurring Fair Value Measurements

In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis. The Company reviews the carrying value of MSRs, intangibles, goodwill and other assets for indications of impairment ~~quarterly.~~

at least annually

. When indications of potential impairment are identified, the Company may be required to determine the fair value of those assets and record an adjustment for the carrying amount in excess of the fair value determined. Any fair value determination would be based on valuation approaches, which are appropriate inunder the circumstances and utilize Level 2 and Level 3 measurements as required. ~~In accordance with U.S. GAAP, from time to time, the Company measures certain assets at fair value on a nonrecurring basis.~~

MSRs are ~~initially~~ recorded at fair value ~~based on internal models and~~upon acquisition of a servicing contract. The Company has elected the amortization method for the subsequent measurement of MSRs. MSRs are carried at the lower of amortized cost or fair value. MSRs are a Level 3 measurement. The Company’s MSRs do not trade in an active, open market with readily observable prices. The ~~Company has elected the amortization method for the subsequent measurement of MSRs. The~~ estimated fair value of the Company’s MSRs were developed using a discounted cash flow ~~models~~model that ~~calculate~~calculates the present value of estimated future net servicing income. The model considers contractual provisions and assumptions of market participants including specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used ~~in the model~~ to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. Management made revisions to the assumptions used in the determination of fair value for MSRs ~~are carried at~~considering the ~~lower~~economic impact of ~~amortized cost or fair value.~~the

COVID-19

pandemic on default rates related to the specific types and underlying collateral of the various serviced loans, interest rates, refinance rates and current government and private sector responses to the pandemic. The fair value of the MSRs approximated the carrying value at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019 after consideration of the revisions to the various assumptions. See Note 7 – “Selected Balance Sheet Data – Other Assets – ~~MSR’s”~~MSRs” for additional information.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As market conditions change, the Company will

re-evaluate

assumptions used in the determination of fair value for MSRs and is uncertain to the extent of the volatility in the unobservable inputs in the foreseeable future.

Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial assets measured at fair value on a nonrecurring basis consisted of the following (dollars in thousands):

Fair Value at

March 31, 2020

Valuation Technique

Unobservable inputs

Range (Weighted

Average)

(1)

MSRs

2,125

Discounted cash flow

Constant prepayment rates

0.0%-20.0%

(10.0%)

Constant default rate

1.5%-1.5%

(1.5%)

Loss severity

30.2%-30.2%

(30.2%)

Discount rate

10.0%-10.0%

(10.0%)

Fair Value at

December 31, 2019

Valuation Technique

Unobservable inputs

Range (Weighted

Average)

(1)

MSRs

2,204

Discounted cash flow

Constant prepayment rates

0.0%-20.0%

(10.0%)

Constant default rate

2.0%-2.0%

(2.0%)

Loss severity

40.0%-40.0%

(40.0%)

Discount rate

9.5%-9.7%

(9.7%)

(1)	Weighted average is based on the 10% constant prepayment rate scenario which the Company uses as the reported fair value.

11.	Stockholders’ Equity

Common Stock

As of ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were ~~39,090,861~~39,272,429 and ~~38,814,464~~39,153,195 shares of common stock, $0.0001 par value, issued and outstanding, which ~~includes~~include unvested restricted stock awards

(“RSAs”)

issued to

non-employee

directors, respectively. See Note

– “Earnings per Share” for additional information.

Preferred Stock

The Company has 25,000,000 authorized shares of preferred stock with a par value $0.0001 per share. At ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were no0 preferred shares issued or outstanding.

Accumulated Other Comprehensive Income/Loss

Amounts reclassified from accumulated other comprehensive income/loss are included as a component of other (expense) income, ~~(expense),~~ net in the condensed consolidated statements of net and comprehensive income. The reclassifications were determined on a specific identification basis.

The Company has not provided for U.S. taxes on unremitted earnings of its foreign subsidiary as it is operating at a loss and has no0 earnings and profits to remit. As a result, deferred taxes were not provided related to the cumulative foreign currency translation adjustments.

12.	Stock-Based Compensation Plans

2013 Omnibus Equity Incentive Plan

The Company’s board of directors adopted the 2013 Omnibus Equity Incentive Plan (the “2013 Plan”), which became effective upon the Company’s IPO. In

February 2017,

, the board of directors amended and restated the 2013 Plan, which was approved by the Company’s stockholders in

May ~~2017~~

.2017. Grants are made from time to time by the compensation committee of the Company’s board of directors at its discretion subject to certain restrictions as to the number and value of shares that may be granted to any individual. In addition,

non-employee

directors receive annual grants under a director compensation policy. As of ~~June 30, 2019,~~March 31, 2020, there were ~~5,322,813~~5,065,218 shares available for future grants under the 2013 ~~Plan.~~Plan.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Awards Granted and Settled

Under the 2013 Plan, the Company has issued ~~restricted stock awards (“RSAs”)~~RSAs to

non-employee

directors and restricted stock units (“RSUs”) to employees and independent contractors. RSAs vest in equal annual installments over a

one-year

or three-year period from the date of grant. ~~All~~ RSUs generally vest in equal annual installments over a five-year period from the date of grant or earlier as approved by the compensation committee of the Company’s board of directors. Any unvested awards are canceled upon termination as a service provider. ~~Awards accelerate upon death subject to approval by the compensation committee.~~ As of ~~June 30, 2019,~~March 31, 2020, there were

0 issued or outstanding options, SARs, performance units or performance ~~shares~~share awards under the 2013 Plan.

~~Table of Contents~~

~~MARCUS & MILLICHAP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

During the ~~six~~three months ended ~~June 30, 2019, 325,219~~March 31, 2020, 170,106 shares of RSUs were vested and ~~delivered. Additionally, 70,386~~50,872 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date. The shares withheld for taxes were returned to the share reserve and are available for future issuance in accordance with provisions of the 2013 Plan. During the three months ended March 31, 2020, there were 0 deferred stock units (“DSUs”) that settled.

Outstanding Awards

Activity under the 2013 Plan consisted of the following (dollars in thousands, except weighted average per share data):

RSA Grants to
Non-employee

Directors

RSU Grants to
Employees

RSU Grants to
Independent
Contractors

Total

Weighted-
Average Grant
Date Fair Value
Per Share

Nonvested shares at December 31, 2018

27,096

471,782

392,697

891,575
$
27.59

Granted

February 2019

—

204,060

7,731

211,791

May 2019

10,542

32,926

7,026

50,494

Total Granted

10,542

236,986

14,757

262,285

40.07

Vested

(22,422
)
(177,154
)
(148,065
)
(347,641
)
23.00

Transferred

—

(8,136
)
8,136

—

29.68

Forfeited/canceled

—

(3,277
)
(20,274
)
(23,551
)
31.36

Nonvested shares at June 30,
2019
(1)

15,216

520,201

247,251

782,668
$
33.70

Unrecognized stock-based compensation expense as of June 30,
2019
(2)
$
477
$
15,847
$
7,575
$
23,899

Weighted average remaining vesting period (years) as of June 30, 2019

0.84

3.86

3.17

3.58


	RSA Grants to Non-employee Directors		RSU Grants to Employees			RSU Grants to Independent Contractors			Total			Weighted- Average Grant Date Fair Value Per Share
Nonvested shares at December 31, 2019		17,480		525,115			257,480			800,075		$	33.91
Granted		—		229,315			20,384			249,699			36.74
Vested		—		(139,152	)		(30,954	)		(170,106	)		31.75
Transferred		—		(14,911	)		14,911			—			32.26
Forfeited/canceled		—		(8,087	)		(223	)		(8,310	)		38.19

Nonvested shares at March 31, 2020 (1)		17,480		592,280			261,598			871,358		$	35.10
Unrecognized stock-based compensation expense as of March 31, 2020 (2)	$	74	$	20,079		$	8,132		$	28,285

Weighted average remaining vesting period (years) as of March 31, 2020		0.17		4.05			3.30			3.83

(1)	Nonvested RSUs will be settled through the issuance of new shares of common stock.

(2)	The total unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately ~~3.58~~3.83 years.

Employee Stock Purchase Plan

In 2013, the Company adopted the 2013 Employee Stock Purchase Plan (“ESPP”). The ESPP ~~qualifies~~is intended to qualify under Section 423 of the Internal Revenue Code and provides for consecutive,

non-overlapping

6-month

offering periods.

The offering periods generally start on the first trading day on or after May 15 and November 15 of each year.

Qualifying employees may purchase shares of the Company stock at a 10% discount based on the lower of the market price at the beginning or end of the offering period, subject to IRS limitations. The Company determined that the ESPP was a compensatory plan and is required to expense the fair value of the awards over each

~~-month~~6-month

offering period.

The ESPP initially had 366,667 shares of common stock reserved, and ~~214,872~~204,473 shares of common stock remain available for issuance ~~at June 30, 2019.~~for each of the periods ended as of March 31, 2020 and December 31, 2019, respectively. The ESPP provides for annual increases in the number of shares available for issuance under the ESPP, equal to the least of (i) 366,667 shares, (ii) 1% of the outstanding shares on such date, or (iii) an amount determined by the compensation committee of the ~~Company’s~~ board of directors. Pursuant to the provisions of the ESPP, the board of directors has determined to not provide for any annual increases to date. At ~~June 30, 2019,~~March 31, 2020, total unrecognized compensation cost related to the ESPP was ~~$61,000~~$23,000 and is expected to be recognized over a weighted average period of ~~0.38~~0.12 years.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SARs and ~~Deferred Stock Units (“DSUs”)~~DSUs

Prior to the IPO, certain employees were granted SARs. As of March 31, 2013, the outstanding SARs were frozen at the liability amount, and will be paid out to each participant in installments upon retirement or departure under the terms of the revised SARs agreements. To replace beneficial ownership in the SARs, the difference between the book value liability and the fair value of the awards was granted to plan participants in the form of DSUs, which were fully vested upon receipt and ~~were~~will be settled in actual stock at a rate of 20% per year if the participant ~~remained~~remains employed by the Company during that period (otherwise all unsettled shares of stock upon termination from service will be settled five years from the termination date, unless otherwise agreed to by the Company). In the event of death or termination of service after reaching the age of 67, 100% of the DSUs will be settled.

~~Table~~ As of ~~Contents~~

~~MARCUS & MILLICHAP, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~Future~~March 31, 2020, the remaining future share settlements of fully vested DSUs by year consisted of the following:


	June 30, 2019		March 31, 2020
2021		60,373		60,373
2022		281,193		281,193

		341,566		341,566

Summary of Stock-Based Compensation

Components of stock-based compensation are included in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income and consisted of the following (in thousands):

Three Months Ended
June 30,

Six Months Ended
June 30,

2019

2018

2019

2018

Employee stock purchase plan
$
38
$
24
$
68
$
63

RSAs –
non-employee
directors

154

165

324

276

RSUs – employees
(1)

1,622

1,096

2,967

2,049

RSUs – independent contractors
(
2
)

771

1,874

1,567

3,384

$
2,585
$
3,159
$
4,926
$
5,772


	Three Months Ended March 31,
	2020		2019
ESPP	$	47	$	30
RSAs – non-employee directors		160		170
RSUs – employees (1)		1,656		1,345
RSUs – independent contractors		769		796

	$	2,632	$	2,341

(1)	~~2019 includes~~Includes expense related to the acceleration of vesting of certain RSUs.

~~(2)~~

~~The Company grants RSUs to independent contractors (i.e. investment sales and financing professionals), who are considered~~

~~non-employees.~~

~~Prior to the adoption of ASU No.~~

~~2018-07~~

on July 1, 2018, such awards were required to be measured at fair value at the end of each reporting period until settlement. Stock-based compensation expense was therefore impacted by the changes in the Company’s common stock price during each reporting period prior to the date of adoption. New awards after the date of adoption are measured based on the grant date closing price of the Company’s common stock consistent with awards made to the Company’s employees and

~~non-employee~~

~~directors.~~

13.	Income Taxes

The Company’s effective tax rate for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019 was ~~28.5%~~31.2% and ~~27.7%~~26.6%, ~~respectively, compared to 26.9% and 26.4% for the three and six months ended June 30, 2018,~~ respectively. The Company provides for the effects of income taxes in interim financial statements based on the Company’s estimate of its annual effective tax rate for the full year, which is based on forecasted income by jurisdiction where the Company operates, adjusted for the tax effects of items that relate discretely to the period, if any.

The provision for income taxes differs from the amount computed by applying the U.S. federal statutory rate to income before provision for income taxes and consisted of the following (dollars in thousands):


	Three Months Ended June 30,											Six Months Ended June 30,												Three Months Ended March 31,
	2019					2018						2019						2018						2020						2019
	Amount		Rate			Amount			Rate			Amount			Rate			Amount			Rate			Amount			Rate			Amount			Rate
Income tax expense at the federal statutory rate	$	6,249		21.0	%	$	6,368			21.0	%	$	10,721			21.0	%	$	11,474			21.0	%	$	3,987			21.0	%	$	4,472			21.0	%
State income tax expense, net of federal benefit		1,346		4.5	%		1,415			4.7	%		2,240			4.4	%		2,511			4.6	%		1,018			5.4	%		894			4.2	%
Windfall tax benefits, net related to stock-based compensation		11		—			(28	)		(0.1	)%		(254	)		(0.5	)%		(245	)		(0.5	)%		(17	)		(0.1	)%		(265	)		(1.2	)%
Change in valuation allowance		200		0.7	%		74			0.2	%		466			0.9	%		121			0.2	%		367			1.9	%		259			1.2	%
Permanent and other items (1)		672		2.3	%		326			1.1	%		962			1.9	%		596			1.1	%		562			3.0	%		297			1.4	%

	$	8,478		28.5	%	$	8,155			26.9	%	$	14,135			27.7	%	$	14,457			26.4	%	$	5,917			31.2	%	$	5,657			26.6	%

(1)	Permanent items relate principally to compensation charges, qualified transportation fringe benefits, ~~and~~reversal of uncertain tax positions, meals and ~~entertainment.~~entertainment and our tax-exempt deferred compensation plan assets.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14.	Earnings per Share

Basic and diluted earnings per share for the three ~~and six~~ months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively consisted of the following (in thousands, except per share data):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Numerator (Basic and Diluted):
Net income	$	21,279		$	22,167		$	36,917		$	40,178		$	13,070		$	15,638

Denominator:
Basic
Weighted average common shares issued and outstanding		39,073			38,606			39,035			38,576			39,217			38,996
Deduct: Unvested RSAs (1)		(20	)		(31	)		(24	)		(31	)		(18	)		(27	)
Add: Fully vested DSUs (2)		342			579			342			579			342			342

Weighted Average Common Shares Outstanding		39,395			39,154			39,353			39,124			39,541			39,311

Basic earnings per common share	$	0.54		$	0.57		$	0.94		$	1.03		$	0.33		$	0.40

Diluted
Weighted Average Common Shares Outstanding from above		39,395			39,154			39,353			39,124			39,541			39,311
Add: Dilutive effect of RSUs, RSAs & ESPP		132			231			171			174			105			204

Weighted Average Common Shares Outstanding		39,527			39,385			39,524			39,298			39,646			39,515

Diluted earnings per common share	$	0.54		$	0.56		$	0.93		$	1.02		$	0.33		$	0.40

Antidilutive shares excluded from diluted earnings per common share (3)		272			55			260			242			521			212

(1)	RSAs were issued and outstanding to the non-employee directors and have a ~~one-year~~one-year or ~~three-year~~three-year vesting term subject to service requirements. See Note 12 – “Stock-Based Compensation Plans” for additional information.

(2)	Shares are included in weighted average common shares outstanding as the shares are fully vested but have not yet been delivered. See Note 12 – “Stock-Based Compensation Plans” for additional information.

(3)	Primarily pertaining to RSU grants to the Company’s employees and independent contractors.

15.	Commitments and Contingencies

Credit Agreement

June 18, 2014,

, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (the “Bank”), ~~dated~~ as of

~~June 1, 2014~~

~~, which was~~ amended and restated on May 28, 2019,

~~(the~~ which was amended on November 27, 2019 (the “Credit Agreement”). The Credit Agreement provides for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of the Company’s domestic subsidiaries (the “Credit Facility”)~~, which, as amended~~ and ~~restated,~~ matures on

June 1, ~~2022~~

.2022. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full.

Borrowings under the Credit Agreement are available for general corporate purposes and working capital. The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit of which $533,000 was utilized at ~~June 30, 2019.~~March 31, 2020. Borrowings under the Credit Facility will bear interest, at the Company’s option, at either (i) a fluctuating rate per annum 2.00% below the Base Rate (defined as the highest of (a) the Bank’s prime rate, (b)

one-month

LIBOR plus

~~1.50~~

% 1.50%, and (c) the federal funds rate plus

~~1.50~~

% 1.50%), or (ii) at a fixed rate per annum determined by Bank to be

~~0.875~~

% 0.875% above LIBOR. In connection with ~~executing~~the amendment of the Credit Agreement, ~~as amended and restated,~~ the Company paid bank fees and other expenses, which are being amortized over the remaining term of the Credit Agreement. The Company pays a commitment fee of up to 0.1% per annum, payable quarterly, based on the amount of unutilized commitments under the Credit Facility. The amortization and commitment fee is included in interest expense in the accompanying condensed consolidated statements of net and comprehensive income and was ~~$ 26,000~~$22,000 and $26,000 during ~~both~~ the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, and $52,000 during both the six months ended June 30, 2019 and 2018.~~respectively. As of ~~June 30, 2019 and December~~March 31, ~~2018,~~2020, there were no0 amounts outstanding under the Credit Agreement.

Table of Contents

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Credit Facility contains customary covenants, including financial and other covenant reporting requirements and events of default. Financial covenants require the Company, on a combined basis with its guarantors, to maintain (i) an EBITDAR Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25:1.0 as of each quarter end, determined on a rolling four-quarter basis, and (ii) total funded debt to EBITDA not greater than 2.0:1.0 as of each quarter end, determined on a rolling four-quarter basis, and ~~(iii) limits~~also limit investments in foreign entities and ~~caps~~cap certain other loans. The Credit Facility is secured by substantially all assets of the Company, including pledges of 100% of the stock or other equity interest of each subsidiary except for the capital stock of a controlled foreign corporation (as defined in the Internal Revenue Code), in which case no such pledge is required. As of ~~June 30, 2019,~~March 31, 2020, the Company was in compliance with all financial and

non-financial

covenants and has not experienced any limitation in its operations as a result of the covenants.

In connection with certain agreements with ~~current and prospective~~ investment sales and financing professionals, the Company ~~has~~may agree to advance amounts to certain investment sales and financing professionals upon reaching certain performance goals. Such commitments as of ~~June 30, 2019 and December~~March 31, ~~2018, aggregating~~

~~$9.8~~

~~million~~

~~and $1.0~~ 2020 aggregated $11.6 million.

~~million, respectively, including amounts committed~~

COVID-19

The Company could experience other potential impacts as a result of

COVID-19.

Actual results may differ from the Company’s current estimates as the scope of

COVID-19

evolves or if the duration of business disruptions is longer than initially anticipated. While this disruption is currently expected to be temporary, there is considerable uncertainty around the

scope and

duration. The extent of the impact of

COVID-19

on our operational and financial performance will depend on the duration of business disruption, which is uncertain and cannot be predicted.

16.	Subsequent Events

In April 2020, the Company completed the acquisition of a commercial real estate finance intermediary specializing in arranging debt and equity for commercial real estate on behalf of developers, investors and owners in the United States.

In connection with agreements in principal with investment sales and financing professionals and business acquisitions, the Company entered into commitments through the date these condensed consolidated financial statements were ~~issued. These~~issued, aggregating $17.9 million. Such commitments ~~are~~to investment sales and financing professionals may be subject to various ~~conditions and/or reaching~~conditions.

During the second quarter of ~~performance goals.~~2020, the Company’s management approved, committed to and initiated a plan to reduce its controllable expenses, including layoffs, furloughs and a reduction of salaries of senior executives, management and key Company personnel. To date, the plan included a reduction of the Company’s employee workforce of approximately 20%. The Company does not expect to incur material one-time terminations benefits related to this plan.

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Unless the context requires otherwise, the words “Marcus & Millichap,” “we,” the “Company,” “us” and “our” refer to Marcus & Millichap, Inc., Marcus & Millichap Real Estate Investment Services, Inc. and its other consolidated subsidiaries.

Forward-Looking Statements

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many ~~factors.~~factors, including but not limited to the impact of the

COVID-19

pandemic. The results of operations for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 are not necessarily indicative of the results that may be expected for the full year ending December 31, ~~2019,~~2020, or for any other future period. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Form

10-Q

and in conjunction with our Annual Report on Form

10-K

for the year ended December 31, ~~2018~~2019 filed with the SEC on March ~~1, 2019,~~2, 2020, including the “Risk Factors” section and the consolidated financial statements and notes included therein.

Overview

We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions over the last 10 years.

As of ~~June 30, 2019,~~March 31, 2020, we had ~~1,965~~1,993 investment sales and financing professionals that are primarily exclusive independent contractors operating in 8082 offices, who provide real estate brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to our clients. During the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020, we closed 2,535 and 4,485 investment sales, financing and other transactions with total volume of approximately $13.0 billion and $22.8 billion, respectively. During the year ended December 31, 2018, we closed 9,4722,250 investment sales, financing and other transactions with total sales volume of approximately ~~$46.4~~$11.8 billion. During the year ended December 31, 2019, we closed 9,726 investment sales, financing and other transactions with total sales volume of approximately $49.7 billion.

We generate revenues by collecting real estate brokerage commissions upon the sale, and fees upon the financing of, commercial properties and by providing consulting, advisory and ~~advisory~~other real estate services. Real estate brokerage commissions are typically based upon the value of the property, and financing fees are typically based upon the size of the loan. ~~For the both~~During the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020, approximately 90% of our revenues were generated from real estate brokerage commissions, 9%8% from financing fees and 1%2% from other ~~revenues, including consulting and advisory~~real estate related services. During the year ended December 31, ~~2018,~~2019, approximately ~~92%~~91% of our revenues were generated from real estate brokerage commissions, 7%8% from financing fees and 1% from other ~~revenues, including consulting and advisory~~real estate related services.

We divide commercial real estate into four major market segments, characterized by price:

Properties priced less than $1 million;

Private client market:

properties priced from $1 million up to $10 million;

Middle market:

properties priced from $10 million up to $20 million; and

Larger transaction market:

properties priced from $20 million and above.

Our strength is in serving private clients in the

$1-$10

million private client market segment, which contributed approximately ~~68%~~67% and ~~65%~~66% of our real estate brokerage commissions during the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and approximately 67% and 65% of our real estate brokerage commissions during the six months ended June 30, 2019 and 2018,~~ respectively. The following ~~tables set~~table sets forth the number of transactions, and amount of sales volume and revenues by commercial real estate market segment for real estate brokerage:


	Three Months Ended June 30,

	2019						2018						Change									Three Months Ended March 31,
	Number		Volume		Revenues		Number		Volume		Revenues		Number			Volume			Revenues			2020						2019						Change
Real Estate Brokerage			(in millions)		(in thousands)				(in millions)		(in thousands)					(in millions)			(in thousands)			Number		Volume		Revenues		Number		Volume		Revenues		Number			Volume			Revenues
																								(in millions)		(in thousands)				(in millions)		(in thousands)					(in millions)			(in thousands)
<$1 million		258	$	170	$	7,137		251	$	161	$	6,727		7		$	9		$	410			216	$	136	$	5,742		201	$	131	$	5,288		15		$	5		$	454
Private client market ($1 - $10 million)		1,392		4,582		128,526		1,299		4,096		118,152		93			486			10,374			1,242		4,001		114,264		1,060		3,320		96,058		182			681			18,206
Middle market ( ≥ $10 - $20 million)		111		1,523		26,944		118		1,602		27,555		(7	)		(79	)		(611	)		91		1,222		22,668		92		1,245		23,580		(1	)		(23	)		(912	)
Larger transaction market ( ≥ $20 million)		73		2,958		26,073		84		3,089		29,206		(11	)		(131	)		(3,133	)		66		3,083		29,155		52		2,407		20,011		14			676			9,144

		1,834	$	9,233	$	188,680		1,752	$	8,948	$	181,640		82		$	285		$	7,040			1,615	$	8,442	$	171,829		1,405	$	7,103	$	144,937		210		$	1,339		$	26,892

Six Months Ended June 30,

2019

2018

Change

Number

Volume

Revenues

Number

Volume

Revenues

Number

Volume

Revenues

Real Estate Brokerage

(in millions)

(in thousands)

(in millions)

(in thousands)

(in millions)

(in thousands)

<$1 million

459
$
301
$
12,425

496
$
323
$
13,595

(37
) $
(22
) $
(1,170
)
Private client market ($1 - $10 million)

2,452

7,902

224,584

2,467

7,656

224,164

(15
)
246

420

Middle market (
≥
$10 - $20 million)

203

2,768

50,524

231

3,208

54,826

(28
)
(440
)
(4,302
)
Larger transaction market (
≥
$20 million)

125

5,365

46,084

143

5,677

51,580

(18
)
(312
)
(5,496
)

3,239
$
16,336
$
333,617

3,337
$
16,864
$
344,165

(98
) $
(528
) $
(10,548
)

We continue to increase our presence in the United States and Canada through execution of our growth strategies by targeting markets based on population, employment, level of commercial real estate sales, inventory and competitive opportunities where we believe the markets will benefit from our business model. In ~~2018,~~2019 and 2020, we completed acquisitions that expanded our presence in the financing market in the Midwest and in the real estate brokerage market in ~~Canada.~~ Canada and United States.

COVID-19

In ~~2018,~~January 2020, the World Health Organization (“WHO”) declared

COVID-19

a Public Health Emergency of International Concern. In February 2020, the WHO raised its assessment of the

COVID-19

threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and in March 2020, the WHO characterized

COVID-19

as a pandemic. Many states and cities, including where we ~~also added~~conduct our business activities, have reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, restrictions on types of business that may continue to operate, and may limit the activity of our sales and financing professionals in engaging with our clients. We have implemented work from home protocols for all of our offices, and most of our employees and investment sales and financing professionals based in the United States and Canada are currently working remotely.

We are closely monitoring the impact of

COVID-19

pandemic on all aspects of our business and in the regions we operate. We did not incur significant disruptions through March 15, 2020, which marked the onset of wide-spread “shelter in place” mandates. Since then, we have seen increases in closing timelines, died transactions, cancelled contracts and miss-priced listings. Overall the economic shut-down and “shelter in place” mandates are slowing our real estate brokerage and financing transaction activity, and, in certain cases, restricting the ability of borrowers to access the capital markets and other sources of financing. Further, the effect of the

COVID-19

restrictions, including an extended period of remote work arrangements and the effects of preventative and precautionary health measures mandated to us by federal, state and local governments will likely affect our ability to identify and close commercial ~~mortgage servicing~~real estate transactions.

The long-term impact of the disruption in financial markets, consumer spending, unemployment as well as other unanticipated consequences remain unknown. Additionally, we are unable to predict the impact that the

COVID-19

pandemic will have on our financial condition, results of operations and cash flows due to numerous uncertainties and the fluidity of this situation, but we anticipate that total revenues will be negatively impacted for the second and third quarter of 2020 until normal business conditions resume. These uncertainties include the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, the direct and indirect economic effects of the pandemic and containment measures and actions and the impact of these and other factors on our employees, independent contractors and clients and potential clients.

We continue to monitor the expected trends and related demand for our services and will continue to adjust our operations accordingly. In response to this period of business disruption, we have assessed our cost structure and instituted various controllable expense reduction initiatives, including but not limited to, base salary reductions for senior executives, management and key personnel, furloughs and layoffs to preserve our balance sheet and financial position. We believe real estate sales and financing ~~services.~~volumes will improve and eventually post solid growth as the market is able to assess the impact of the economic shut down on property occupancies, rent collections and values and when financing flows improve. Due to a high degree of uncertainty, the timing of this recovery in real estate transactions and therefore our revenues is difficult to forecast. Our priority is to support our team’s efforts to increase client contact, provide expanded content and advisory services to investors and clients and preserve our financial position through expense reductions. We believe our company will be well positioned to benefit from and lead in the real estate transaction recovery when it emerges.

Factors Affecting Our Business

Our business and our operating results, financial condition and liquidity are significantly affected by the number and size of commercial real estate investment sales and financing transactions that we close in any period. The number and size of these transactions are affected by our ability to recruit and retain investment sales and financing professionals, identify and contract properties for sale and identify those that need financing and refinancing. We principally monitor the commercial real estate market through four factors, which generally drive our business. The factors are the economy, commercial real estate supply and demand, capital markets and ~~investment~~investor sentiment and investment activity.

The Economy

Our business is dependent on economic conditions within the markets in which we operate. Changes in the economy on a global, national, regional or local basis can have a positive or a negative impact on our business. Economic indicators and projections related to job growth, unemployment, interest rates, retail spending and confidence trends can have a positive or a negative impact on our business. Overall market conditions, including global trade, interest rate changes and job creation, can affect investor sentiment and, ultimately, the demand for our services from investors in real estate.

The rapid spread of

COVID-19

across the globe and into the U.S. has dramatically impacted the global, U.S. and key local economies in which we operate. The movement of 95 percent of the U.S. population to

“sheltering-in-place”

and the associated shutdown of numerous businesses has taken a heavy toll on employment, consumption and many other segments of the economy. Action by both the Federal Reserve and Congress appear to have largely sustained financial market liquidity while delivering resources to support local governments, the healthcare sector, businesses of all sizes and the general public. However, with the magnitude and duration of the pandemic still in question, the severity and length of the economic impact remains unclear. The broad range of unknowns, including the impact of large-scale furloughs and layoffs as well as the significant short-term changes in public policy such as those forestalling evictions have increased investor uncertainty. We believe these and other conditions caused many investors to step to the sidelines until additional clarity emerges.

Commercial Real Estate Supply and Demand

Our business is dependent on the willingness of investors to invest in or sell commercial real estate, which is affected by many factors beyond our control. These factors include the supply of commercial real estate coupled with user demand for these properties and the performance of real estate assets when compared with other investment alternatives, such as stocks and bonds.

The COVID-19 pandemic quickly transformed the 2020 real estate market outlook from a promising start to one with significant uncertainty. Although occupancy levels have technically remained elevated for most property types, questions surrounding rent collections remains an issue for operators, potential buyers and financiers alike. Preliminary indicators point to differing results for different real estate asset classes. With the CARES stimulus package beginning to flow to the businesses and people that need it and with several states starting to take initial steps to cautiously reopen, pressures on the economy and commercial real estate may begin to ease in the future, which should increase both supply and demand. However, such easing will be dependent on the nature of, severity of and speed with which the federal, state and local governments mandate and eventually begin to lift the preventative and precautionary measures our business will be subject to as it begins to resume normal operations.

Capital Markets

Credit and liquidity issues in the financial markets have a direct impact on the flow of capital to the commercial real estate market. Real estate purchases are often financed with debt and, as a result, credit and liquidity impact transaction activity and prices. Changes in interest rates, as well as steady and protracted movements of interest rates in one direction, whether increases or decreases, could adversely or positively affect the operations and income potential of commercial real estate properties, as well as lender and equity underwriting for real estate investments. These changes influence the demand of investors for commercial real estate investments.

Financial markets faced significant pressure from the economic and financial shockwave spawned by the pandemic, but we believe that action by the Federal Reserve largely sustained current market liquidity. The Fed’s commitment to quantitative easing, including the purchase of commercial mortgage backed securities (“CMBS”), as well as its main street lending programs and wide range of debt facilities have been instrumental in ensuring that lending is available across the business and investment spectrum. Despite these measures, access to acquisition capital has tightened, with active lenders increasing their spreads over the exceptionally low

10-year

Treasury rate. CMBS lenders have largely been absent from the market since the onset of the pandemic, and major national banks have set elevated rates that in many cases have not been competitive. Fannie Mae and Freddie Mac have increased their reserve requirements, slowing the lending flow for apartment investments. Local community banks and credit unions have been the most active capital source in recent weeks, but their flow of capital was temporarily impeded by the flood of applications for CARES Act created Paycheck Protection Program lending. Although lending processes have been slowed by the pandemic, we believe that sufficient capital flow has been available to meet market needs in most cases.

Investor Sentiment and Investment Activity

We rely on investors to buy and sell properties in order to generate commissions. Investors’ desires to engage in real estate transactions are dependent on many factors that are beyond our control. The economy, supply and demand for properly positioned properties, available credit and market events impact investor sentiment and, therefore, transaction velocity. In addition, our private clients are often motivated to buy, sell and/or refinance properties due to personal circumstances such as death, divorce, partnership breakups and estate planning.

Questions about all facets of the real estate sector outlook as well as logistics hurdles impacting appraisals, site visits and the closing process have adversely impacted transaction activity. Many institutional investors moved to the sidelines in March, while many private investors remained active in their local markets. Investors in a 1031 tax deferred exchange sustained much of the activity as the market slowed, but the IRS extension of 1031 exchange timelines until July 15 may reduce some of the time pressure and urgency for investors. We understand that a wide range of well-funded investors are awaiting opportunistic acquisitions. Despite the significant toll the pandemic has had on the U.S. economy, strong underwriting practices and sturdy investor balance sheets have helped mitigate the pressure felt by property owners. In addition, many impacted investors, including many hotel owners, have been able to achieve various levels of lender forbearance to bridge the impact of the imposed economic downturn. In our view, many lenders, property owners and tenants understand their need to jointly address the economic consequences of the pandemic and are in the process of developing collaborative strategies to navigate the path ahead.

Investors have been reinvigorated by the interest rate decline as the widening spread between asset yields and debt financing costs has granted increased underwriting latitude. However, the combination of economic momentum and strong fundamentals across most property types has raised seller expectations, causing them to price assets aggressively in many cases. Buyers, however, continue to demonstrate increased caution as they consider the maturing growth cycle and the prospects of a recession occurring during their hold period. The resulting gap in expectations remains a modest but steady headwind, extending asset marketing and closing timelines. We believe that sustained economic and fundamentals performance momentum is balancing with caution surrounding financial market volatility, international trade relations and the maturing cycle to offer a generally stable investment climate.

Seasonality

Our real estate brokerage commissions and financing fees have tended to be seasonal and, combined with other factors, can affect an investor’s ability to compare our financial condition and results of operations on a

quarter-by-quarter

basis. Historically, this seasonality has generally caused our revenue, operating income, net income and cash flows from operating activities to be lower in the first half of the year and higher in the second half of the year, particularly in the fourth quarter. The concentration of earnings and cash flows in the last six months of the year, particularly in the fourth quarter, is due to an industry-wide focus of clients to complete transactions towards the end of the calendar year. This historical trend can be disrupted ~~both~~either positively ~~and~~or negatively by major economic or political events, such as the

COVID-19

pandemic, impacting investor sentiment for a particular property type or location, volatility in financial markets, current and future projections of interest rates, attractiveness of other asset classes, market liquidity and the extent of limitations or availability of capital allocations for larger property buyers, among others. Private client investors may also accelerate or delay transactions due to personal or business-related reasons unrelated to economic or political events. In addition, our operating margins are typically lower during the second half of each year due to our commission structure for some of our senior investment sales and financing professionals. These senior investment sales and financing professionals are on a graduated commission schedule that resets annually, pursuant to which higher commissions are paid for higher sales volumes. Our historical pattern of seasonality may orbe significantly disrupted by the

COVID-19

pandemic due to uncertainties around all aspects of the economy and may not continue to the same degree experienced in prior years.

Operating Segments

We follow the guidance for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of our operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing, consulting, advisory and ~~consulting and advisory~~other real estate related services. Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute only one operating segment for financial reporting purposes.

Key Financial Measures and Indicators

Revenues

Our revenues are primarily generated from our real estate investment sales business. In addition to real estate brokerage commissions, we generate revenues from financing fees and from other real estate related revenues, which are primarily comprised of consulting and advisory fees.

Because our business is transaction oriented, we rely on investment sales and financing professionals to continually develop leads, identify properties to sell, market those properties and close the sale timely to generate a consistent flow of revenue. While our sales volume is impacted by seasonality factors, the timing of closings is also dependent on many market and personal factors unique to a particular client or transaction, particularly clients transacting in the

$1-$10

million private client market segment. These factors can cause transactions to be accelerated or delayed beyond our control. Further, commission rates earned are generally inversely related to the value of the property sold. As a result of our expansion into the middle and larger transaction market segments, we have seen our overall commission rates fluctuate from

period-to-period

as a result of changes in the relative mix of the number and volume of investment sales transactions closed in the middle and larger transaction market segments as compared to the

$1-$10

million private client market segment. These factors may result in

period-to-period

variations in our revenues that differ from historical patterns.

A small percentage of our transactions include retainer fees and/or breakage fees. Retainer fees are credited against a success-based fee paid upon the closing of a transaction or a breakage fee. Transactions that are terminated before completion will sometimes generate breakage fees, which are usually calculated as a set amount or a percentage of the fee ~~that~~ we would have received had the transaction closed.

Real Estate Brokerage Commissions

We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenues from real estate brokerage commissions are typically recognized at the close of escrow.

Financing Fees

We earn financing fees by securing financing on purchase transactions or by securing refinancing of our clients’ existing mortgage debt. We recognize financing fee revenues at the time the loan closes, and we have no remaining significant obligations for performance in connection with the transaction. To a lesser extent, we also earn mortgage servicing revenue, mortgage servicing fees and ancillary fees associated with financing activities. We recognize mortgage servicing revenues upon the acquisition of a servicing obligation. We generate mortgage servicing fees through the provision of collection, remittance, recordkeeping, reporting and other related mortgage servicing functions, activities and services.

Other Revenues

Other revenues include fees generated from consulting, advisory and ~~advisory~~other real estate services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed.

Table of Contents

Operating Expenses

Our operating expenses consist of cost of services, selling, general and administrative expenses and depreciation and amortization. The significant components of our expenses are further described below.

Cost of Services

The majority of our cost of services expense is variable commissions paid to our investment sales professionals and compensation-related costs related to our financing activities. Commission expenses are directly attributable to providing services to our clients for investment sales and financing services. Most of our investment sales and financing professionals are independent contractors and are paid commissions; however, because there are some who are initially paid a salary and certain of our financing professionals are employees, costs of services also include employee-related compensation, employer taxes and benefits for those employees. The commission rates we pay to our investment sales and financing professionals vary based on individual contracts negotiated and are generally higher for the more experienced professionals. Some of our most senior investment sales and financing professionals also have the ability to earn additional commissions after meeting certain annual revenue thresholds. These additional commissions are recognized as cost of services in the period in which they are earned. Payment of a portion of these additional commissions are generally deferred for a period of three years, at our election, and paid at the beginning of the fourth calendar year. Cost of services also includes referral fees paid to other real estate brokers where we are the principal service provider. Cost of services, therefore, can vary based on the commission structure of the independent contractors that closed transactions in any particular period.

Selling, General and Administrative Expenses

The largest expense component within selling, general and administrative expenses is personnel expenses for our management team and sales and support staff. In addition, these costs include facilities costs (excluding depreciation and amortization), staff related expenses, sales, marketing, legal, telecommunication, network, data sources, transaction costs related to acquisitions, changes in fair value for contingent consideration and other administrative expenses. Also included in selling, general and administrative are expenses for stock-based compensation to

non-employee

directors, employees and independent contractors (i.e. investment sales and financing professionals) under the Amended and Restated 2013 Omnibus Equity Incentive Plan (“2013 Plan”) and the 2013 Employee Stock Purchase Plan (“ESPP”).

Depreciation and Amortization Expense

Depreciation expense consists of depreciation recorded on our computer software and hardware and furniture, fixture and equipment. Depreciation is provided over estimated useful lives ranging from three to seven years for owned assets. Amortization expense consists of (i) amortization recorded on our mortgage servicing rights (“MSRs”) using the interest method over the period that servicing income is expected to be received and (ii) amortization recorded on intangible assets amortized on a straight-line basis using a useful life between one and six years.

Other (Expense) Income, ~~(Expense),~~ Net

Other (expense) income, ~~(expense),~~ net primarily consists of interest income, net gains or losses on our deferred compensation plan assets, realized gains and losses on our marketable debt securities,

available-for-sale,

foreign currency gains and losses and other

non-operating

gains and losses.

Interest Expense

Interest expense primarily consists of interest expense associated with the stock appreciation rights (“SARs”) liability, notes payable to former stockholders and our credit agreement.

Provision for Income Taxes

We are subject to U.S. and Canadian federal taxes and individual state and local taxes based on the income generated in the jurisdictions in which we operate. Our effective tax rate fluctuates as a result of the change in the mix of our activities in the jurisdictions we operate due to differing tax rates in those jurisdictions and ~~other~~the impact of permanent ~~items.~~items, including principally compensation charges, qualified transportation fringe benefits, reversal of uncertain tax positions, meals and entertainment and

tax-exempt

deferred compensation plan assets. Our provision for income taxes includes the windfall tax benefits, net, from shares issued in connection with our 2013 Plan and ESPP.

We record deferred taxes, net based on the tax rate expected to be in effect at the time those items are expected to be recognized for tax purposes.

Table of Contents

Results of Operations

Following is a discussion of our results of operations for the three ~~and six~~ months ended ~~June 30, 2019~~March 31, 2020 and ~~2018.~~2019. The tables included in the period comparisons below provide summaries of our results of operations. The

period-to-period

comparisons of financial results are not necessarily indicative of future results.

Key Operating Metrics

We regularly review a number of key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate financial projections and make strategic decisions. During the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we closed more than ~~2,500~~2,200 and ~~2,300~~1,900 investment sales, financing and other transactions, respectively, with total sales volume of approximately ~~$13.0~~$11.8 billion and $11.4 billion, respectively. During the six months ended June 30, 2019 and 2018, we closed more than 4,400 investment sales, financing and other transactions in each period, with total sales volume of approximately $22.8 billion and $21.1$9.8 billion, respectively. Such key metrics for real estate brokerage and financing activities (excluding other transactions) are as follows:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
Real Estate Brokerage	2019			2018			2019			2018			2020			2019
Average Number of Investment Sales Professionals		1,834			1,694			1,826			1,682			1,889			1,818
Average Number of Transactions per Investment Sales Professional		1.00			1.03			1.77			1.98			0.85			0.77
Average Commission per Transaction	$	102,879		$	103,676		$	103,000		$	103,136		$	106,396		$	103,158
Average Commission Rate		2.04	%		2.03	%		2.04	%		2.04	%		2.04	%		2.04	%
Average Transaction Size (in thousands)	$	5,034		$	5,107		$	5,044		$	5,054		$	5,227		$	5,056
Total Number of Transactions		1,834			1,752			3,239			3,337			1,615			1,405
Total Sales Volume (in millions)	$	9,233		$	8,948		$	16,336		$	16,864		$	8,442		$	7,103

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
Financing (1)	2019			2018			2019			2018			2020			2019
Average Number of Financing Professionals		104			96			106			94			89			106
Average Number of Transactions per Financing Professional		4.65			4.51			8.23			8.05			5.37			3.66
Average Fee per Transaction	$	35,406		$	35,125		$	34,576		$	32,519		$	30,900		$	33,541
Average Fee Rate		0.92	%		0.93	%		0.91	%		0.93	%		0.84	%		0.89	%
Average Transaction Size (in thousands)	$	3,851		$	3,774		$	3,812		$	3,490		$	3,670		$	3,763
Total Number of Transactions		484			433			872			757			478			388
Total Financing Volume (in millions)	$	1,864		$	1,634		$	3,324		$	2,642		$	1,754		$	1,460

(1)	Operating metrics calculated excluding certain financing fees not directly associated towith transactions.

Comparison of Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~

Below are key operating results for the three months ended ~~June 30, 2019~~March 31, 2020 compared to the three months ended ~~June 30, 2018 (dollar and share amounts~~March 31, 2019 (dollars in ~~thousands, except per share amounts)~~thousands):


	Three Months Ended June 30,			Percentage of			Three Months Ended June 30,			Percentage of			Change						Three Months Ended March 31, 2020			Percentage of Revenue			Three Months Ended March 31, 2019			Percentage of Revenue			Change
	2019			Revenue			2018			Revenue			Dollar			Percentage			Three Months Ended March 31, 2020			Percentage of Revenue			Three Months Ended March 31, 2019			Percentage of Revenue			Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	188,680			90.0	%	$	181,640			91.1	%	$	7,040			3.9	%	$	171,829			90.1	%	$	144,937			90.2	%	$	26,892			18.6	%
Financing fees		17,742			8.5			15,563			7.8			2,179			14.0	%		15,351			8.0			13,732			8.5			1,619			11.8	%
Other revenues		3,171			1.5			2,199			1.1			972			44.2	%		3,537			1.9			2,038			1.3			1,499			73.6	%

Total revenues		209,593			100.0			199,402			100.0			10,191			5.1	%		190,717			100.0			160,707			100.0			30,010			18.7	%

Operating expenses:
Cost of services		127,847			61.0			119,869			60.1			7,978			6.7	%		113,757			59.6			91,688			57.1			22,069			24.1	%
Selling, general and administrative expense		52,836			25.2			49,080			24.6			3,756			7.7	%		54,860			28.8			48,918			30.4			5,942			12.1	%
Depreciation and amortization expense		1,932			0.9			1,503			0.8			429			28.5	%		2,464			1.3			1,832			1.1			632			34.5	%

Total operating expenses		182,615			87.1			170,452			85.5			12,163			7.1	%		171,081			89.7			142,438			88.6			28,643			20.1	%

Operating income		26,978			12.9			28,950			14.5			(1,972	)		(6.8	)%		19,636			10.3			18,269			11.4			1,367			7.5	%
Other income (expense), net		3,119			1.5			1,724			0.9			1,395			80.9	%
Other (expense) income, net																				(366	)		(0.2	)		3,375			2.1			(3,741	)		(110.8	)%
Interest expense		(340	)		(0.2	)		(352	)		(0.2	)		12			(3.4	)%		(283	)		(0.1	)		(349	)		(0.2	)		66			(18.9	)%

Income before provision for income taxes		29,757			14.2			30,322			15.2			(565	)		(1.9	)%		18,987			10.0			21,295			13.3			(2,308	)		(10.8	)%
Provision for income taxes		8,478			4.0			8,155			4.1			323			4.0	%		5,917			3.1			5,657			3.6			260			4.6	%

Net income	$	21,279			10.2	%	$	22,167			11.1	%	$	(888	)		(4.0	)%	$	13,070			6.9	%	$	15,638			9.7	%	$	(2,568	)		(16.4	)%

Adjusted EBITDA (1)	$	32,016			15.3	%	$	33,721			16.9	%	$	(1,705	)		(5.1	)%	$	22,378			11.7	%	$	23,159			14.4	%	$	(781	)		(3.4	)%

Earnings per share:
Basic	$	0.54					$	0.57
Diluted	$	0.54					$	0.56
Weighted average common shares outstanding:
Basic		39,395						39,154
Diluted		39,527						39,385

(1)

Adjusted EBITDA is not a measurement of our financial performance under U.S. generally accepted accounting principles (“U.S. GAAP”) and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see

“Non-GAAP

Financial Measure.”

Revenues

Our total revenues were ~~$209.6~~$190.7 million for the three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~$199.4~~$160.7 million for the same period in ~~2018,~~2019, an increase of ~~$10.2~~$30.0 million, or ~~5.1%~~18.7%. Total revenues increased as a result of increases in real estate brokerage commissions, financing fees and other revenues, as described below.

Real estate brokerage commissions.

Revenues from real estate brokerage commissions increased to ~~$188.7~~$171.8 million for the three months ended ~~June 30, 2019~~March 31, 2020 from ~~$181.6~~$144.9 million for the same period in ~~2018,~~2019, an increase of ~~$7.0~~$26.9 million, or ~~3.9%~~18.6%. The increase was primarily driven by ~~the increase~~increases in the number of ~~brokerage~~investment sales transactions ~~(4.7%~~(14.9%) and average ~~commission rates (1 basis point), partially offset by a decrease in average~~ transaction size ~~(1.4%~~(3.4%). These increases generated an 18.9% increase in the amount of sales volume. The average commission rate remained comparable.

Financing fees.

Revenues from financing fees increased to ~~$17.7~~$15.4 million for the three months ended ~~June 30, 2019~~March 31, 2020 from ~~$15.6~~$13.7 million for the same period in ~~2018,~~2019, an increase of ~~$2.2~~$1.6 million, or ~~14.0%, in part spurred by growth from acquisitions during 2018.~~11.8%. The increase was primarily driven by a 20.1% increase in financing volume, partially offset by a 5 basis point reduction in average fee rates. Financing volume was primarily impacted by the 23.2% increase in the number of financing transactions, ~~(11.8%) and an increase in average transaction size (2.1%). These factors combined generated the increase in financing volume of 14.1%. This increase was~~ partially offset by a decrease in the average ~~fee rates (1 basis point)~~transaction size of 2.5%.

Other revenues.

Other revenues increased to ~~$3.2~~$3.5 million for the three months ended ~~June 30, 2019~~March 31, 2020 from ~~$2.2~~$2.0 million for the same period in ~~2018,~~2019, an increase of ~~$1.0~~$1.5 million, or ~~44.2%~~73.6%. The increase was primarily driven by increases in consulting and advisory services during the three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in ~~2018.~~2019.

Total Operating Expenses

Our total operating expenses were ~~$182.6~~$171.1 million for the three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~$170.5~~$142.4 million for the same period in ~~2018,~~2019, an increase of ~~$12.2~~$28.6 million, or ~~7.1%~~20.1%. The increase was primarily due to ~~increases~~an increase in cost of services, which are variable commissions paid to our investment sales professionals and compensation related costs in connection with our financing activities, and increases in selling, general and administrative costs and ~~to a lesser extent~~ depreciation and amortization, as described below.

Table of Contents

Cost of services.

Cost of services increased to ~~$127.8~~$113.8 million for the three months ended ~~June 30, 2019~~March 31, 2020 from ~~$119.9~~$91.7 million for the same period in ~~2018,~~2019, an increase of ~~$8.0~~$22.1 million, or ~~6.7%~~24.1%. The increase was primarily due to increased commission expenses driven by the related increased revenues noted above. Cost of services as a percent of total revenues increased to ~~61.0%~~59.6% compared to ~~60.1%~~57.1% for the same period in ~~2018~~2019 primarily due to ~~transaction size, mix~~a higher proportion of transactions closed by our more senior investment sales and ~~brokerage compensation.~~financing professionals. Traditionally, cost of services as a percent of total revenues is lower during the three-month periods ended March 31 as certain investment professionals may earn a higher commission rate later in the year after meeting annual revenue thresholds. However, due to the uncertainty surrounding

COVID-19,

we expect cost of services as a percent of total revenues to remain elevated in the coming quarters as we expect the majority of the deals closed to be weighted towards senior investment sales and financing professionals.

Selling, general and administrative expense.

Selling, general and administrative expense ~~increased to $52.8 million~~ for the three months ended ~~June 30, 2019~~March 31, 2020 increased $5.9 million, or 12.1%, to $54.9 million from ~~$49.1~~$48.9 million for the same period in ~~2018, an increase of $3.8 million, or 7.7%. The increases~~2019. Increases in our selling, general and administrative expense ~~has~~have been driven by our growth plans and ~~spending’s~~investments in technology, sales and marketing tools, and marketing and expansion of our services supporting our investment sales and financing professionals. These initiatives have primarily driven (i) a ~~$1.8 million increase in compensation related costs, including salaries and related benefits; (ii) a $1.7~~$4.0 million increase in sales operations support and promotional marketing ~~expenses to support sales activity;~~expenses; (ii) a $1.2 million increase in legal costs; (iii) a ~~$0.8~~$0.9 million increase in facilities expenses due to expansion of existing offices; (iv) a $0.6 million increase in net other expense categories, primarily driven by ~~the~~an increase in certain licensing ~~fees;~~ and ~~(iv)~~professional fees, partially offset by decreases in the change in value for deferred and contingent consideration; and (v) a ~~$0.7~~$0.3 million increase in ~~facilities expenses due to expansion of existing offices.~~stock-based compensation expense. These increases were partially offset by ~~(i)~~ a ~~$0.6~~$1.1 million decrease in ~~legal~~compensation related costs, primarily driven by decreases in deferred compensation obligation and ~~(ii) a $0.6 million decrease~~management performance compensation, which were partially offset by increases in ~~stock-based compensation.~~salaries and related benefits.

Depreciation and amortization expense.

Depreciation and amortization expense increased to ~~$1.9~~$2.5 million for the three months ended ~~June 30, 2019~~March 31, 2020 from ~~$1.5~~$1.8 million for the same period in ~~2018,~~2019, an increase of ~~$0.4~~$0.6 million, or ~~28.5%~~34.5%. The increase was primarily driven by ~~capital expenditures due to our expansion and growth and~~ the increase in amortization of intangible ~~assets and MSRs.~~assets.

Other (Expense) Income, ~~(Expense),~~ Net

Other (expense) income, ~~(expense),~~ net ~~increased~~decreased to ~~$3.1~~$(0.4) million for the three months ended ~~June 30, 2019~~March 31, 2020 from ~~$1.7~~$3.4 million for the same period in ~~2018.~~2019. The ~~increase~~decrease was primarily driven by ~~increases~~(i) a $2.1 million unfavorable change in the value of our deferred compensation plan assets that are held in a rabbi trust; (ii) a $1.1 million foreign currency loss related to our Canadian operations; and (iii) a $0.6 million reduction in interest income on our investments in marketable debt securities,

~~available-for-sale~~available-for-sale.

~~and foreign currency gains.~~

Interest Expense

There were no significant changes in interest expense for the three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in ~~2018.~~2019.

Provision for Income Taxes

The provision for income taxes was ~~$8.5~~$5.9 million for the three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~$8.2~~$5.7 million in the same period in ~~2018,~~2019, an increase of $0.3 million, or ~~4.0%~~4.6%. The effective income tax rate for the three months ended ~~June 30, 2019~~March 31, 2020 was ~~28.5%~~31.2% compared to ~~26.9%~~26.6% for the same period in ~~2018.~~2019. The effective income tax rate increased primarily due to ~~an increase in permanent items,~~ the effect of permanent items ~~from~~driven by the decrease in value of our deferred compensation plan assets, a ~~decreased~~

~~pre-tax~~

~~income~~shift in the blended state tax rate to higher taxing jurisdictions and ~~an increase~~a recording of a valuation allowance with respect to ~~our~~the deferred tax assets of the Company’s Canadian operations.

Table of Contents

~~Comparison of Six Months Ended June 30, 2019 and 2018~~

~~Below are key operating results for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 (dollar and share amounts in thousands, except per share amounts):~~

Six Months
Ended
June 30,

Percentage
of

Six Months
Ended
June 30,

Percentage
of

Change

2019

Revenue

2018

Revenue

Dollar

Percentage

Revenues:

Real estate brokerage commissions
$
333,617

90.1
% $
344,165

92.0
% $
(10,548
)
(3.1
)%
Financing fees

31,474

8.5

25,287

6.8

6,187

24.5
%
Other revenues

5,209

1.4

4,491

1.2

718

16.0
%

Total revenues

370,300

100.0

373,943

100.0

(3,643
)
(1.0
)%

Operating expenses:

Cost of services

219,535

59.3

221,518

59.2

(1,983
)
(0.9
)%
Selling, general, and administrative expense

101,754

27.5

97,133

26.0

4,621

4.8
%
Depreciation and amortization expense

3,764

1.0

2,878

0.8

886

30.8
%

Total operating expenses

325,053

87.8

321,529

86.0

3,524

1.1
%

Operating income

45,247

12.2

52,414

14.0

(7,167
)
(13.7
)%
Other income (expense), net

6,494

1.8

2,933

0.8

3,561

121.4
%
Interest expense

(689
)
(0.2
)
(712
)
(0.2
)
23

(3.2
)%

Income before provision for income taxes

51,052

13.8

54,635

14.6

(3,583
)
(6.6
)%
Provision for income taxes

14,135

3.8

14,457

3.9

(322
)
(2.2
)%

Net income

36,917

10.0
% $
40,178

10.7
% $
(3,261
)
(8.1
)%

Adjusted EBITDA
(1)
$
55,175

14.9
% $
61,154

16.4
% $
(5,979
)
(9.8
)%

Earnings per share:

Basic
$
0.94
$
1.03

Diluted
$
0.93
$
1.02

Weighted average common shares outstanding:

Basic

39,353

39,124

Diluted

39,524

39,298

~~(1)~~

Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures derived in accordance with U.S. GAAP. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, see

~~“Non-GAAP~~

~~Financial Measure.”~~

~~Revenues~~

Our total revenues were $370.3 million for the six months ended June 30, 2019 compared to $373.9 million for the same period in 2018, a decrease of $3.6 million, or 1.0%. Total revenues decreased as a result of decreased real estate brokerage commissions, partially offset by increases in financing fees and other revenues, as described below.

~~Real estate brokerage commissions.~~

Revenues from real estate brokerage commissions decreased to $333.6 million for the six months ended June 30, 2019 from $344.2 million for the same period in 2018, a decrease of $10.5 million, or 3.1%. The decrease was primarily driven by the decrease in the number of investment sales transactions (2.9%) and a decrease in average transaction size (0.2%). These factors combined generated a decrease in sales volume of 3.1%.

~~Financing fees.~~

Revenues from financing fees increased to $31.5 million for the six months ended June 30, 2019 from $25.3 million for the same period in 2018, an increase of $6.2 million, or 24.5% in part spurred by growth from acquisitions during 2018. The increase was primarily driven by the increase in the number of financing transactions (15.2%) and an increase in average transaction size (9.2%). These factors combined generated the increase in financing volume of 25.8%. This increase was partially offset by a decrease in average fee rates (2 basis points).

~~Other revenues.~~

Other revenues increased to $5.2 million for the six months ended June 30, 2019 from $4.5 million for the same period in 2018, an increase of $0.7 million, or 16.0%. The increase was primarily driven by increases in consulting and advisory services during the six months June 30, 2019 compared to the same period in 2018.

~~Table of Contents~~

~~Total operating expenses~~

Our total operating expenses were $325.1 million for the six months ended June 30, 2019 compared to $321.5 million for the same period in 2018, an increase of $3.5 million, or 1.1%. The increase was primarily due to an increase in selling, general and administrative costs and to a lesser extent depreciation and amortization, partially offset by a decrease in cost of services, which are variable commissions paid to our investment sales professionals and compensation related costs in connection with our financing activities, as described below.

~~Cost of services.~~

Cost of services decreased to $219.5 million for the six months ended June 30, 2019 from $221.5 million for the same period in 2018, a decrease of $2.0 million, or 0.9%. The decrease was primarily due to decreased commission expenses driven by the related decreased revenues noted above. Cost of services as a percent of total revenues slightly increased to 59.3% for the six months ended June 30, 2019 compared to 59.2% for the same period in 2018.

~~Selling, general and administrative expense.~~

Selling, general and administrative expense increased to $101.8 million for the six months ended June 30, 2019 from $97.1 million for the same period in 2018, an increase of $4.6 million, or 4.8%. Increases in our selling, general and administrative expense have been driven by our growth plans and spending’s in technology, sales and marketing tools and marketing and expansion of our services supporting our investment sales and financing professionals. These initiatives have primarily driven (i) a $3.0 million increase in sales and promotional marketing expenses to support increased sales activity; (ii) a $1.7 million increase in net other expense categories, primarily driven by the increase in certain licensing fees; (iii) a $1.2 million increase in facilities expenses due to expansion of existing offices; and (iv) a $1.0 million increase in salaries and related benefits, partially offset by decreases in management performance compensation. These increases were partially offset by (i) a $1.5 million decrease in legal costs and (ii) a $0.8 million decrease in stock-based compensation.

~~Depreciation and amortization expense.~~

Depreciation and amortization expense increased to $3.8 million for the six months ended June 30, 2019 from $2.9 million for the same period in 2018, an increase of $0.9 million, or 30.8%. The increase was primarily driven by capital expenditures due to our expansion and growth and the amortization of intangible assets and MSRs.

~~Other income (expense), net~~

Other income (expense), net increased to $6.5 million for the six months ended June 30, 2019 from $2.9 million for the same period in 2018. The increase was primarily driven by increases in interest income on our investments in marketable securities,

~~available-for-sale,~~

~~the value of our deferred compensation plan assets held in the Rabbi Trust and foreign currency gains.~~

~~Interest expense~~

~~There were no significant changes in interest expense for the six months ended June 30, 2019 compared to the same period in 2018.~~

~~Provision for income taxes~~

The provision for income taxes was $14.1 million for the six months ended June 30, 2019 compared to $14.5 million in the same period in 2018, a decrease of $0.3 million, or 2.2%. The effective income tax rate for the six months ended June 30, 2019 was 27.7% compared to 26.4% for the same period in 2018. The effective income tax rate increased primarily due to an increase in permanent items, the effect of permanent items from a decreased

~~pre-tax~~

~~income and an increase of a valuation allowance with respect to our Canadian operations.~~

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Non-GAAP

Financial Measure

In this quarterly report on Form

10-Q,

we include a

non-GAAP

financial measure, adjusted earnings before interest income/expense, taxes, depreciation and amortization, ~~and~~ stock-based compensation and other

non-cash

items, or Adjusted EBITDA. We define Adjusted EBITDA as net income before (i) interest income and other, including net realized gains (losses) on marketable debt securities,

available-for-sale

and cash and cash equivalents, (ii) interest expense, (iii) provision for income taxes, (iv) depreciation and amortization, (v) stock-based compensation, ~~expense~~ and (vi)

non-cash

~~MSRs~~MSR activity. We use Adjusted EBITDA in our business operations to evaluate the performance of our business, develop budgets and measure our performance against those budgets, among other things. We also believe that analysts and investors use Adjusted EBITDA as a supplemental measure to evaluate our overall operating performance. However, Adjusted EBITDA has material limitations as an analytical tool and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. We find Adjusted EBITDA asto be a useful tool to assist in evaluating performance, because Adjusted EBITDA eliminates items related to capital structure, taxes and

non-cash

items. In light of the foregoing limitations, we do not rely solely on Adjusted EBITDA as a performance measure and also consider our U.S. GAAP results. Adjusted EBITDA is not a measurement of our financial performance under U.S. GAAP and should not be considered as an alternative to net income, operating income or any other measures calculated in accordance with U.S. GAAP. Because Adjusted EBITDA is not calculated in the same manner by all companies, it may not be comparable to other similarly titled measures used by other companies.

A reconciliation of the most directly comparable U.S. GAAP financial measure, net income, to Adjusted EBITDA is as follows (in thousands):


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Net income	$	21,279		$	22,167		$	36,917		$	40,178		$	13,070		$	15,638
Adjustments:
Interest income and other (1)		(2,562	)		(1,574	)		(5,103	)		(2,802	)		(2,003	)		(2,541	)
Interest expense		340			352			689			712			283			349
Provision for income taxes		8,478			8,155			14,135			14,457			5,917			5,657
Depreciation and amortization		1,932			1,503			3,764			2,878			2,464			1,832
Stock-based compensation		2,585			3,159			4,926			5,772			2,632			2,341
Non-cash MSRs activity (2)		(36	)		(41	)		(153	)		(41	)
Non-cash MSR activity (2)														15			(117	)

Adjusted EBITDA (3)	$	32,016		$	33,721		$	55,175		$	61,154		$	22,378		$	23,159

(1)	Other ~~for the three and six months ended June 30, 2019 and 2018~~ includes net realized gains (losses) on marketable debt securities available-for-sale.

(2)	Non-cash ~~MSRs~~MSR activity ~~relates to~~includes the assumption of servicing obligations.

(3)

The decrease in Adjusted EBITDA for the three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in ~~2018~~2019 is primarily due to higher proportion of operating expenses compared to revenues. The decrease in Adjusted EBITDA for the six months ended June 30, 2019 compared to the same period in 2018 is primarily due to lower total revenues and a higher proportion of operating expenses compared to total revenues.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, marketable debt securities,

available-for-sale

and, if necessary, borrowings under our credit agreement. In order to enhance yield to us, we have invested a portion of our cash in money market funds and in fixed and variable income debt securities, in accordance with our investment policy approved by the board of directors. Certain of our investments in money market funds may not maintain a stable net asset value and may impose fees on redemptions and/or ~~gate~~gating fees. To date, the Company has not experienced any restrictions or gating fees on its ability to redeem funds from money market funds. Although we have historically funded our operations through operating cash flows, there can be no assurance that we can continue to meet our cash requirements entirely through our operations, cash and cash equivalents, proceeds from the sale of marketable debt securities,

available-for-sale

or availability under our credit agreement.

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Cash Flows

Our total cash and cash equivalents balance decreased by ~~$7.9~~$42.9 million to ~~$206.8~~$189.8 million at ~~June 30, 2019~~March 31, 2020, compared to ~~$214.7~~$232.7 million at December 31, ~~2018.~~2019. The following table sets forth our summary cash flows for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~ (in thousands):


	Six Months Ended June 30,						Three Months Ended March 31,
	2019			2018			2020			2019
Net cash (used in) provided by operating activities	$	(24,363	)	$	23,046
Net cash provided by (used in) investing activities		19,626			(1,420	)
Net cash used in operating activities							$	(52,793	)	$	(38,598	)
Net cash provided by investing activities								13,097			24,073
Net cash used in financing activities		(3,188	)		(2,393	)		(2,940	)		(2,026	)

Net (decrease) increase in cash and cash equivalents		(7,925	)		19,233
Effect of currency exchange rate changes on cash and cash equivalents								(274	)		—

Net decrease in cash and cash equivalents								(42,910	)		(16,551	)
Cash and cash equivalents at beginning of period		214,683			220,786			232,670			214,683

Cash and cash equivalents at end of period	$	206,758		$	240,019		$	189,760		$	198,132

Operating Activities

Cash flows used in operating activities were ~~$24.4~~$52.8 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~cash flows provided by operating activities of $23.0~~$38.6 million for the same period in ~~2018.~~2019. Net cash ~~(used in) provided by~~used in operating activities is driven by our net income adjusted for

non-cash

items and changes in operating assets and liabilities. The ~~$47.4~~$14.2 million increased usage in operating cash flows for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in ~~2018~~2019 was primarily due to ~~a decrease in our real estate brokerage revenue and~~ a higher proportion of operating expenses compared to total revenues, differences in timing of certain payments and receipts and an increase in advances to our investment sales and financing professionals, which was partially offset by a reduction in bonus accruals and a reduction in the deferral of certain discretionary commissions. We traditionally experience net cash used in operating activities during the three-month periods ended March 31, since bonuses and certain deferred commissions related to the prior year(s) are typically paid during the first quarter of the new year.

Investing Activities

Cash flows provided by investing activities were ~~$19.6~~$13.1 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~cash flows used in investing activities of $1.4~~$24.1 million for the same period in ~~2018.~~2019. The ~~$21.0~~$11.0 million ~~decreased usage~~decrease in ~~investing~~ cash flows provided by investing activities for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in ~~2018~~2019 was primarily due to a ~~$23.8~~$4.0 million reduction in net proceeds from sales and maturities of marketable debt securities,

available-for-sale

~~for the six months ended June 30, 2019 compared to a $7.6 million in net proceeds of marketable securities,~~

~~available-for-sale~~

~~for the same period in 2018~~ and a ~~$6.2~~net $6.0 million of outflow for acquisitions ~~net of cash received~~ during the ~~six~~three months ended ~~June 30, 2018~~March 31, 2020 with no such comparable outflow for the same period in 2019.

Financing Activities

Cash flows used in financing activities were ~~$3.2~~$2.9 million for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~$2.4~~$2.0 million for the same period in ~~2018.~~2019. The change in cash flows used in financing activities for the ~~six~~three months ended ~~June 30, 2019~~March 31, 2020 compared to the same period in ~~2018~~2019 was primarily impacted by taxes paid related to net share settlement of stock-based ~~awards.~~awards and principal payments on stock appreciation rights liability. See Note 12 – “Stock-Based Compensation Plans” of our Notes to Condensed Consolidated Financial Statements for additional information.

Liquidity

We believe that our existing balances of cash and cash equivalents, cash flows expected to be generated from our operations, proceeds from the sale of marketable debt securities,

available-for-sale

and borrowings available under the Credit Agreement (defined below) will be sufficient to satisfy our operating requirements for the foreseeable future. As of March 31, 2020, cash on hand and core-cash investments aggregated $336.9 million, and we had $60.0 million of borrowing capacity under our credit agreement.

If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at ~~all.~~all due to various risks and uncertainties, including, but not limited to, the economic effects of the

COVID-19

pandemic. Our failure to raise sufficient capital when needed could prevent us from, among other factors, to fund acquisitions or to otherwise finance our growth or operations. In addition, our notes payable to former stockholders and SARs agreements have provisions, which could accelerate repayment of outstanding principal and accrued interest and adversely impact our liquidity.

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Credit Agreement

~~On June 18, 2014, we entered into~~We have a Credit Agreement with Wells Fargo Bank, National Association (the “Bank”), dated as of June 1, 2014, which was amended and restated on May 28, 2019 (the “Credit Agreement”). The Credit Agreement is intended to provide for future liquidity needs, if needed. The Credit Agreement provides for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries ~~(the “Credit Facility”), which, as amended~~ and ~~restated,~~ matures on June 1, 2022. We may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. We must pay a commitment fee of up to 0.1% per annum, payable quarterly, based on the amount of unutilized commitments under the Credit Facility.

The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit, of which $533,000 was utilized as of June 30, 2019. As of June 30, 2019, there were no amounts outstanding under the Credit Agreement.

~~Borrowings under the Credit Facility bear interest, at our option, at either (i) a fluctuating rate per annum 2.00% below the Base Rate (defined as the highest of (a) the Bank’s prime rate, (b)~~

~~one-month~~

~~LIBOR plus 1.50%, and (c) the federal funds rate plus 1.50%~~2022 (the “Credit Agreement”)~~, or (ii) at a fixed rate per annum determined by Bank to be 0.875% above LIBOR.~~

The Credit Facility contains customary covenants, including financial and other covenant reporting requirements and events of default. Financial covenants require us, on a combined basis with our guarantors, to maintain (i) an EBITDAR Coverage Ratio (as defined in the Credit Agreement) of not less than 1.25:1.0 as of each quarter end, determined on a rolling four-quarter basis, (ii) total funded debt to EBITDA not greater than 2.0:1.0 as of each quarter end, determined on a rolling four-quarter basis and (iii) limits investments in foreign entities and caps certain other loans. The Credit Facility is secured by substantially all of our assets, including pledges of 100% of the stock or other equity interest of each subsidiary except for the capital stock of a controlled foreign corporation (as defined in the Internal Revenue Code), in which case no such pledge is required.

. See Note 15 – “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements for additional information on the Credit Agreement.

Contractual Obligations and Commitments

There have been no material changes in our commitments under contractual obligations, as disclosed in our Annual Report on Form

10-K

for the year ended December 31, ~~2018~~2019 through the date the condensed consolidated financial statements were issued other than an increase of operating lease obligations of $8.1 million due to new or extended leases and commitments of $9.8 million to current and prospective investment sales and financing professionals, subject to certain conditions and/or reaching performance goals.issued.

Off Balance Sheet Arrangements

We do not have any ~~off balance~~

off-balance

sheet arrangements.

Inflation

Our commissions and other variable costs related to revenue are primarily affected by real estate market supply and demand, which may be affected by ~~general~~uncertain or changing economic and market conditions, including ~~inflation. However,~~inflation/deflation arising in connection with and in response to ~~date, we do not believe that general inflation has had a material impact upon~~the

COVID-19

pandemic. The economic impacts from inflation/deflation to our ~~operations.~~business remain unknown at this time.

Critical Accounting Policies; Use of Estimates

We prepare our financial statements in accordance with U.S. GAAP. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. There were no ~~material~~significant changes in our critical accounting policies, as disclosed in in our Annual Report on Form

10-K

for the year ended December 31, ~~2018~~2019 except for the following:

Investments in Marketable Debt Securities,

~~Leases~~

Available-for-Sale

We ~~utilize operating leases for all~~maintain a portfolio of investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt, asset-backed securities and other. We consider our ~~facilities~~ investments in marketable debt securities to be

available-for-sale,

and ~~autos.~~accordingly are recorded at their fair values. We determine ~~if an arrangement is a lease~~the appropriate classification of investments in marketable debt securities at ~~inception.~~

~~Right-of-use~~

~~assets (“ROU assets”) represent our right to use an underlying asset for~~ the ~~lease term~~time of purchase. Interest along with accretion and ~~lease liabilities represent our~~amortization of purchase premiums and discounts from the purchase date through the estimated maturity date, including consideration of variable maturities and contractual ~~obligation to make lease payments under the lease. Operating leases~~call provisions, are included in ~~the operating lease ROU assets,~~

~~non-current,~~

~~and operating lease liabilities, current and~~

~~non-current,~~

~~captions~~other (expense) income, net in the condensed consolidated ~~balance sheets.~~statements of net and comprehensive income. We typically invest in highly-rated debt securities, and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires substantially all investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities.

We review quarterly our investment portfolio of all securities in an unrealized loss position to determine if an impairment charge or credit reserve is required. We exclude accrued interest from both the fair value and the amortized cost basis of marketable debt securities,

available-for-sale,

for the purposes of identifying and measuring an impairment. An investment is impaired if the fair value is less than its amortized cost basis. Impairment relating to credit losses is recorded through a reduction in the amortized cost of the security or an allowance for credit losses and credit loss expense (included in selling, general and administrative expense), limited by the amount that the fair value is less than the amortized cost basis. Impairment that has not been recorded as a credit loss is recorded through other comprehensive income (loss), net of applicable taxes. We made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables. We evaluate

write-off

of accrued interest receivable by the major security-type level at the time credit loss exists for the underlying security.

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~~Operating lease ROU~~Determining whether a credit loss exists requires a high degree of judgment and we consider both qualitative and quantitative factors in making our determination. We evaluate our intent to sell, or whether we will more likely than not be required to sell, the security before recovery of its amortized cost basis. For all securities in an unrealized loss position, we evaluate, among other items, the extent and length of time the fair market value of a security is less than its amortized cost, time to maturity, duration, seniority, the financial condition of the issuer including credit ratings, any changes thereto and relative default rates, leverage ratios, availability of liquidity to make principle and interest payments, performance indicators of the underlying assets, analyst reports and ~~liabilities are recognized on the commencement date based on~~recommendations and changes in base and market interest rates. If qualitative and quantitative analysis is sufficient to conclude that an impairment related to credit losses does not exist, we typically do not perform further quantitative analysis to estimate the present value of lease payments over the lease term. Lease agreements may contain periods of free rent or reduced rent, predetermined fixed increases in the minimum rent and renewal or termination options, all impacting the determination of the lease term and lease paymentscash flows expected to be ~~used in calculating~~collected from the lease liability. Certain facility leases provide for rental escalations related to increases in the lessors’ direct operating expenses. We use the implicit rate in the lease when determinable. As mostdebt security. Estimates of expected future cash flows are our ~~leases do not have a determinable implicit rate, we use a derived incremental borrowing rate~~best estimate based on borrowing options under our credit agreement. We apply a spread over treasury rates for the indicated term of the lease based on the information available on the commencement date of the lease. We typically lease general purpose

~~built-out~~

~~We have lease agreements with lease and~~

~~non-lease~~

components, which are accounted for as a single lease component. Lease cost is recognized on a straight-line basis over the lease term. Variable lease payments consist of common area costs, insurance, taxesreasonable and ~~other lease related costs, which are determined principally based on billings from landlords.~~supportable economic forecasts.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, see Note 2 – “Accounting Policies and Recent Accounting Pronouncements” of our Notes to Condensed Consolidated Financial Statements. ~~The~~Other than changing certain accounting processes and disclosures, the accounting pronouncement related to ~~leases had a material impact on our condensed consolidated balance sheets but~~ Accounting Standards Update No.

2016-13,

Financial Instruments—Credit Losses

did not have a material impact on our condensed consolidated ~~statements of net and comprehensive income.~~financial statements. Although we do not believe any of the other accounting pronouncements listed in that note will have a significant impact on our business, we are still in the process of determining the impact ~~some~~ of the new pronouncements may have on our condensed consolidated financial statements.

~~Item 3.~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We maintain a portfolio of investments in a variety of fixed and variable debt rate securities, including U.S. government and federal agency, ~~securities,~~ corporate debt, ~~securities, asset backed~~asset-backed securities and other. As of ~~June 30, 2019,~~March 31, 2020, the fair value of investments in marketable debt securities,

available-for-sale

was ~~$199.2~~$189.1 million. The primary objective of our investment activity is to maintain the safety of principal, and to provide for future liquidity requirements while maximizing yields without significantly increasing risk. While some investments may be securities of companies in foreign countries, all investments are denominated and payable in U.S. Dollars. We do not enter into investments for trading or speculative purposes. While our intent is not to sell these investment securities prior to their stated maturities, we may choose to sell any of the securities for strategic reasons including, but not limited to, anticipated capital requirements, anticipation of credit deterioration, duration management and because a security no longer meets the criteria of our investment policy. We do not use derivatives or similar instruments to manage our interest rate risk. We seek to invest in high quality investments. The weighted average rating (exclusive of cash and cash equivalents) was AA+ as of ~~June 30, 2019.~~March 31, 2020. Maturities are maintained consistent with our short-, medium- and long-term liquidity objectives.

Currently, our portfolio of investments predominantly consists of fixed interest rate debt securities; however, a portion of our investment portfolio may consist of variable interest rate debt securities. Our investments in fixed interest rate debt securities are subject to various market ~~risk.~~risks. Changes in prevailing interest rates may adversely or positively impact their fair market value should interest rates generally rise or fall. Accordingly, we also may have interest rate risk with variable interest rate debt securities as the income produced may decrease if interest rates fall. Contraction in market liquidity may adversely affect the value of portions of our portfolio and affect our ability to sell securities in the time frames required and at acceptable prices. Uncertainty in future market conditions may raise market participant’s expectations of returns, thus impacting the value of securities in our portfolio as well. During the three months ended March 31, 2020, increased demand for treasury securities caused a significant decrease in the yields on treasury securities and unbalanced demand and supply factors created significant liquidity shortfalls until the Federal Reserve initiated market intervention programs to stabilize the market. The following table sets forth the impact on the fair value of our investments as of ~~June 30, 2019~~March 31, 2020 from changes in interest rates based on the weighted average duration of the debt securities in our portfolio (in thousands):


~~Change in Interest Rates~~	Approximate Change in Fair Value of Investments Increase (Decrease)
~~2% Decrease~~	$	~~5,024~~
~~1% Decrease~~	$	~~2,556~~
~~1% Increase~~	$	~~(2,555~~	)
~~2% Increase~~	$	~~(5,109~~	)


Change in Interest Rates	Approximate Change in Fair Value of Investments Increase (Decrease)
2% Decrease	$	2,703
1% Decrease	$	1,469
1% Increase	$	(2,114	)
2% Increase	$	(4,228	)

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Due to the nature of our business and the manner in which we conduct our operations, we believe we do not face any material interest rate risk with respect to other assets and liabilities, equity price risk or other market risks. The functional currency of our Canadian operations is the Canadian dollar. We are exposed to foreign currency exchange rate risk for the settlement of transactions of the Canadian operations as well as unrealized translation adjustments. To date, realized foreign currency exchange rate gains and losses have not been material.

~~Table of Contents~~

~~Item 4.~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules

13a-15(f),

including maintenance of (i) records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, and (ii) policies and procedures that provide reasonable assurance that (a) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (b) our receipts and expenditures are being made only in accordance with authorizations of management and our board of directors and (c) we will prevent or timely detect unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.

~~As of June 30, 2019, our~~Our management, with the supervision and participation of our ~~Chief Executive Officer~~chief executive officer (“CEO”) and ~~Chief Financial Officer,~~chief financial officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules

~~13a-15(e)~~13a-

15(e) and

~~15d-15(e)~~15d-

15(e) under the Exchange ~~Act.~~Act, as of the end of the period covered by this Form

10-Q,

based on the criteria established under the Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 framework). Based ~~upon that~~on such evaluation, our ~~Chief Executive Officer and Chief Financial Officer~~management has concluded that as of ~~June 30, 2019,~~March 31, 2020, our disclosure controls and procedures ~~were~~are designed at a reasonable assurance level and are effective ~~in ensuring~~to provide reasonable assurance that ~~material~~ information we are required to ~~be disclosed by us~~disclose in ~~the~~ reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the ~~Securities and Exchange Commission’s~~ rules and forms ~~including ensuring~~of the SEC, and that such ~~material~~ information is accumulated by and communicated to our management, including our ~~Chief Executive Officer~~CEO and ~~Chief Financial Officer,~~CFO, as appropriate, to allow timely decisions regarding required disclosure.

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

There ~~were no~~have not been any changes in our internal control over financial reporting (as such term is defined in Rules

13a-15(f)

and

15d-15(f)

under the Exchange Act) during the quarter ended ~~June 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

~~Item 1.~~

Item 1. Legal Proceedings

We are involved in claims and legal actions arising in the ordinary course of our business, some of which involve claims for damages that are substantial in amount. Most of these litigation matters are covered by our insurance policies, which contain deductibles, exclusions, claim limits and aggregate policy limits. Such litigation and other proceedings may include, but are not limited to, actions relating to commercial relationships, standard brokerage disputes like the alleged failure to disclose physical or environmental defects or property expenses or contracts, the alleged inadequate disclosure of matters relating to the transaction like the relationships among the parties to the transaction, potential claims or losses pertaining to the asset, vicarious liability based upon conduct of individuals or entities outside of our control, general fraud claims, conflicts of interest claims, employment law claims, including claims challenging the classification of our sales professionals as independent contractors, claims alleging violations of state consumer fraud statutes and intellectual property. While the ultimate liability for these legal proceedings cannot be determined, we review the need for ~~our~~an accrual for loss contingencies quarterly and record an accrual for litigation related losses where the likelihood of loss is both probable and estimable. We do not believe, based on information currently available to us, that the final outcome of these proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

~~Item 1A.~~

Item 1A. Risk Factors

There have been no material changes from the risk factors described in our Annual Report on Form

10-K

for the year ended December 31, ~~2018.~~2019, other than the new risk factor below relating to the

COVID-19

pandemic.

The COVID-19 pandemic

has adversely affected and could continue to adversely affect

how we operate our business, and the duration and extent to which it will impact our future results of operations and overall financial performance is unknown.

The

COVID-19

pandemic is a prolonged widespread global health crisis that has adversely affected and could continue to adversely affect the broader economies, capital markets and overall demand for our services.

Government imposed restrictions, including the current state and local level

shelter-in-place

orders, that are implemented as a result of a pandemic can affect our clients or potential clients’ ability or willingness to purchase properties with limited or no ability to view properties; delay the closing of real estate sales and financing transactions; increase the borrowing cost and reduce the availability of debt financing; impact our ability to provide or deliver services to our clients or potential clients; and/or temporarily delay our expansion efforts. The current

COVID-19

pandemic, the reoccurrence of the

COVID-19

pandemic or a future pandemic, could materially affect our future sales, operating results and overall financial performance due to, among other factors:

~~Item 2.~~

Any impairment in value of our investments in marketable debt securities,

available-for-sale,

tangible or intangible assets, which could be recorded as a result of weaker economic conditions.

A potential negative impact on the health of our employees and investment sales and financing professionals, particularly if a significant number of them are impacted, could result in a deterioration in our ability to ensure business continuity during a disruption.

If significant portions of our workforce are unable to work effectively, including because of quarantines, facility closures, ineffective remote work arrangements or technology failures or limitations, our operations would be adversely impacted.

The long-term potential economic impact of a pandemic may be difficult to assess or predict. A pandemic, such as the current

COVID-19

pandemic, can result in significant long-term disruption of global financial markets, and a recession or long-term market correction could have a material direct impact on the flow of capital to the commercial real estate market and/or the willingness of investors to invest in or sell commercial real estate. This may adversely impact the demand for our services as well as the value of our common stock and our access to capital.

We did not incur significant disruptions during the three months ended March 31, 2020 from the

COVID-19

pandemic. To date, we have seen an increase in closing timelines, slowing of our real estate brokerage and financing transaction activity, and, in certain cases, restricted ability of borrowers to access the capital markets and other sources of financing. Further, the effect of the

COVID-19

restrictions on our operations, including an extended period of remote work arrangements and preventative and precautionary health measures mandated to us by federal, state and local governments will likely affect our ability to identify and close commercial real estate transactions. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

Please see “Management’s Discussion and Analysis of Financial Position and Results of Operations” for a more detailed discussions of the potential impact of the COVID-19 pandemic and associated economic disruptions.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

~~Item 3.~~

~~Defaults Upon Senior Securities~~

~~None.~~

~~Item 4.~~

~~Mine Safety Disclosures~~

~~Not Applicable.~~

~~Item 5.~~

~~Other Information~~

~~None.~~

Table of Contents

Item 3. Defaults Upon Senior Securities

~~Item 6.~~

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits


Exhibit No.		Description

	~~10.22~~10.1*	~~Amended and Restated Credit~~Consulting Services Agreement between the Company and ~~Wells Fargo Bank, National Association~~L5K Investments, Inc. dated ~~May 28, 2019 (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on June 3, 2019).~~January 1, 2020.

	31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1**	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Exchange Act and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	101.INS*	~~XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.~~

	101.SCH*101	The following financial statements from the Company’s Quarterly Report on Form ~~XBRL Taxonomy Extension Schema Document~~10-Q for the quarter ended March 31, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Net and Comprehensive Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

	101.CAL*104	Cover Page Interactive Data File (formatted as Inline XBRL ~~Taxonomy Calculation Linkbase Document~~

	101.DEF*	~~XBRL Taxonomy Extension Definition Document~~

	101.LAB*	~~XBRL Taxonomy Label Linkbase Document~~

	101.PRE*	~~XBRL Taxonomy Presentation Linkbase Document~~and contained in Exhibit 101)

*	Filed herewith.

**	Furnished, not filed.

4041

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: ~~August 9, 2019~~	May 11, 2020	By:	/s/ Martin E. Louie
			Martin E. Louie Chief Financial Officer (Principal Financial Officer)


	June 30, 2019 (Unaudited)			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	206,758		$	214,683
Commissions receivable		5,768			4,948
Prepaid expenses		9,593			7,904
Income tax receivable		4,762			—
Marketable securities, available-for-sale		118,909			137,436
Other assets, net		6,233			6,368

Total current assets		352,023			371,339
Prepaid rent		—			13,892
Property and equipment, net		20,854			19,550
Operating lease right-of-use assets, net		93,090			—
Marketable securities, available-for-sale		80,329			83,209
Assets held in rabbi trust		9,119			8,268
Deferred tax assets, net		18,525			22,959
Goodwill and other intangible assets, net		14,889			15,385
Other assets		50,845			31,778

Total assets	$	639,674		$	566,380
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other liabilities	$	11,115		$	11,035
Notes payable to former stockholders		6,564			1,087
Deferred compensation and commissions		31,638			47,910
Income tax payable		—			4,486
Operating lease liabilities		17,400			—
Accrued bonuses and other employee related expenses		14,050			28,338

Total current liabilities		80,767			92,856
Deferred compensation and commissions		38,964			49,887
Notes payable to former stockholders		—			6,564
Operating lease liabilities		67,429			—
Deferred rent and other liabilities		2,001			7,499

Total liabilities		189,161			156,806

Commitments and contingencies		—			—

Stockholders’ equity:
Preferred stock, $ 0.0001 par value:
Authorized shares – 25,000,000 ; issued and outstanding shares – none at June 30, 2019 and December 31, 2018, respectively		—			—
Common stock, $ 0.0001 par value:
Authorized shares – 150,000,000 ; issued and outstanding shares – 39,090,861 and 38,814,464 at June 30, 2019 and December 31, 2018, respectively		4			4
Additional paid-in capital		100,098			97,458
Stock notes receivable from employees		(4	)		(4	)
Retained earnings		348,258			311,341
Accumulated other comprehensive income		2,157			775

Total stockholders’ equity		450,513			409,574

Total liabilities and stockholders’ equity	$	639,674		$	566,380


	Three Months Ended June 30, 2019
		Preferred Stock			Common Stock					Additional Paid-In			Stock Notes Receivable From			Retained		Accumulated Other Comprehensive
		Shares	Amount		Shares			Amount		Capital			Employees			Earnings		Income		Total
Balance at March 31, 2019		—	$	—		39,042,434		$	4	$	97,587		$	(4	)	$	326,979	$	1,526	$	426,092
Net and comprehensive income		—		—		—			—		—			—			21,279		631		21,910
Stock-based award activity
Stock-based compensation		—		—		—			—		2,585			—			—		—		2,585
Shares issued pursuant to employee stock purchase plan		—		—		11,022			—		338			—			—		—		338
Issuance of common stock for vesting of restricted stock units		—		—		40,823			—		—			—			—		—		—
Issuance of common stock for unvested restricted stock awards		—		—		10,542			—		—			—			—		—		—
Shares withheld related to net share settlement of stock-based awards		—		—		(13,960	)		—		(412	)		—			—		—		(412	)

Balance as of June 30, 2019		—	$	—		39,090,861		$	4	$	100,098		$	(4	)	$	348,258	$	2,157	$	450,513


	Three Months Ended June 30, 2018
	Preferred Stock				Common Stock					Additional Paid-In			Stock Notes Receivable From			Retained		Accumulated Other Comprehensive
	Shares		Amount		Shares			Amount		Capital			Employees			Earnings		Income (Loss)			Total
Balance at March 31, 2018		—	$	—		38,578,834		$	4	$	90,840		$	(4	)	$	242,095	$	474		$	333,409
Net and comprehensive income		—		—		—			—		—			—			22,167		(130	)		22,037
Stock-based award activity
Stock-based compensation		—		—		—			—		3,159			—			—		—			3,159
Shares issued pursuant to employee stock purchase plan		—		—		13,028			—		356			—			—		—			356
Issuance of common stock for vesting of restricted stock units		—		—		21,810			—		—			—			—		—			—
Issuance of common stock for unvested restricted stock awards		—		—		12,852			—		—			—			—		—			—
Shares withheld related to net share settlement of stock-based awards		—		—		(4,812	)		—		(64	)		—			—		—			(64	)

Balance as of June 30, 2018		—	$	—		38,621,712		$	4	$	94,291		$	(4	)	$	264,262	$	344		$	358,897


	Six Months Ended June 30, 2019
	Preferred Stock				Common Stock					Additional Paid-In			Stock Notes Receivable From			Retained		Accumulated Other Comprehensive
	Shares		Amount		Shares			Amount		Capital			Employees			Earnings		Income		Total
Balance at December 31, 2018		—	$	—		38,814,464		$	4	$	97,458		$	(4	)	$	311,341	$	775	$	409,574
Net and comprehensive income		—		—		—			—		—			—			36,917		1,382		38,299
Stock-based award activity
Stock-based compensation		—		—		—			—		4,926			—			—		—		4,926
Shares issued pursuant to employee stock purchase plan		—		—		11,022			—		338			—			—		—		338
Issuance of common stock for vesting of restricted stock units		—		—		325,219			—		—			—			—		—		—
Issuance of common stock for unvested restricted stock awards		—		—		10,542			—		—			—			—		—		—
Shares withheld related to net share settlement of stock-based awards		—		—		(70,386	)		—		(2,624	)		—			—		—		(2,624	)

Balance as of June 30, 2019		—	$	—		39,090,861		$	4	$	100,098		$	(4	)	$	348,258	$	2,157	$	450,513


	Six Months Ended June 30, 2018
	Preferred Stock				Common Stock					Additional Paid-In			Stock Notes Receivable From			Retained		Accumulated Other Comprehensive
	Shares		Amount		Shares			Amount		Capital			Employees			Earnings		Income (Loss)			Total
Balance at December 31, 2017		—	$	—		38,374,011		$	4	$	89,877		$	(4	)	$	224,071	$	940		$	314,888
Cumulative effect of a change in accounting principle		—		—		—			—		—			—			13		(13	)		—

Balance at January 1, 2018, as adjusted		—		—		38,374,011			4		89,877			(4	)		224,084		927			314,888
Net and comprehensive income		—		—		—			—		—			—			40,178		(583	)		39,595
Stock-based award activity
Stock-based compensation		—		—		—			—		5,772			—			—		—			5,772
Shares issued pursuant to employee stock purchase plan		—		—		13,028			—		356			—			—		—			356
Issuance of common stock for vesting of restricted stock units		—		—		274,740			—		—			—			—		—			—
Issuance of common stock for unvested restricted stock awards		—		—		12,852			—		—			—			—		—			—
Shares withheld related to net share settlement of stock-based awards		—		—		(52,919	)		—		(1,714	)		—			—		—			(1,714	)

Balance as of June 30, 2018		—	$	—		38,621,712		$	4	$	94,291		$	(4	)	$	264,262	$	344		$	358,897


	June 30, 2019
Remainder of 2019	$	10,242
2020		20,469
2021		17,842
2022		13,820
2023		10,741
Thereafter		21,237

Total future minimum lease payments		94,351
Less imputed interest		(9,522	)

Present value of operating lease liabilities	$	84,829


	~~June 30, 2019~~
~~Weighted average remaining operating lease term~~		~~5.35 years~~
~~Weighted average discount rate~~		~~3.9~~	%


	December 31, 2018
2019	$	19,649
2020		19,287
2021		16,833
2022		12,368
2023		8,805
Thereafter		10,452

	$	87,394


	June 30, 2019					December 31, 2018
	Unrealized Loss			Fair Value		Unrealized Loss			Fair Value
Less than 12 months	$	(7	)	$	9,825	$	(576	)	$	127,326
12 months or longer	$	(26	)	$	4,045	$	(383	)	$	30,609


	Six Months Ended June 30,			Percentage of			Six Months Ended June 30,			Percentage of			Change
	2019			Revenue			2018			Revenue			Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	333,617			90.1	%	$	344,165			92.0	%	$	(10,548	)		(3.1	)%
Financing fees		31,474			8.5			25,287			6.8			6,187			24.5	%
Other revenues		5,209			1.4			4,491			1.2			718			16.0	%

Total revenues		370,300			100.0			373,943			100.0			(3,643	)		(1.0	)%

Operating expenses:
Cost of services		219,535			59.3			221,518			59.2			(1,983	)		(0.9	)%
Selling, general, and administrative expense		101,754			27.5			97,133			26.0			4,621			4.8	%
Depreciation and amortization expense		3,764			1.0			2,878			0.8			886			30.8	%

Total operating expenses		325,053			87.8			321,529			86.0			3,524			1.1	%

Operating income		45,247			12.2			52,414			14.0			(7,167	)		(13.7	)%
Other income (expense), net		6,494			1.8			2,933			0.8			3,561			121.4	%
Interest expense		(689	)		(0.2	)		(712	)		(0.2	)		23			(3.2	)%

Income before provision for income taxes		51,052			13.8			54,635			14.6			(3,583	)		(6.6	)%
Provision for income taxes		14,135			3.8			14,457			3.9			(322	)		(2.2	)%

Net income		36,917			10.0	%	$	40,178			10.7	%	$	(3,261	)		(8.1	)%

Adjusted EBITDA (1)	$	55,175			14.9	%	$	61,154			16.4	%	$	(5,979	)		(9.8	)%

Earnings per share:
Basic	$	0.94					$	1.03
Diluted	$	0.93					$	1.02
Weighted average common shares outstanding:
Basic		39,353						39,124
Diluted		39,524						39,298

Marcus
& Millichap, Inc
.

Date: ~~August 9, 2019~~

May 11, 2020

/s/ Hessam Nadji

Hessam Nadji
President and Chief Executive Officer
(Principal Executive Officer)