☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 35-2478370 | ||
(State or Other Jurisdiction | (I.R.S. Employer | ||
Incorporation or Organization) | Identification No.) | ||
23975 Park Sorrento, Suite 400 Calabasas, California | 91302 | ||
(Address of Principal Executive Offices) | (Zip Code) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.0001 per share | MMI | New York Stock Exchange |
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||
Emerging growth company | ☐ |
Page | |||||||
3 | |||||||
4 | |||||||
5 | |||||||
7 | |||||||
8 | |||||||
September 30, 2019 (Unaudited) | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 226,081 | $ | 214,683 | ||||
Commissions receivable | 6,316 | 4,948 | ||||||
Prepaid expenses | 9,330 | 7,904 | ||||||
Income tax receivable | 7,786 | — | ||||||
Marketable securities, available-for-sale | 124,475 | 137,436 | ||||||
Other assets, net | 12,352 | 6,368 | ||||||
Total current assets | 386,340 | 371,339 | ||||||
Prepaid rent | — | 13,892 | ||||||
Property and equipment, net | 21,609 | 19,550 | ||||||
Operating lease right-of-use assets, net | 90,165 | — | ||||||
Marketable securities, available-for-sale | 70,785 | 83,209 | ||||||
Assets held in rabbi trust | 9,102 | 8,268 | ||||||
Deferred tax assets, net | 18,513 | 22,959 | ||||||
Goodwill and other intangible assets, net | 14,647 | 15,385 | ||||||
Other assets | 53,432 | 31,778 | ||||||
Total assets | $ | 664,593 | $ | 566,380 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and other liabilities | $ | 11,003 | $ | 11,035 | ||||
Notes payable to former stockholders | 6,564 | 1,087 | ||||||
Deferred compensation and commissions | 32,450 | 47,910 | ||||||
Income tax payable | — | 4,486 | ||||||
Operating lease liabilities | 17,500 | — | ||||||
Accrued bonuses and other employee related expenses | 16,964 | 28,338 | ||||||
Total current liabilities | 84,481 | 92,856 | ||||||
Deferred compensation and commissions | 41,695 | 49,887 | ||||||
Notes payable to former stockholders | — | 6,564 | ||||||
Operating lease liabilities | 64,316 | — | ||||||
Deferred rent and other liabilities | 2,001 | 7,499 | ||||||
Total liabilities | 192,493 | 156,806 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value: | ||||||||
Authorized shares – 25,000,000; issued and outstanding shares – NaN at September 30, 2019 and December 31, 2018, respectively | — | — | ||||||
Common stock, $ 0.0001 par value: | ||||||||
Authorized shares – 150,000,000; issued and outstanding shares – 39,132,236 and38,814,464 at September 30, 2019 and December 31, 2018, respectively | 4 | 4 | ||||||
Additional paid-in capital | 102,142 | 97,458 | ||||||
Stock notes receivable from employees | (4 | ) | (4 | ) | ||||
Retained earnings | 367,550 | 311,341 | ||||||
Accumulated other comprehensive income | 2,408 | 775 | ||||||
Total stockholders’ equity | 472,100 | 409,574 | ||||||
Total liabilities and stockholders’ equity | $ | 664,593 | $ | 566,380 | ||||
September 30, (Unaudited) | December 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 173,112 | $ | 232,670 | ||||
Commissions receivable, net | 6,846 | 5,003 | ||||||
Prepaid expenses | 8,694 | 10,676 | ||||||
Income tax receivable | 10,023 | 4,999 | ||||||
Marketable debt securities, available-for-sale | 169,513 | 150,752 | ||||||
Advances and loans, net | 2,090 | 2,882 | ||||||
Other assets | 3,013 | 3,185 | ||||||
Total current assets | 373,291 | 410,167 | ||||||
Property and equipment, net | 23,371 | 22,643 | ||||||
Operating lease right-of-use | 82,202 | 90,535 | ||||||
Marketable debt securities, available-for-sale 2020 and December 31, 2019, respectively, and $0 allowance for credit losses) | 46,505 | 60,809 | ||||||
Assets held in rabbi trust | 9,467 | 9,452 | ||||||
Deferred tax assets, net | 15,839 | 22,122 | ||||||
Goodwill and other intangible assets, net | 36,883 | 22,312 | ||||||
Advances and loans, net | 104,248 | 66,647 | ||||||
Other assets | 4,319 | 4,347 | ||||||
Total assets | $ | 696,125 | $ | 709,034 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and other liabilities | $ | 10,601 | $ | 10,790 | ||||
Notes payable to former stockholders | 0 | 6,564 | ||||||
Deferred compensation and commissions | 37,244 | 44,301 | ||||||
Operating lease liabilities | 17,954 | 17,762 | ||||||
Accrued bonuses and other employee related expenses | 10,238 | 22,388 | ||||||
Total current liabilities | 76,037 | 101,805 | ||||||
Deferred compensation and commissions | 33,921 | 45,628 | ||||||
Operating lease liabilities | 57,002 | 63,155 | ||||||
Other liabilities | 8,131 | 3,539 | ||||||
Total liabilities | 175,091 | 214,127 | ||||||
Commitments and contingencies | 0 | 0 | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value: | ||||||||
Authorized shares – 25,000,000; issued and outstanding shares – NaN at September 30, 2020 and December 31, 2019, respectively | 0 | 0 | ||||||
Common stock, $0.0001 par value: | ||||||||
Authorized shares – 150,000,000; issued and outstanding shares – 39,376,477 and 39,153,195 at September 30, 2020 and December 31, 2019, respectively | 4 | 4 | ||||||
Additional paid-in capital | 110,625 | 104,658 | ||||||
Stock notes receivable from employees | 0 | (4 | ) | |||||
Retained earnings | 407,454 | 388,271 | ||||||
Accumulated other comprehensive income | 2,951 | 1,978 | ||||||
Total stockholders’ equity | 521,034 | 494,907 | ||||||
Total liabilities and stockholders’ equity | $ | 696,125 | $ | 709,034 | ||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Real estate brokerage commissions | $ | 180,198 | $ | 191,980 | $ | 513,815 | $ | 536,145 | ||||||||
Financing fees | 16,013 | 15,947 | 47,487 | 41,234 | ||||||||||||
Other revenues | 2,009 | 2,663 | 7,218 | 7,154 | ||||||||||||
Total revenues | 198,220 | 210,590 | 568,520 | 584,533 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of services | 124,147 | 132,896 | 343,682 | 354,414 | ||||||||||||
Selling, general and administrative expense | 48,091 | 48,659 | 149,845 | 145,792 | ||||||||||||
Depreciation and amortization expense | 1,910 | 1,651 | 5,674 | 4,529 | ||||||||||||
Total operating expenses | 174,148 | 183,206 | 499,201 | 504,735 | ||||||||||||
Operating income | 24,072 | 27,384 | 69,319 | 79,798 | ||||||||||||
Other income (expense), net | 2,573 | 2,127 | 9,067 | 5,060 | ||||||||||||
Interest expense | (329 | ) | (342 | ) | (1,018 | ) | (1,054 | ) | ||||||||
Income before provision for income taxes | 26,316 | 29,169 | 77,368 | 83,804 | ||||||||||||
Provision for income taxes | 7,024 | 8,315 | 21,159 | 22,772 | ||||||||||||
Net income | 19,292 | 20,854 | 56,209 | 61,032 | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||
Marketable securities, available-for-sale: | ||||||||||||||||
Change in unrealized gains (losses) | 160 | (115 | ) | 1,874 | (779 | ) | ||||||||||
Less: reclassification adjustment for net (gains) losses included in other income (expense), net | (23 | ) | — | (41 | ) | 8 | ||||||||||
Net change, net of tax of $ 46 , $(38), $617 and $(259) for the three and nine monthsended September 30, 2019 and 2018, respectively | 137 | (115 | ) | 1,833 | (771 | ) | ||||||||||
Foreign currency translation gain (loss), net of tax of $0 for each of the three and nine months ended September 30, 2019 and 2018 | 114 | (29 | ) | (200 | ) | 44 | ||||||||||
Total other comprehensive income (loss) | 251 | (144 | ) | 1,633 | (727 | ) | ||||||||||
Comprehensive income | $ | 19,543 | $ | 20,710 | $ | 57,842 | $ | 60,305 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.49 | $ | 0.53 | $ | 1.43 | $ | 1.56 | ||||||||
Diluted | $ | 0.49 | $ | 0.53 | $ | 1.42 | $ | 1.55 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 39,441 | 39,191 | 39,383 | 39,147 | ||||||||||||
Diluted | 39,550 | 39,484 | 39,527 | 39,359 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues: | ||||||||||||||||
Real estate brokerage commissions | $ | 140,844 | $ | 180,198 | $ | 416,044 | $ | 513,815 | ||||||||
Financing fees | 15,620 | 16,013 | 43,674 | 47,487 | ||||||||||||
Other revenues | 2,111 | 2,009 | 6,974 | 7,218 | ||||||||||||
Total revenues | 158,575 | 198,220 | 466,692 | 568,520 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of services | 99,707 | 124,147 | 287,207 | 343,682 | ||||||||||||
Selling, general and administrative | 49,722 | 48,091 | 148,101 | 149,845 | ||||||||||||
Depreciation and amortization | 2,606 | 1,910 | 7,822 | 5,674 | ||||||||||||
Total operating expenses | 152,035 | 174,148 | 443,130 | 499,201 | ||||||||||||
Operating income | 6,540 | 24,072 | 23,562 | 69,319 | ||||||||||||
Other income (expense), net | 1,615 | 2,573 | 4,224 | 9,067 | ||||||||||||
Interest expense | (199 | ) | (329 | ) | (695 | ) | (1,018 | ) | ||||||||
Income before provision for income taxes | 7,956 | 26,316 | 27,091 | 77,368 | ||||||||||||
Provision for income taxes | 1,916 | 7,024 | 7,875 | 21,159 | ||||||||||||
Net income | 6,040 | 19,292 | 19,216 | 56,209 | ||||||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Marketable debt securities, available-for-sale: | ||||||||||||||||
Change in net unrealized gains and losses | (30 | ) | 160 | 687 | 1,874 | |||||||||||
Less: reclassification adjustment for net losses (gains) included in other income (expense), net | 8 | (23 | ) | 32 | (41 | ) | ||||||||||
Net change, net of tax of $(7), $46, $246 and $617 for the three and nine months ended September 30, 2020 and 2019, respectively | (22 | ) | 137 | 719 | 1,833 | |||||||||||
Foreign currency translation (loss) gain, net of tax of $0 for each of the three and nine months ended September 30, 2020 and 2019 | (214 | ) | 114 | 254 | (200 | ) | ||||||||||
Total other comprehensive (loss) income | (236 | ) | 251 | 973 | 1,633 | |||||||||||
Comprehensive income | $ | 5,804 | $ | 19,543 | $ | 20,189 | $ | 57,842 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.15 | $ | 0.49 | $ | 0.49 | $ | 1.43 | ||||||||
Diluted | $ | 0.15 | $ | 0.49 | $ | 0.48 | $ | 1.42 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 39,681 | 39,441 | 39,617 | 39,383 | ||||||||||||
Diluted | 39,727 | 39,550 | 39,676 | 39,527 |
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||
Additional Paid-In | Stock Notes Receivable From | Retained | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | |||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Employees | Earnings | Income | Total | ||||||||||||||||||||||||||||
Balance at June 30, 2019 | — | $ | — | 39,090,861 | $ | 4 | $ | 100,098 | $ | (4 | ) | $ | $ | 2,157 | $ | |||||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 19,292 | 251 | 19,543 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,114 | — | — | — | 2,114 | |||||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 41,257 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | — | — | 2,264 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (2,146 | ) | — | (70 | ) | — | — | — | (70 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2019 | — | $ | — | 39,132,236 | $ | 4 | $ | 102,142 | $ | (4 | ) | $ | 367,550 | $ | 2,408 | $ | 472,100 |
Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-In Capital | Stock Notes Receivable From Employees | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | 0 | $ | 0 | 39,328,017 | $ | 4 | $ | 108,308 | $ | 0 | $ | 401,414 | $ | 3,187 | $ | 512,913 | ||||||||||||||||||||
Net and comprehensive income (loss) | — | 0 | — | 0 | 0 | 0 | 6,040 | (236 | ) | 5,804 | ||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | 0 | 0 | 0 | 0 | 2,383 | 0 | 0 | 0 | 2,383 | |||||||||||||||||||||||||||
Shares issued pursuant to employee purchase plan | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | 0 | 0 | 50,912 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | 0 | 0 | (2,452 | ) | 0 | (66 | ) | 0 | 0 | 0 | (66 | ) | ||||||||||||||||||||||||
Reduction of stock notes receivable from employees | — | 0 | — | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Balance as of September 30, 2020 | 0 | $ | 0 | 39,376,477 | $ | 4 | $ | 110,625 | $ | 0 | $ | 407,454 | $ | 2,951 | $ | 521,034 | ||||||||||||||||||||
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-In Capital | Stock Notes Receivable From Employees | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | 0 | $ | 0 | 39,090,861 | $ | 4 | $ | 100,098 | $ | (4 | ) | $ | 348,258 | $ | 2,157 | $ | 450,513 | |||||||||||||||||||
Net and comprehensive income | — | 0 | — | 0 | 0 | 0 | 19,292 | 251 | 19,543 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | 0 | 0 | 0 | 0 | 2,114 | 0 | 0 | 0 | 2,114 | |||||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | 0 | 0 | 41,257 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | 0 | 0 | 2,264 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | 0 | 0 | (2,146 | ) | 0 | (70 | ) | 0 | 0 | 0 | (70 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2019 | 0 | $ | 0 | 39,132,236 | $ | 4 | $ | 102,142 | $ | (4 | ) | $ | 367,550 | $ | 2,408 | $ | 472,100 | |||||||||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-In | Stock Notes Receivable From | Retain ed | Accumulated Other Comprehensive | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Employees | Earnings | Income (Loss) | Total | ||||||||||||||||||||||||||||
Balance at June 30, 2018 | — | $ | — | 38,621,712 | $ | 4 | $ | $ | (4 | ) | $ | $ | 344 | $ | ||||||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 20,854 | (144 | ) | 20,710 | ||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 3,147 | — | — | — | 3,147 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 31,235 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (1,587 | ) | — | (63 | ) | — | — | — | (63 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2018 | — | $ | — | 38,651,360 | $ | 4 | $ | 97,375 | $ | (4 | ) | $ | 285,116 | $ | 200 | $ | 382,691 | |||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||
Stock Notes | Accumulated | |||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-I n | Receivable From | Retained | Other Comprehensive | |||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Employees | Earnings | Income | Total | ||||||||||||||||||||||||||||
Balance at December 31, 2018 | — | $ | — | 38,814,464 | $ | 4 | $ | 97,458 | $ | (4 | ) | $ | $ | 775 | $ | |||||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 56,209 | 1,633 | 57,842 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 7,040 | — | — | — | 7,040 | |||||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | — | — | 11,022 | — | 338 | — | — | — | 338 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 366,476 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | — | — | 12,806 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (72,532 | ) | — | (2,694 | ) | — | — | — | (2,694 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2019 | — | $ | — | 39,132,236 | $ | 4 | $ | 102,142 | $ | (4 | ) | $ | 367,550 | $ | 2,408 | $ | 472,100 | |||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||||
Additional Paid-In | Stock Notes Receivable | Accumulated Other | ||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | From | Retained | 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 | — | — | — | — | — | — | 61,032 | (727 | ) | 60,305 | ||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 8,919 | — | — | — | 8,919 | |||||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | — | — | 13,028 | — | 356 | — | — | — | 356 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 305,975 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | — | — | 12,852 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (54,506 | ) | — | (1,777 | ) | — | — | — | (1,777 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2018 | — | $ | — | 38,651,360 | $ | 4 | $ | 97,375 | $ | (4 | ) | $ | 285,116 | $ | 200 | $ | 382,691 | |||||||||||||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-In Capital | Stock Notes Receivable From Employees | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | 0 | $ | 0 | 39,153,195 | $ | 4 | $ | 104,658 | $ | (4 | ) | $ | 388,271 | $ | 1,978 | $ | 494,907 | |||||||||||||||||||
Cumulative effect of a change in accounting principle, net of tax | 0 | 0 | 0 | 0 | 0 | 0 | (33 | ) | 0 | (33 | ) | |||||||||||||||||||||||||
Balance at January 1, 2020, as adjusted | 0 | 0 | 39,153,195 | 4 | 104,658 | (4 | ) | 388,238 | 1,978 | 494,874 | ||||||||||||||||||||||||||
Net and comprehensive income | — | 0 | — | 0 | 0 | 0 | 19,216 | 973 | 20,189 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | 0 | 0 | 0 | 0 | 7,551 | 0 | 0 | 0 | 7,551 | |||||||||||||||||||||||||||
Shares issued pursuant to employee purchase plan | 0 | 0 | 15,923 | 0 | 371 | 0 | 0 | 0 | 371 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | 0 | 0 | 248,391 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | 0 | 0 | 19,516 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | 0 | 0 | (60,548 | ) | 0 | (1,955 | ) | 0 | 0 | 0 | (1,955 | ) | ||||||||||||||||||||||||
Reduction of stock notes receivable from employees | — | 0 | — | 0 | 0 | 4 | 0 | 0 | 4 | |||||||||||||||||||||||||||
Balance as of September 30, 2020 | 0 | $ | 0 | 39,376,477 | $ | 4 | $ | 110,625 | $ | 0 | $ | 407,454 | $ | 2,951 | $ | 521,034 | ||||||||||||||||||||
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-In Capital | Stock Notes Receivable From Employees | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | 0 | $ | 0 | 38,814,464 | $ | 4 | $ | 97,458 | $ | (4 | ) | $ | 311,341 | $ | 775 | $ | 409,574 | |||||||||||||||||||
Net and comprehensive income | — | 0 | — | 0 | 0 | 0 | 56,209 | 1,633 | 57,842 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | 0 | 0 | 0 | 0 | 7,040 | 0 | 0 | 0 | 7,040 | |||||||||||||||||||||||||||
Shares issued pursuant to employee purchase plan | 0 | 0 | 11,022 | 0 | 338 | 0 | 0 | 0 | 338 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | 0 | 0 | 366,476 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | 0 | 0 | 12,806 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | 0 | 0 | (72,532 | ) | 0 | (2,694 | ) | 0 | 0 | 0 | (2,694 | ) | ||||||||||||||||||||||||
Balance as of September 30, 2019 | 0 | $ | 0 | 39,132,236 | $ | 4 | $ | 102,142 | $ | (4 | ) | $ | 367,550 | $ | 2,408 | $ | 472,100 | |||||||||||||||||||
Nine Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2020 | 2019 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 56,209 | $ | 61,032 | $ | 19,216 | $ | 56,209 | ||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||
Depreciation and amortization expense | 5,674 | 4,529 | ||||||||||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 7,822 | 5,674 | ||||||||||||||
Amortization of right-of-use assets | 15,433 | — | 16,883 | 15,433 | ||||||||||||
Provision of bad debt expense | 75 | 52 | ||||||||||||||
Credit loss expense | 55 | 75 | ||||||||||||||
Stock-based compensation | 7,040 | 8,919 | 7,551 | 7,040 | ||||||||||||
Deferred taxes, net | 3,829 | (735 | ) | 6,050 | 3,829 | |||||||||||
Net realized gains on marketable securities, available-for-sale | (70 | ) | (12 | ) | ||||||||||||
Unrealized foreign exchange loss | 276 | 0 | ||||||||||||||
Net realized gains on marketable debt securities, available-for-sale | (180 | ) | (70 | ) | ||||||||||||
Other non-cash items | 489 | (148 | ) | 930 | 489 | |||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Commissions receivable | (1,368 | ) | 4,183 | (1,928 | ) | (1,368 | ) | |||||||||
Prepaid expenses | (1,426 | ) | 3,145 | 1,988 | (1,426 | ) | ||||||||||
Prepaid rent | — | 875 | ||||||||||||||
Other assets, net | (31,302 | ) | (9,066 | ) | ||||||||||||
Advances and loans | (36,905 | ) | (20,379 | ) | ||||||||||||
Other assets | (1,087 | ) | (10,923 | ) | ||||||||||||
Accounts payable and other liabilities | 103 | (1,552 | ) | (1,373 | ) | 103 | ||||||||||
Income tax receivable/payable | (12,272 | ) | 7,271 | (5,024 | ) | (12,272 | ) | |||||||||
Accrued bonuses and other employee related expenses | (11,314 | ) | (558 | ) | (12,145 | ) | (11,314 | ) | ||||||||
Deferred compensation and commissions | (24,409 | ) | (23,739 | ) | (17,593 | ) | (24,409 | ) | ||||||||
Operating lease liabilities | (12,725 | ) | — | (13,504 | ) | (12,725 | ) | |||||||||
Deferred rent and other liabilities | (19 | ) | 817 | |||||||||||||
Other liabilities | 702 | (19 | ) | |||||||||||||
Net cash (used in) provided by operating activities | (6,053 | ) | 55,013 | |||||||||||||
Net cash used in operating activities | (28,266 | ) | (6,053 | ) | ||||||||||||
Cash flows from investing activities | ||||||||||||||||
Acquisition, net of cash received | — | (6,990 | ) | |||||||||||||
Purchases of marketable securities, available-for-sale | (115,744 | ) | (168,672 | ) | ||||||||||||
Proceeds from sales and maturities of marketable securities, available-for-sale | 143,638 | 88,027 | ||||||||||||||
Acquisition of businesses, net of cash received | (11,821 | ) | 0 | |||||||||||||
Purchases of marketable debt securities, available-for-sale | (179,221 | ) | (115,744 | ) | ||||||||||||
Proceeds from sales and maturities of marketable debt securities, available-for-sale | 175,226 | 143,638 | ||||||||||||||
Issuances of employee notes receivable | (200 | ) | (126 | ) | (243 | ) | (200 | ) | ||||||||
Payments received on employee notes receivable | 28 | 12 | 90 | 28 | ||||||||||||
Purchase of property and equipment | (6,643 | ) | (4,574 | ) | (5,412 | ) | (6,643 | ) | ||||||||
Net cash provided by (used in) investing activities | 21,079 | (92,323 | ) | |||||||||||||
Net cash (used in) provided by investing activities | (21,381 | ) | 21,079 | |||||||||||||
Cash flows from financing activities | ||||||||||||||||
Taxes paid related to net share settlement of stock-based awards | (2,694 | ) | (1,777 | ) | (1,955 | ) | (2,694 | ) | ||||||||
Proceeds from issuance of shares pursuant to employee stock purchase plan | 338 | 356 | 371 | 338 | ||||||||||||
Principal payments on notes payable to former stockholders | (1,087 | ) | (1,035 | ) | (6,564 | ) | (1,087 | ) | ||||||||
Principal payments on stock appreciation rights liability | (185 | ) | — | (1,251 | ) | (185 | ) | |||||||||
Principal payments on contingent consideration | (420 | ) | 0 | |||||||||||||
Net cash used in financing activities | (3,628 | ) | (2,456 | ) | (9,819 | ) | (3,628 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents | 11,398 | (39,766 | ) | |||||||||||||
Effect of currency exchange rate changes on cash and cash equivalents | (92 | ) | 0 | |||||||||||||
Net (decrease) increase in cash and cash equivalents | (59,558 | ) | 11,398 | |||||||||||||
Cash and cash equivalents at beginning of period | 214,683 | 220,786 | 232,670 | 214,683 | ||||||||||||
Cash and cash equivalents at end of period | $ | 226,081 | $ | 181,020 | $ | 173,112 | $ | 226,081 | ||||||||
Supplemental disclosures of cash flow information | ||||||||||||||||
Interest paid during the period | $ | 2,092 | $ | 2,180 | $ | 1,208 | $ | 2,092 | ||||||||
Income taxes paid, net | $ | 29,602 | $ | 16,237 | $ | 6,849 | $ | 29,602 | ||||||||
1. | Description of Business and Basis of Presentation |
2. |
Accounting Policies The complete list of the Company’s accounting policies is included in the Company’s Annual Report on Form 10-K filed on March Cash and Cash Equivalents The Company 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 paper for impairment in connection with investments in marketable debt securities, available-for-sale. 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. 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 investment sales and 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. 9 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 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. Investments in Marketable Debt Securities, Available-for-Sale The Company available-for-sale, 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, write-off of accrued interest receivable by the major security-type level at the time credit loss exists for the underlying security.Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, available-for-sale, non-current) and commissions available-for-sale To reduce its credit risk, the Company monitors the credit standing of the financial institutions 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 three and nine months ended September 30, 2020 and 2019, 10 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS During the three and nine months ended September 30, 2020, the Company’s Canadian operations represented less than 2% of total revenues. During the three and nine months ended September 30, 2019, During the three and nine months ended September 30, Recent Accounting Pronouncements Adopted In No. Financial Instruments - Credit Losses 2016-13”). The new standard requires the use of an expected-loss model for 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. Previously, U.S. GAAP prohibited reflecting any reversals of impairment charges. The Company adopted the new standard on January 1, 2020 using the modified-retrospective transition method for assets measured at amortized cost other than marketable debt securities,available-for-sale, 2016-13 did not have a material impact on the available-for-sale. available-for-sale, . In August 2018, the FASB issued ASU No. 2018-15, Internal-Use Software (Subtopic350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract2018-15”). ASU2018-15 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 obtaininternal-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 aninternal-use software project. The Company adopted the new standard effective January 1, Pending Adoption In No. step-up in tax basis for goodwill and interim recognition of 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 2020-04”). ASU2020-04 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. ASU2020-04 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 September 30, 2020, the Company has 0t drawn funds from the credit facility. The Company continues to evaluate the impact of this new standard and does not expect ASU2020-04 to have a material effect on its condensed consolidated financial statements.11 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Property and equipment, net consisted of the following (in thousands):
During the nine months ended September 30, wrote-off approximately As of September 30, 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 September 30, 2020, the Company considered the impact of COVID-19 pandemic and evaluated its property and equipment for potential indicators of impairment. The Company concluded that as of September 30, 2020, there was 0 indicators of impairment of its property and equipment.
The Company has operating leases for all of its facilities and autos. As of September 30, 2020 and December 31, 2019, operating lease $37.0 million and $20.6 million, respectively.right-of-use 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):
Maturities of lease liabilities by
12 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Supplemental cash flow information and noncash activity related to the operating leases consisted of the following (in thousands):
Other information related to the operating leases consisted of the following:
available-for-sale, o usands):
available-for-sale
14 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Gross realized gains and available-for-sale
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 September 30, 2020, the portfolio had an average credit rating of AA and weighted term to final maturity of 1.7 years, with 20 securities in the portfolio with an unrealized loss aggregating $97,000, or 1% of amortized cost, and a weighted average credit rating of AA-. As of September 30, Amortized cost and fair value of marketable debt securities, available-for-sale,
Actual maturities may differ from contractual maturities because certain
During the nine months ended September 30, 2020, the Company expanded its network of its real estate sales and financing professionals and provided further diversification to its real estate brokerage and financing ser v ices. 15 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company completed an acquisition of 2 businesses that were accounted for as business combinations and the results have been included in the condensed consolidated financial statements beginning on the acquisition dates. Aggregate terms of these acquisitions included: (i) cash paid at closing of approximately $11.8 million, net of cash received, (ii) the fair value of contingent consideration of $1.8 million with payments conditioned upon achieving certain financial metrics, and (iii) the fair value of deferred consideration of $3.9 million with the only remaining condition on such payments being the passage of time. Contingent consideration and deferred consideration are included in accounts payable and other liabilities and other liabilities captions in the condensed consolidated balance sheets. See Note 10 – “Fair Value Measurements” for additional information on contingent and deferred consideration. Based on preliminary purchase price allocations, $8.3 million was allocated to the fair values of intangible assets with the remainder of $9.2 million allocated to goodwill. The Company recorded acquisition related costs of $480,000 and $199,000 for the three months ended September 30, 2020 and 2019, respectively, and $1.5 million and $339,000 for the nine months ended September 30, 2020 and 2019, respectively. These amounts are included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income. The goodwill recorded as part of the acquisitions primarily arises from the acquired assembled workforce and brokerage and financing sales platforms. 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):
The changes in the carrying amount of goodwill consisted of the following (in thousands):
Estimated amortization expense for intangible assets by year for the next five years and thereafter consisted of the following (in thousands):
16 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company evaluates goodwill 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. The Company evaluates its intangible assets that have finite useful lives whenever an event or change in circumstances indicates that the carrying value of the asset may not be recoverable. As of September 30, 2020, the Company considered the impact of COVID-19 pandemic and evaluated its goodwill and intangible assets for impairment testing. The Company considered qualitative and quantitative factors, including the impact from theCOVID-19 induced economic slowdown and current projected recovery timeframes. The Company estimated the recoverability of the intangible assets by comparing the carrying amount of each asset to the future undiscounted cash flows that the Company expects the asset to generate. The sum of the undiscounted expected future cash flows was greater than the carrying amount of the intangible assets. The Company concluded that as of September 30, 2020, there was 0 impairment of its goodwill and intangible assets.
Advances and Loans, Net and Commissions Receivable, Net Allowance for credit losses for advances and loans and commissions receivable consisted of the following (in thousands):
Other Assets Other assets consisted of the following (in thousands):
17 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MSRs The net change in the carrying value of MSRs consisted of the following (in thousands):
The portfolio of loans serviced by the Company aggregated $1.7 billion and $1.6 billion as of September 30, In connection with MSR activities, the Company holds funds in escrow for the benefit of the lenders. These funds, which totaled Deferred Compensation and Commissions Deferred compensation and commissions consisted of the following (in thousands):
SARs Liability 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 Under the revised agreements, MMI is required to accrue interest on the outstanding balance beginning on January 1, 2014 at a rate based on the10-year treasury note, plus 2%. The rate resets annually. The rates at January 1, 2020 and 2019 were 3.920% and Estimated payouts within the next twelve months for participants that have separated from service have been classified as current. During the nine months ended September 30, 18 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Commissions Payable 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 tothe limits set forth in the Deferred Compensation Plan. Amounts are paid out generally when the participant is no longer a service provider; however, anin-service payout election is available to participants. Participants may elect to receive payouts as a lump sum or quarterly over a two to 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 nine months ended September 30, 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):
19 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
I 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
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 September 30, 2020 and 2019 of $10,000 and 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 September 30, Operating Lease with MMC 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. The related operating lease cost was $333,000 for each of the three months ended September 30, 2020 and 2019, and Accounts Payable and Other Liabilities with MMC As of September 30, Other The Company makes advances to non-executive employees fromtime-to-time. non-current) in the accompanying condensed consolidated balance sheets. See Note 7 – “Selected Balance Sheet Data” for additional information.As of September 30, 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 20 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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: Level 1: Level 2: Level 3: Recurring Fair Value Measurements The Company values its investments, including commercial paper and floating available-for-sale, available-for-sale Fair values for assets held in the rabbi trust and Contingent consideration in connection with acquisitions, is carried at fair value and determined on a contract-by-contract COVID-19 on the probability of achieving EBITDA and other performance targets, and current and future interest rates in its determination of fair value for the contingent consideration. The Company Deferred consideration in connection with acquisitions is carried at fair value 21 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):
There were 0 transfers in or out of Level As of September 30, 2020 and December 31, 2019, contingent and deferred consideration has a maximum undiscounted payment of $16.1 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 and deferred payments will be made over the next one to five-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):
22 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quantitative information about the valuation technique and significant unobservable inputs used in the valuation of the Company’s Level 3 financial liabilities measured at fair value on a recurring basis consisted of the following (dollars in thousands):
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 which are appropriate under the circumstances and utilize Level 2 and Level 3 measurements as required.MSRs are COVID-19 pandemic on default, severity, prepayment and discount 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 September 30, 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.23 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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):
Common Stock As of September 30, non-employee directors, respectively. See Note 14 – “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 September 30, Accumulated Other Comprehensive Income/Loss Amounts reclassified from accumulated other comprehensive income/loss include marketable debt securities, available for sale are included as a component of other income (expense), net or selling, general and administrative expense, as applicable, 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 0 earnings and profits to remit. As a result, deferred taxes were not provided related to the cumulative foreign currency translation adjustments.
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. 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 directorsreceive annual grants under a director compensation policy. As of September 30, 24 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Awards Granted and Settled Under the 2013 Plan, the Company has issued non-employee directors and restricted stock units (“RSUs”) to employees and independent contractors. RSAs vest in equal annual installments over aDuring the nine months ended September 30, Outstanding Awards Activity under the 2013 Plan consisted of the following (dollars in thousands, except weighted average per share data):
Employee Stock Purchase Plan In 2013, the Company adopted the 2013 Employee Stock Purchase Plan (“ESPP”). The ESPP 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 each6-month offering period.The ESPP initially had 366,667 shares of common stock reserved, 25 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SARs and 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
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):
The Company’s effective tax rate for the three and nine months ended September 30, for the three and nine months ended September 30, 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):
26 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basic and diluted earnings per share for the three and nine months ended September 30,
Credit Agreement On June 18, 2014, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (the “Bank”), 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 September 30, (b) the amendment of the Credit Agreement, 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 27 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 also non-financial covenants and has not experienced any limitation in its operations as a result of the covenants.Other In connection with certain agreements with
In October 2020, the Company acquired a commercial real estate capital markets advisory firm specializing in debt placement and 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 . 28 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 COVID-19 pandemic. The results of operations for the three and nine months ended September 30, 10-Q and in conjunction with our Annual Report on Form10-K for the year ended December 31, 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 September 30, 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 We divide commercial real estate into four major market segments, characterized by price: Properties priced less than $1 million; Private client market: Middle market: Larger transaction market: Our strength is in serving private clients in the $1-$10 million
29
Acquisitions We continue to increase our market presence In October 2020, the Company acquired a commercial real estate capital markets advisory firm specializing in debt placement and equity advisory services, commercial and residential loan sales and consultative/due diligence services across all property types in the United States. COVID-19 In March 2020, the World Health Organization characterized COVID-19 as a pandemic. Many states and cities, including where we conduct our business activities, reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, and restrictions on types of business that may continue to operate, which may limit the activity of our sales and financing professionals in engaging with our clients. We implemented measures such as increased sanitizing, physical distancing and remote work arrangements, with the goal of protecting our employees, sales and financing professionals and clients. We continue to follow the local guidelines in cities where our offices are located, and all of our offices havere-opened and are available to our employees and sales and financing professionals on an as needed basis.We are closely monitoring the impact of COVID-19 pandemic on all aspects of our business and in the regions we operate. Since the start of the pandemic, we have taken multiple measures to support our investment sales and financing professionals’ ability to generate and execute business remotely. Such measures include multiple technological solutions, intensified internal training and education, as well as a significant increase in client outreach and investor education webcasts. The pandemic has caused a major market disruption, and we have seen significant slowing of our real estate brokerage COVID-19, with the number of transactions and total revenues increasing 34.8% and 35.1%, respectively on a sequential basis compared to the second quarter. Given these circumstances, our financial results continue to bewell-below prior levels, the reversal of which remains a major priority for us. We are also COVID-19 restrictions, including the effects of preventative and precautionary health measures mandated to us by federal, state and local governments will likely continue to affect our ability to identify and close commercial 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 extent of the negative impact that the COVID-19 pandemic will continue to have on our financial condition, results of operations and cash flows due to numerous uncertainties and the fluidity of this situation. Although the negative impact to our business has moderated to some extent, we anticipate that total revenues will be negatively impacted for at least the fourth quarter of 2020 and until more stable business conditions begin to resume in 2021. These uncertainties include the scope, severity and duration of the pandemic, expectation gaps among buyers and sellers on pricing and property operation vulnerability to further economic weakness and/or slow recovery, a more difficult market environment for new sales and financing ramp-up time to reach production goals, the actions taken by state and local governments to contain the pandemic or mitigate its impact, the direct and indirect economic effects of the pandemic and containment measures and actions taken, and the impact of these and other factors on our employees, independent contractors and clients and potential clients.30 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 ongoing period of business disruption, we assessed our cost structure and instituted various expense reduction initiatives, including but not limited to, compensation reductions, reductions in events and travel, suspension of company matching contributions in our 401(k) plan and layoffs to preserve our balance sheet and financial position. These reductions were strategically decided upon to ensure proper allocation of capital and human resources to support our sales force’s ability to conduct business as well as develop strategic investments in tools, technology and infrastructure vital to our long-term competitiveness. We have reinstated some of our furloughs and compensation levels for certain employees; however, the compensation reductions of our senior executives remain in effect. We expect real estate sales and financing volumes to improve and eventually post solid growth after 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 are 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. Given our significant liquidity, we expect our company to be well positioned to benefit from and contribute to the real estate transaction recovery when it emerges, including making accretive and synergistic acquisitions, which will help expand service offerings and market coverage. 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 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 U.S. economy continues to grapple with the impact of emerge.COVID-19, and although we believe some progress has been made, the pace of employment growth lost momentum over the course of the third quarter. The CARES Act stimulus package delivered pre-pandemic levels. WithCOVID-19 infections once again rising in the U.S., we expect that economic growth in the 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. 31 The apartment and single-tenant property types, which are a significant part of our business, have performed relatively well as they have been more stable than the other property types. The hotel sector and parts of the retail sector continue to face headwinds, although we believe segments of each of the sectors appear to have built some momentum. While large destination tourist hotels and those catering to conferences continue to face the severe impact of the pandemic, it appears smaller drivable vacation hotels have partially recovered. In the retail sector, older enclosed shopping malls, experiential retail, gyms, movie theaters and sit-down dining restaurants have faced extensive difficulties while restaurants with drive-thru facilities, necessity and discount retailers as well as pharmacies have in many cases partially recovered. Suburban office and apartment properties have generally outperformed their urban counterparts as home offices and need for more space outweighed the many closed amenities offered in the urban core. Industrial property performance, meanwhile, has generally remained stable, bolstered by the rapid ascension of eCommerce as a primary consumption channel. Rent collections for apartment, office and industrial properties remain above 90 percent, but collections could face increased pressure if another round of stimulus and/or a health solution is not delivered soon. We believe risks to apartment collections could be mitigated by the renewal of federal unemployment benefits or the addition of a rent assistance program. That said, asset performance varies significantly by locality as cities across the country have faced wide-ranging economic and health-related fallout. Some cities have only experienced a marginal rise in unemployment while other have been impacted more severely.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. Following the second quarter uncertainty-driven financing slowdown, lenders have become more active. Led by local and regional banks, financing liquidity for most property types and locations is available at interest rates near all-time lows. Hotels and some retail centers, which are the property types grappling with the greatest levels of distress, still face limited access to debt capital. Other property types, particularly those that have maintained strong rent collections, have financing options. Speculative investment, including construction andvalue-add assets face closer lender scrutiny. The increased debt liquidity and particularly low interest rates have supported rising investor activity in the third quarter compared to the second quarter, but transaction activity remains well belowpre-crisis levels. The Federal Reserve’s commitment to 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. on-hand that could spur transaction activity once the uncertainties begin to 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 COVID-19 pandemic, which may impact, among other things, 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 COVID-19 pandemic due to uncertainties around substantially all aspects of the economy and may not continue to the same degree experienced in prior years.32 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 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 and finance, 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 period-to-period $1-$10 million period-to-period 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 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 33 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 Other Income (Expense), Net Other 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, 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 tax-exempt deferred compensation plan assets. Our provision for income taxes includes the windfall tax benefits and shortfall expense, 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. 34 Results of Operations Following is a discussion of our results of operations for the three and nine months ended September 30, period-to-period 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
35 Comparison of Three Months Ended September 30, Below are key operating results for the three months ended September 30,
Revenues Our total revenues were Real estate brokerage commissions. COVID-19 pandemic.Financing fees. re-financings due to lower interest rates offset by decreased financings for purchases resulting primarily from the economic uncertainty and other transactional impediments surrounding theCOVID-19 pandemic.Other revenues. Operating expenses Our total operating expenses were $152.0 million for the three months ended September 30, 2020 compared to $174.1 million for the same period in 2019, a decrease of $22.1 million, or 12.7%. The decrease was primarily due to 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, partially offset by increases in selling, general and administrative costs and depreciation and amortization expense, as described below. 36 Cost of services. 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. COVID-19 pandemic; (ii) prior year’s low accrual level for variable employee incentive compensation due to that period’s performance shortfall from plan; and (iii) business development, marketing and other support related to the long-term retention of our sales and financing professionals, as well as recent additions of experienced professionals. These increases were partially offset byCOVID-19 related (i) reductions in headcount, salaries and related benefits and (ii) decreases in sales events, travel and other related expenses.Depreciation and amortization expense. Other Income (Expense), Net Other income (expense), net decreased to $1.6 million for the three months ended September 30, 2020 from $2.6 million for the same period in 2019. The decrease was primarily driven by (i) a $1.6 million reduction in interest income on our investments in marketable debt securities, available-for-sale Interest Expense Interest Expense decreased to $0.2 million for the three months ended September 30, 2020 from $0.3 million for the same period in 2019. The decrease for the three months ended September 30, 2020 was primarily due to no interest expense related to notes payable to former stockholders, which was fully repaid during the second quarter of 2020, compared to the same period in 2019. Provision for Income Taxes The provision for income taxes was $1.9 million for the three months ended September 30, 2020 compared to $7.0 million in the same period in 2019, a decrease of $5.1 million, or 72.7%, primarily due to the significant decline in income before provision for income taxes and a partial reversal of a reserve of uncertain tax positions. The effective income tax rate for the three months ended September 30, 2020 was 24.1% compared to 26.7% for the same period in 2019. 37 Comparison of Nine Months Ended September 30, 2020 and 2019 Below are key operating results for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019 (dollars in thousands):
Revenues Our total revenues were $466.7 million for the nine months ended September 30, 2020 compared to $568.5 million for the same period in 2019, a decrease of $101.8 million, or 17.9%. Total revenues decreased primarily as a result of decreases in real estate brokerage commissions and Real estate brokerage commissions. COVID-19 pandemic. The average commission rates Financing fees. COVID-19 pandemic. Other revenues. Our total operating expenses were 38 Cost of services. Selling, general and administrative expense. COVID-19, and COVID-19. These decreases were partially offset by increases Depreciation and amortization expense. Other Income (Expense), Net Other income (expense), net available-for-sale Interest
Provision for income taxes The provision for income taxes was 39 Non-GAAP Financial MeasureIn this quarterly report on Form 10-Q, we include anon-GAAP financial measure, adjusted earnings before interest income/expense, taxes, depreciation and amortization, 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 (vi) non-cash 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 to be a useful tool to assist in evaluating performance, because Adjusted EBITDA eliminates items related to capital structure, taxes andnon-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):
Liquidity and Capital Resources Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, marketable debt securities, available-for-sale available-for-sale 40 Cash Flows Our total cash and cash equivalents balance
Operating Activities Cash flows used in operating activities were non-cash items and changes in operating assets and liabilities. The Investing Activities Cash flows Financing Activities Cash flows used in financing activities were 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 COVID-19” section above.Credit Agreement We have a Credit Agreement with Wells Fargo Bank, National Association for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries and matures on June 1, 2022 (the “Credit Agreement”). See Note 15 – “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements for additional information on the Credit Agreement. 41 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, Off Balance Sheet Arrangements We do not have any 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 business remain unknown at this time.COVID-19 pandemic. The economic impacts from inflation/deflation to our 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 10-K for the year ended December 31, Investments in Marketable Debt Securities, Available-for-Sale We available-for-sale, available-for-sale, 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 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 42 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. No. 2016-13, Financial Instruments - Credit Losses 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, available-for-sale 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
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. 43 Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures 13a-15(f), including maintenance of Our management, with the supervision and participation of our 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 Changes in Internal Control over Financial Reporting There 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended September 30, the COVID-19 pandemic. The design of our processes and controls allow for remote execution with accessibility to secure data. We are continually monitoring and assessingthe COVID-19 situation to minimize the impact, if any, on the design and operating effectiveness on our internal controls.44 PART II. OTHER INFORMATION 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 Item 1A. Risk Factors There have been no material changes from the risk factors described in our Annual Report on Form 10-K for 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 social distancing and other prevention measures, intended to slow the community spread of COVID-19 have, and will likely continue to 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. In addition, the currentCOVID-19 pandemic, the reoccurrence of theCOVID-19 pandemic or a future pandemic and the resumption of or any new state or localshelter-in-place Any impairment in value of our investments in marketable debt securities, available-for-sale, 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. 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 due to various risks and uncertainties. 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. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed. The long-term potential economic impact of a pandemic may be difficult to assess or predict. The COVID-19 pandemic has resulted in significant disruption of global financial markets, and on June 8, 2020, the National Bureau of Economic Research announced that the United States was in a recession. A long-term recession or long-term market correction could have a long-term 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.While we did not incur significant disruptions during the three months ended March 31, 2020 from the COVID-19 pandemic, our business was materially adversely impacted during the three months ended June 30, 2020. During the three months ended June 30, 2020, we saw a significant increase in closing timelines, a dramatic slowing of our real estate brokerage and financing transaction activity, difficulty in pricing assets and, in certain cases, restricted ability of borrowers to access the capital markets and other sources of financing. During the three months ended September 30, 2020, we have seen some improvement in transaction activity and availability of capital. However, the effect of the government imposed restrictions, including social distancing and other prevention measures related toCOVID-19 as mandated by federal, state and local governments, continues to restrict our operations and will likely continue to affect our ability to identify and close commercial real estate transactions.45 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. Item 6. Exhibits
46 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. Marcus & Millichap, Inc
|