☒ | 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 of Incorporation or Organization) | (I.R.S. Employer | ||
Incorporation or Organization) | Identification No.) | ||
23975 Park Sorrento, Suite 400 Calabasas, California | 91302 | ||
(Address of Principal Executive Offices) | (Zip Code) | ||
Title of each class | Trading | Name of each exchange | ||
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 | |||||||
March 31, 2020 (Unaudited) | December 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 189,760 | $ | 232,670 | ||||
Commissions receivable, net | 3,600 | 5,003 | ||||||
Prepaid expenses | 9,072 | 10,676 | ||||||
Income tax receivable | 929 | 4,999 | ||||||
Marketable debt securities, available-for-sale (includes amortized cost and an allowance for credit losses of $143,115 and $0, respectively, at March 31, 2020) | 143,864 | 150,752 | ||||||
Advances and loans, net | 1,969 | 2,882 | ||||||
Other assets | 2,871 | 3,185 | ||||||
Total current assets | 352,065 | 410,167 | ||||||
Property and equipment, net | 23,173 | 22,643 | ||||||
Operating lease right-of-use assets, net | 88,454 | 90,535 | ||||||
Marketable debt securities, available-for-sale (includes amortized cost and an allowance for credit losses of $44,954 and $0, respectively, at March 31, 2020) | 45,210 | 60,809 | ||||||
Assets held in rabbi trust | 7,992 | 9,452 | ||||||
Deferred tax assets, net | 20,959 | 22,122 | ||||||
Goodwill and other intangible assets, net | 31,254 | 22,312 | ||||||
Advances and loans, net | 96,857 | 66,647 | ||||||
Other assets | 4,365 | 4,347 | ||||||
Total assets | $ | 670,329 | $ | 709,034 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and other liabilities | $ | 10,642 | $ | 10,790 | ||||
Notes payable to former stockholders | 6,564 | 6,564 | ||||||
Deferred compensation and commissions | 25,253 | 44,301 | ||||||
Operating lease liabilities | 17,715 | 17,762 | ||||||
Accrued bonuses and other employee related expenses | 5,339 | 22,388 | ||||||
Total current liabilities | 65,513 | 101,805 | ||||||
Deferred compensation and commissions | 28,220 | 45,628 | ||||||
Operating lease liabilities | 61,677 | 63,155 | ||||||
Other liabilities | 5,627 | 3,539 | ||||||
Total liabilities | 161,037 | 214,127 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value: | ||||||||
Authorized shares – 25,000,000; issued and outstanding shares – NaN at March 31, 2020 and December 31, 2019, respectively | — | — | ||||||
Common stock, $0.0001 par value: | ||||||||
Authorized shares – 150,000,000; issued and outstanding shares – 39,272,429 and 39,153,195 at March 31, 2020 and December 31, 2019, respectively | 4 | 4 | ||||||
Additional paid-in capital | 105,601 | 104,658 | ||||||
Stock notes receivable from employees | (4 | ) | (4 | ) | ||||
Retained earnings | 401,308 | 388,271 | ||||||
Accumulated other comprehensive income | 2,383 | 1,978 | ||||||
Total stockholders’ equity | 509,292 | 494,907 | ||||||
Total liabilities and stockholders’ equity | $ | 670,329 | $ | 709,034 | ||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Revenues: | ||||||||
Real estate brokerage commissions | $ | 171,829 | $ | 144,937 | ||||
Financing fees | 15,351 | 13,732 | ||||||
Other revenues | 3,537 | 2,038 | ||||||
Total revenues | 190,717 | 160,707 | ||||||
Operating expenses: | ||||||||
Cost of services | 113,757 | 91,688 | ||||||
Selling, general and administrative expense | 54,860 | 48,918 | ||||||
Depreciation and amortization expense | 2,464 | 1,832 | ||||||
Total operating expenses | 171,081 | 142,438 | ||||||
Operating income | 19,636 | 18,269 | ||||||
Other (expense) income, net | (366 | ) | 3,375 | |||||
Interest expense | (283 | ) | (349 | ) | ||||
Income before provision for income taxes | 18,987 | 21,295 | ||||||
Provision for income taxes | 5,917 | 5,657 | ||||||
Net income | 13,070 | 15,638 | ||||||
Other comprehensive (loss) income: | ||||||||
Marketable debt securities, available-for-sale: | ||||||||
Change in unrealized (losses) gains | (497 | ) | 858 | |||||
Less: reclassification adjustment for net losses (gains) included in other (expense) income, net | 11 | (9 | ) | |||||
Net change, net of tax of $(168) and $288 for the three months ended March 31, 2020 and 2019, respectively | (486 | ) | 849 | |||||
Foreign currency translation gain (loss), net of tax of $0 for each of the three months ended March 31, 2020 and 2019 | 891 | (98 | ) | |||||
Total other comprehensive income | 405 | 751 | ||||||
Comprehensive income | $ | 13,475 | $ | 16,389 | ||||
Earnings per share: | ||||||||
Basic | $ | 0.33 | $ | 0.40 | ||||
Diluted | $ | 0.33 | $ | 0.40 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 39,541 | 39,311 | ||||||
Diluted | 39,646 | 39,515 | ||||||
| June 30, 2020 (Unaudited) | December 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 154,880 | $ | 232,670 | ||||
Commissions receivable, net | 4,956 | 5,003 | ||||||
Prepaid expenses | 8,391 | 10,676 | ||||||
Income tax receivable | 4,224 | 4,999 | ||||||
Marketable debt securities, available-for-sale at June 30, 2020 and December 31, 2019, respectively, and $0 | 169,768 | 150,752 | ||||||
Advances and loans, net | 1,830 | 2,882 | ||||||
Other assets | 3,619 | 3,185 | ||||||
Total current assets | 347,668 | 410,167 | ||||||
Property and equipment, net | 23,429 | 22,643 | ||||||
Operating lease right-of-use | 86,035 | 90,535 | ||||||
Marketable debt securities, available-for-sale at June 30, 2020 and December 31, 2019, respectively, and $0 | 42,781 | 60,809 | ||||||
Assets held in rabbi trust | 9,081 | 9,452 | ||||||
Deferred tax assets, net | 17,710 | 22,122 | ||||||
Goodwill and other intangible assets, net | 37,829 | 22,312 | ||||||
Advances and loans, net | 101,781 | 66,647 | ||||||
Other assets | 4,501 | 4,347 | ||||||
Total assets | $ | 670,815 | $ | 709,034 | ||||
Liabilities and stockholders’ equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and other liabilities | $ | 10,914 | $ | 10,790 | ||||
Notes payable to former stockholders | — | 6,564 | ||||||
Deferred compensation and commissions | 25,549 | 44,301 | ||||||
Operating lease liabilities | 17,880 | 17,762 | ||||||
Accrued bonuses and other employee related expenses | 4,211 | 22,388 | ||||||
Total current liabilities | 58,554 | 101,805 | ||||||
Deferred compensation and commissions | 31,388 | 45,628 | ||||||
Operating lease liabilities | 60,262 | 63,155 | ||||||
Other liabilities | 7,698 | 3,539 | ||||||
Total liabilities | 157,902 | 214,127 | ||||||
Commitments and contingencies | — | — | ||||||
Stockholders’ equity: | ||||||||
Preferred stock, $0.0001 par value: | ||||||||
Authorized shares – 25,000,000; issued and outstanding shares – 0ne at June 30, 2020 and December 31, 2019, respectively | — | — | ||||||
Common stock, $0.0001 par value: | ||||||||
Authorized shares – 150,000,000; issued and outstanding shares – 39,328,017 and 39,153,195 at June 30, 2020 and December 31, 2019, respectively | 4 | 4 | ||||||
Additional paid-in capital | 108,308 | 104,658 | ||||||
Stock notes receivable from employees | — | (4 | ) | |||||
Retained earnings | 401,414 | 388,271 | ||||||
Accumulated other comprehensive income | 3,187 | 1,978 | ||||||
Total stockholders’ equity | 512,913 | 494,907 | ||||||
Total liabilities and stockholders’ equity | $ | 670,815 | $ | 709,034 | ||||
Three Months Ended March 31, 2020 | ||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional Paid-In Capital | Stock Notes Receivable From Employees | Retained Earnings | Accumulated Other Comprehensive Income | Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | — | $ | — | 39,153,195 | $ | 4 | $ | 104,658 | $ | (4 | ) | $ | 388,271 | $ | 1,978 | $ | 494,907 | |||||||||||||||||||
Cumulative effect of a change in accounting principle, net of tax | — | — | — | — | — | — | (33 | ) | — | (33 | ) | |||||||||||||||||||||||||
Balance at January 1, 2020, as adjusted | — | — | 39,153,195 | 4 | 104,658 | (4 | ) | 388,238 | 1,978 | 494,874 | ||||||||||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 13,070 | 405 | 13,475 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,632 | — | — | — | 2,632 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 170,106 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (50,872 | ) | — | (1,689 | ) | — | — | — | (1,689 | ) | ||||||||||||||||||||||||
Balance as of March 31, 2020 | — | $ | — | 39,272,429 | $ | 4 | $ | 105,601 | $ | (4 | ) | $ | 401,308 | $ | 2,383 | $ | 509,292 | |||||||||||||||||||
Three Months Ended March 31, 20 19 | ||||||||||||||||||||||||||||||||||||
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 | — | $ | — | 38,814,464 | $ | 4 | $ | 97,458 | $ | (4 | ) | $ | 311,341 | $ | 775 | $ | 409,574 | |||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 15,638 | 751 | 16,389 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,341 | — | — | — | 2,341 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 284,396 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (56,426 | ) | — | (2,212 | ) | — | — | — | (2,212 | ) | ||||||||||||||||||||||||
Balance as of March 31, 2019 | — | $ | — | 39,042,434 | $ | 4 | $ | 97,587 | $ | (4 | ) | $ | 326,979 | $ | 1,526 | $ | 426,092 | |||||||||||||||||||
Three Months Ended March 31, | ||||||||
2020 | 2019 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 13,070 | $ | 15,638 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization expense | 2,464 | 1,832 | ||||||
Amortization of right-of-use assets | 5,500 | 5,081 | ||||||
Credit loss recovery | (120 | ) | (104 | ) | ||||
Stock-based compensation | 2,632 | 2,341 | ||||||
Deferred taxes, net | 1,345 | 2,243 | ||||||
Unrealized f oreign exchange lo ss | 1,024 | — | ||||||
Net realized (gains) losses on marketable debt securities, available-for-sale | (53 | ) | 12 | |||||
Other non-cash items | 485 | 28 | ||||||
Changes in operating assets and liabilities: | ||||||||
Commissions receivable | 1,350 | (1,171 | ) | |||||
Prepaid expenses | 1,576 | (929 | ) | |||||
Advances and loans | (29,441 | ) | (6,663 | ) | ||||
Other assets | (100 | ) | (2,149 | ) | ||||
Accounts payable and other liabilities | (923 | ) | 2,067 | |||||
Income tax receivable/payable | 4,070 | 3,117 | ||||||
Accrued bonuses and other employee related expenses | (17,035 | ) | (20,060 | ) | ||||
Deferred compensation and commissions | (33,898 | ) | (35,838 | ) | ||||
Operating lease liabilities | (4,477 | ) | (4,110 | ) | ||||
Other liabilities | (262 | ) | 67 | |||||
Net cash used in operating activities | (52,793 | ) | (38,598 | ) | ||||
Cash flows from investing activities | ||||||||
Acquisition, net of cash received | (6,000 | ) | — | |||||
Purchases of marketable debt securities, available-for-sale | (28,919 | ) | (30,117 | ) | ||||
Proceeds from sales and maturities of marketable debt securities, available-for-sale | 50,623 | 55,833 | ||||||
Issuances of employee notes receivable | (211 | ) | — | |||||
Payments received on employee notes receivable | 1 | 1 | ||||||
Purchase of property and equipment | (2,397 | ) | (1,644 | ) | ||||
Net cash provided by investing activities | 13,097 | 24,073 | ||||||
Cash flows from financing activities | ||||||||
Taxes paid related to net share settlement of stock-based awards | (1,689 | ) | (2,212 | ) | ||||
Principal payments on stock appreciation rights liability | (1,251 | ) | 186 | |||||
Net cash used in financing activities | (2,940 | ) | (2,026 | ) | ||||
Effect of currency exchange rate changes on cash and cash equivalents | (274 | ) | — | |||||
Net decrease in cash and cash equivalents | (42,910 | ) | (16,551 | ) | ||||
Cash and cash equivalents at beginning of period | 232,670 | 214,683 | ||||||
Cash and cash equivalents at end of period | $ | 189,760 | $ | 198,132 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest paid during the period | $ | 845 | $ | 1,751 | ||||
Income taxes paid, net | $ | 503 | $ | 296 | ||||
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenues: | ||||||||||||||||
Real estate brokerage commissions | $ | 103,371 | $ | 188,680 | $ | 275,200 | $ | 333,617 | ||||||||
Financing fees | 12,703 | 17,742 | 28,054 | 31,474 | ||||||||||||
Other revenues | 1,326 | 3,171 | 4,863 | 5,209 | ||||||||||||
Total revenues | 117,400 | 209,593 | 308,117 | 370,300 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of services | 73,743 | 127,847 | 187,500 | 219,535 | ||||||||||||
Selling, general and administrative | 43,519 | 52,836 | 98,379 | 101,754 | ||||||||||||
Depreciation and amortization | 2,752 | 1,932 | 5,216 | 3,764 | ||||||||||||
Total operating expenses | 120,014 | 182,615 | 291,095 | 325,053 | ||||||||||||
Operating (loss) income | (2,614 | ) | 26,978 | 17,022 | 45,247 | |||||||||||
Other income (expense), net | 2,975 | 3,119 | 2,609 | 6,494 | ||||||||||||
Interest expense | (213 | ) | (340 | ) | (496 | ) | (689 | ) | ||||||||
Income before provision for income taxes | 148 | 29,757 | 19,135 | 51,052 | ||||||||||||
Provision for income taxes | 42 | 8,478 | 5,959 | 14,135 | ||||||||||||
Net income | 106 | 21,279 | 13,176 | 36,917 | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||
Marketable debt securities, available-for-sale: | ||||||||||||||||
Change in unrealized gains | 1,214 | 856 | 717 | 1,714 | ||||||||||||
Less: reclassification adjustment for net losses (gains) included in other income (expense), net | 13 | (9 | ) | 24 | (18 | ) | ||||||||||
Net change, net of tax of $421, $283, $253 and $571 for the three and six months ended June 30, 2020 and 2019, respectively | 1,227 | 847 | 741 | 1,696 | ||||||||||||
Foreign currency translation (loss) gain, net of tax of $0 for each of the three and six months ended June 30, 2020 and 2019 | (423 | ) | (216 | ) | 468 | (314 | ) | |||||||||
Total other comprehensive income | 804 | 631 | 1,209 | 1,382 | ||||||||||||
Comprehensive income | $ | 910 | $ | 21,910 | $ | 14,385 | $ | 38,299 | ||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | — | $ | 0.54 | $ | 0.33 | $ | 0.94 | ||||||||
Diluted | $ | — | $ | 0.54 | $ | 0.33 | $ | 0.93 | ||||||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 39,629 | 39,395 | 39,585 | 39,353 | ||||||||||||
Diluted | 39,673 | 39,527 | 39,662 | 39,524 | ||||||||||||
| Three Months Ended June 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 March 31, 2020 | — | $ | — | 39,272,429 | $ | 4 | $ | 105,601 | $ | (4 | ) | $ | 401,308 | $ | 2,383 | $ | 509,292 | |||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 106 | 804 | 910 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,536 | — | — | — | 2,536 | |||||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | — | — | 15,923 | — | 371 | — | — | — | 371 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 27,373 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | — | — | 19,516 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (7,224 | ) | — | (200 | ) | — | — | — | (200 | ) | ||||||||||||||||||||||||
Reduction of stock notes receivable from employees | — | — | — | — | — | 4 | — | — | 4 | |||||||||||||||||||||||||||
Balance as of June 30, 2020 | — | $ | — | 39,328,017 | $ | 4 | $ | 108,308 | $ | — | $ | 401,414 | $ | 3,187 | $ | 512,913 | ||||||||||||||||||||
| Three Months Ended June 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 March 31, 2019 | — | $ | — | 39,042,434 | $ | 4 | $ | 97,587 | $ | (4 | ) | $ | 326,979 | $ | 1,526 | $ | 426,092 | |||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 21,279 | 631 | 21,910 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,585 | — | — | — | 2,585 | |||||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | — | — | 11,022 | — | 338 | — | — | — | 338 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 40,823 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | — | — | 10,542 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (13,960 | ) | — | (412 | ) | — | — | — | (412 | ) | ||||||||||||||||||||||||
Balance as of June 30, 2019 | — | $ | — | 39,090,861 | $ | 4 | $ | 100,098 | $ | (4 | ) | $ | 348,258 | $ | 2,157 | $ | 450,513 | |||||||||||||||||||
| Six Months Ended June 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 | — | $ | — | 39,153,195 | $ | 4 | $ | 104,658 | $ | (4 | ) | $ | 388,271 | $ | 1,978 | $ | 494,907 | |||||||||||||||||||
Cumulative effect of a change in accounting principle, net of tax | — | — | — | — | — | — | (33 | ) | — | (33 | ) | |||||||||||||||||||||||||
Balance at January 1, 2020, as adjusted | — | — | 39,153,195 | 4 | 104,658 | (4 | ) | 388,238 | 1,978 | 494,874 | ||||||||||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 13,176 | 1,209 | 14,385 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 5,168 | — | — | — | 5,168 | |||||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | — | — | 15,923 | — | 371 | — | — | — | 371 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 197,479 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | — | — | 19,516 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (58,096 | ) | — | (1,889 | ) | — | — | — | (1,889 | ) | ||||||||||||||||||||||||
Reduction of stock notes receivable from employees | — | — | — | — | — | 4 | — | — | 4 | |||||||||||||||||||||||||||
Balance as of June 30, 2020 | — | $ | — | 39,328,017 | $ | 4 | $ | 108,308 | $ | — | $ | 401,414 | $ | 3,187 | $ | 512,913 | ||||||||||||||||||||
| Six Months Ended June 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 | — | $ | — | 38,814,464 | $ | 4 | $ | 97,458 | $ | (4 | ) | $ | 311,341 | $ | 775 | $ | 409,574 | |||||||||||||||||||
Net and comprehensive income | — | — | — | — | — | — | 36,917 | 1,382 | 38,299 | |||||||||||||||||||||||||||
Stock-based award activity | ||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 4,926 | — | — | — | 4,926 | |||||||||||||||||||||||||||
Shares issued pursuant to employee stock purchase plan | — | — | 11,022 | — | 338 | — | — | — | 338 | |||||||||||||||||||||||||||
Issuance of common stock for vesting of restricted stock units | — | — | 325,219 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Issuance of common stock for unvested restricted stock awards | — | — | 10,542 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Shares withheld related to net share settlement of stock-based awards | — | — | (70,386 | ) | — | (2,624 | ) | — | — | — | (2,624 | ) | ||||||||||||||||||||||||
Balance as of June 30, 2019 | — | $ | — | 39,090,861 | $ | 4 | $ | 100,098 | $ | (4 | ) | $ | 348,258 | $ | 2,157 | $ | 450,513 | |||||||||||||||||||
| Six Months Ended June 30, | ||||||||
| 2020 | 2019 | |||||||
Cash flows from operating activities | ||||||||
Net income | $ | 13,176 | $ | 36,917 | ||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||
Depreciation and amortization | 5,216 | 3,764 | ||||||
Amortization of right-of-use | 11,151 | 10,242 | ||||||
Credit loss recovery | (78 | ) | (13 | ) | ||||
Stock-based compensation | 5,168 | 4,926 | ||||||
Deferred taxes, net | 4,172 | 3,863 | ||||||
Unrealized foreign exchange loss | 557 | — | ||||||
Net realized (gains) losses on marketable debt securities, available-for-sale | (117 | ) | (12 | ) | ||||
Other non-cash items | 567 | (228 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Commissions receivable | (5 | ) | (820 | ) | ||||
Prepaid expenses | 2,259 | (1,689 | ) | |||||
Advances and loans | (34,149 | ) | (17,614 | ) | ||||
Other assets | (1,059 | ) | (3,753 | ) | ||||
Accounts payable and other liabilities | (1,204 | ) | 14 | |||||
Income tax receivable/payable | 775 | (9,248 | ) | |||||
Accrued bonuses and other employee related expenses | (18,168 | ) | (14,228 | ) | ||||
Deferred compensation and commissions | (31,425 | ) | (28,291 | ) | ||||
Operating lease liabilities | (9,016 | ) | (8,169 | ) | ||||
Other liabilities | 331 | (24 | ) | |||||
Net cash used in operating activities | (51,849 | ) | (24,363 | ) | ||||
Cash flows from investing activities | ||||||||
Acquisition of businesses, net of cash received | (11,821 | ) | — | |||||
Purchases of marketable debt securities, available-for-sale | (95,266 | ) | (79,357 | ) | ||||
Proceeds from sales and maturities of marketable debt securities, available-for-sale | 95,028 | 103,108 | ||||||
Issuances of employee notes receivable | (211 | ) | — | |||||
Payments received on employee notes receivable | 1 | 1 | ||||||
Purchase of property and equipment | (4,190 | ) | (4,126 | ) | ||||
Net cash (used in) provided by investing activities | (16,459 | ) | 19,626 | |||||
Cash flows from financing activities | ||||||||
Taxes paid related to net share settlement of stock-based awards | (1,889 | ) | (2,624 | ) | ||||
Proceeds from issuance of shares pursuant to employee stock purchase plan | 371 | 338 | ||||||
Principal payments on notes payable to former stockholders | (6,563 | ) | (1,087 | ) | ||||
Principal payments on stock appreciation rights liability | (1,251 | ) | 185 | |||||
Net cash used in financing activities | (9,332 | ) | (3,188 | ) | ||||
Effect of currency exchange rate changes on cash and cash equivalents | (150 | ) | — | |||||
Net decrease in cash and cash equivalents | (77,790 | ) | (7,925 | ) | ||||
Cash and cash equivalents at beginning of period | 232,670 | 214,683 | ||||||
Cash and cash equivalents at end of period | $ | 154,880 | $ | 206,758 | ||||
Supplemental disclosures of cash flow information | ||||||||
Interest paid during the period | $ | 1,193 | $ | 1,967 | ||||
Income taxes paid, net | $ | 1,013 | $ | 19,520 | ||||
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 2, 2020 with the SEC. The following are updated, or new accounting policies related to the adoption of the credit losses standard.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 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 and reasonableInvestments in Marketable Debt Securities, Available-for-Sale The Company maintains a portfolio of investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt, asset-backed securities (“ABS”) and other. The Company considers its investments in marketable debt securities to be available-for-sale, 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.Determining whether a credit loss exists requires a high degree of judgment and the Company considers both qualitative and quantitative factors in making its determination. The Company evaluates its intent to sell, or whether the Company will more likely than not be required to sell, the security before recovery of its amortized cost basis. For all securities in an unrealized loss position, the Company evaluates, among other items, the extent and length of time the fair market value of a security is less than its amortized cost, time to maturity, duration, seniority, the financial condition of the issuer including credit ratings, any changes thereto and relative default rates, leverage ratios, availability of liquidity to make principle and interest payments, performance indicators of the underlying assets, analyst reports and recommendations and changes in base and market interest rates. If qualitative and quantitative analysis is sufficient to conclude that an impairment related to credit losses does not exist, the Company typically does not perform further quantitative analysis to estimate the present value of cash flows expected to be collected from the debt security. Estimates of expected future cash flows are the Company’s best estimate based on past events, current conditions and reasonable and supportable economic forecasts. Concentrations of Credit Risk Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, investments in marketable debt securities, available-for-sale, non-current) and commissions receivable, net. Cash and cash equivalents are placed with high-credit quality financial institutions and invested in high-credit quality money market funds and commercial paper. Concentrations of marketable debt securities,available-for-sale To reduce its credit risk, the Company monitors the credit standing of the financial institutions money market funds that represent amounts recorded as cash and cash equivalents. The Company historically has not experienced any significant losses related to cash and cash equivalents. The Company derives its revenues from a broad range of real estate investors, owners, and users in the United Statesand 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 six months ended 10 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS During the three and six months ended During the three and six months ended June 30, 2020 and 2019, 0 office represented 10% or more of total revenues. Recent Accounting Pronouncements Adopted In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments - CreditLosses 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, associated with 2016-13 did not have a material impact on the Company’s investment policy and impairment model for marketable debt securities,available-for-sale. available-for-sale, In August 2018, the FASB issued ASU No. 2018-15, Internal-Use Software(Subtopic 350-40 ) - Customer’sAccounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract 2018-15”). 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, 2020, using the prospective method. The adoption of ASU2018-15 did not have a material effect on the Company’s condensed consolidated financial statements.Pending Adoption In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes 2019-12”). ASU2019-12 is effective for reporting periods beginning after December 15, 2020 with early adoption permitted. For the Company, the new standard will be effective on January 1, 2021. ASU2019-12 simplifies the accounting for income taxes by eliminating certain exceptions including the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities related to outside basis differences. It also clarifies and simplifies other aspects of the accounting for income taxes such asstep-up in tax basis for goodwill and interim recognition of enactment of tax laws or rate changes. The Company is currently evaluating the impact of this new standard and does not expect ASU2019-12 to have a material effect on its condensed consolidated financial statements.In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting 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 2020-04 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 wrote-off approximately As of 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 0f COVID-19 pandemic indicators of impairment of its property and equipment.
The Company has operating leases for all of its facilities and autos. As of 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 year consisted of the following (in thousands):
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:
13 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amortized cost, allowance for credit losses, gross unrealized gains/losses in accumulated other comprehensive available-for-sale,
The Company’s investments in 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 AA+.As of Amortized cost and fair value of marketable debt securities, available-for-sale,
Actual maturities may differ from contractual maturities because certain issuers have the right to prepay certain obligations with or without prepayment penalties.
15 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The Company completed an acquisition of 2 businesses that were accounted for as s and the results s . Aggregate terms of these acquisitions included: (i) cash paid at closing , and the only remaining condition on such paymentsbeing 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 $446,000 and $94,000 for the three months ended June 30, 2020 and 2019, respectively, and $1.1 million and $140,000 for the six months ended June 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 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):
The Company evaluates goodwill and intangible assets for impairment annually in the fourth quarter. In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment 16 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS loss has occurred. As of COVID-19 pandemicassets for impairment testing. The Company considered qualitative factors, including the impact from the COVID-19 induced economic slowdown and current projected recovery timeframes and their impact on goodwill and intangible assets. The Company concluded that as of
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):
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 17 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 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 and was transferred to MMI through a capital distribution. The SARs liability will be settled with each participant in ten annual installments in January of each year upon retirement or termination from service, or in full upon consummation of a change in control of the Company. Under the revised agreements, MMI is required to accrue interest on the outstanding balance beginning on January 1, 2014 at a rate based on the 10-year treasury note, plus 2%. The rate resets annually. The rates at January 1, 2020 and 2019 were 3.920% and 4.684%, respectively. MMI recorded interest expense related to this liability of Estimated payouts within the next twelve months for participants that have separated from service have been classified as current. During the 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. 18 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Deferred Compensation Liability A select group of management is eligible to participate in the Marcus & Millichap Deferred Compensation Plan (the “Deferred Compensation Plan”). The Deferred Compensation Plan is a non-qualified deferred compensation plan that is intended to comply with Section 409A of the Internal Revenue Code and permits participants to defer compensation up to the limits set forth in the Deferred Compensation Plan. Amounts are paid out generally when the participant is no longer a service provider; however, anin-service payout election is available to participants. Participants may elect to receive payouts as a lump sum or quarterly over a two to fifteen-year period. The Company elected to fund the Deferred Compensation Plan through company owned variable life insurance policies. The Deferred Compensation Plan is managed by a third-party institutional fund manager, and the deferred compensation and investment earnings are held as a Company asset in a rabbi trust, which is recorded in assets held in rabbi trust in the accompanying condensed consolidated balance sheets. The assets in the trust are restricted unless the Company becomes insolvent, in which case the trust assets are subject to the claims of the Company’s creditors. The Company may also, in its sole and absolute discretion, elect to withdraw at any time a portion of the trust assets by an amount by which the fair market value of the trust assets exceeds 110% of the aggregate deferred compensation liability represented by the participants’ accounts. Estimated payouts within the next twelve months for participants that have separated from service or elected in service payout have been classified as current. During the 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):
Other Liabilities Other liabilities consisted of the following (in thousands):
In conjunction with the spin-off and IPO, notes payable to certain former stockholders of MMREIS were issued in settlement of restricted stock and SARs awards that were redeemed by MMREIS upon the termination of employment by the former stockholders (“the Notes”). Such Notes had been previously assumed by MMC and were transferred to the Company. The Notes 19 MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 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 Operating Lease with 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 $332,000 and $333,000 for the three months ended Accounts Payable and Other Liabilities with MMC As of 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 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 fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to provide and validate the values utilized. The degree of judgment used in measuring the fair value of financial instruments is generally inversely correlated with the level of observable valuation inputs. Financial instruments with quoted prices in active markets generally have more pricing observability and less judgment is used in measuring fair value. Financial instruments for which no quoted prices are available have less observability and are measured at fair value using valuation models or other pricing techniques that require more judgment. Assets recorded at fair value are measured and classified in accordance with a fair value hierarchy consisting of the three “levels” based on the observability of inputs available in the marketplace used to measure the fair values as discussed below:
20 MARCUS & MILLICHAP ,INC .NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Level 2: Level 3: Recurring Fair Value Measurements The Company values its investments , including commercial paper and floating net asset value money market funds recorded in cash and cash equivalents, investments in marketable debt securities,available-for-sale, available-for-sale Fair values for assets held in the rabbi trust and related deferred compensation liability were determined based on the cash surrender value of the company owned variable life insurance policies and underlying investments in the trust, and are Level 2 and Level 1 measurements, respectively. 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 is uncertain to the extent of the volatility in the unobservable inputs in the foreseeable future.Deferred consideration in connection with acquisitions is carried at fair value and calculated using a discounted cash flow estimate with the only remaining condition on such payments being the passage of time, and is a Level 2 measurement. 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 3 during the As of and deferred consideration has a maximum undiscounted payment of earn-out and deferred payments will be made over the next one to 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 at least MSRs are recorded at fair value upon acquisition of a servicing contract. The Company has elected the amortization method for the subsequent measurement of MSRs. MSRs are carried at the lower of amortized cost or fair value. MSRs are a Level 3 measurement. The Company’s MSRs do not trade in an active, open market with readily observable prices. The estimated fair value of the Company’s MSRs were developed using a discounted cash flow model that calculates the present value of estimated future net servicing income. The model considers contractual provisions and assumptions of market participants including specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. Management made revisions to the assumptions used in the determination of fair value for MSRs after considering the economic impact of the 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 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 (“RSAs”) issued to 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 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 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 directors receive annual grants under a director compensation policy. As of 24 MARCUS & MILLICHAP , INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Awards Granted and Settled Under the 2013 Plan, the Company has issued RSAs to non-employee directors and restricted stock units (“RSUs”) to employees and independent contractors. RSAs vest in equal annual installments over aDuring the 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, and 0.38years. MARCUS & MILLICHAP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SARs and DSUs Prior to the IPO, certain employees were granted SARs. As of March 31, 2013, the outstanding SARs were frozen at the liability amount, and will be paid out to each participant in installments upon retirement or departure under the terms of the revised SARs agreements. To replace beneficial ownership in the SARs, the difference between the book value liability and the fair value of the awards was granted to plan participants in the form of DSUs, which were fully vested upon receipt and will be settled in actual stock at a rate of 20% per year if the participant remains employed by the Company during that period (otherwise all unsettled shares of stock upon termination from service will be settled five years from the termination date, unless otherwise agreed to by the Company). In the event of death or termination of service after reaching the age of 67, 100% of the DSUs will be settled. As of
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 six months ended 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 six months ended June 30, 2020 and 2019, respectively consisted of the following (in thousands, except per share data):
Credit Agreement On June 18, 2014, the Company entered into a Credit Agreement with Wells Fargo Bank, National Association (the “Bank”), as amended and restated on May 28, 2019 and further , amended on November 27, 2019 (the “Credit Agreement”). The Credit Agreement provides for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of the Company’s domestic subsidiaries (the “Credit Facility”) and matures on June 1, 2022. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full.Borrowings under the Credit Agreement are available for general corporate purposes and working capital. The Credit Facility includes a $10.0 million sublimit for the issuance of standby letters of credit of which $533,000 was utilized at (b) 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 investment sales and financing professionals, the Company may agree to advance amounts to certain investment sales and financing professionals upon reaching certain time and performance goals. Such commitments as of COVID-19 The Company could experience other potential impacts as a result of the scope and duration of the COVID-19 COVID-19 on our operational and financial performance Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Unless the context requires otherwise, the words “Marcus & Millichap,” “we,” the “Company,” “us” and “our” refer to Marcus & Millichap, Inc., Marcus & Millichap Real Estate Investment Services, Inc. and its other consolidated subsidiaries. Forward-Looking Statements The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to the continuing impact of the COVID-19 pandemic. The results of operations for the three and six months ended 10-Q and in conjunction with our Annual Report on Form10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020, including the “Risk Factors” section and the consolidated financial statements and notes included therein.Overview We are a leading national brokerage firm specializing in commercial real estate investment sales, financing, research and advisory services. We have been the top commercial real estate investment broker in the United States based on the number of investment transactions over the last 10 years. As of 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 other real estate services. Real estate brokerage commissions are typically based upon the value of the property, and financing fees are typically based upon the size of the loan. During the three months ended We divide commercial real estate into four major market segments, characterized by price:
Our strength is in serving private clients in the $1-$10 million
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Acquisitions We continue to increase our market presence COVID-19 In COVID-19 as a pandemic. Many states and cities, including where we conduct our business activities, have reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, and restrictions on types of business that may continue to operate, re-opened and are We are closely monitoring the impact of COVID-19 pandemic on all aspects of our business and in the regions we operate. COVID-19 restrictions, includingThe 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 We continue to monitor the expected trends and related demand for our services and will continue to adjust our operations accordingly. In response to this period of business disruption, we have assessed our cost structure and instituted various 30 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. COVID-19 “sheltering-in-place” COVID-19 spread has forced most states to walk back their reopening plans. The retail sales sector remains fragile and at risk given the rise inCOVID-19 cases. Numerous retailsub-sectors such as gyms, entertainment venues and restaurants are still largely shut down, and we believe that any recovery will likely be health dependent. Earlier actions by both the Federal Reserve and Congress Commercial Real Estate Supply and Demand Our business is dependent on the willingness of investors to invest in or sell commercial real estate, which is affected by many factors beyond our control. These factors include the supply of commercial real estate coupled with user demand for these properties and the performance of real estate assets when compared with other investment alternatives, such as stocks and bonds. The impact of trajectories.COVID-19 on both the shelter-in-place mid-90 percent range since the onset of the pandemic. Apartment collections vary significantly by state, but have been in thelow-90 percent range on average since the onset of the pandemic, supported in part by the expanded Federal unemployment benefits. Health issues and public policy, including any forthcoming stimulus, 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. 31 Financial markets, 10-year treasury remained stable at very low levels through the second quarter of 2020, a number of real estate lenders increased their spreads, tightened underwriting and COVID-19 pandemic, we believe that capital flow may be improving and sufficient capital 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. The uncertainty surrounding the array of health, economic, policy and operational variables has adversely impacted investor activity. Questions about all facets of the real estate sector outlook, as well as continued logistics hurdles impacting appraisals, site visits and the closing process have adversely impacted transaction activity. COVID-19 pandemic has had on the U.S. economy, strong underwriting practices and sturdy investor balance sheets 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, COVID-19 pandemic due to uncertainties around all aspects of the economy and may not continue to the same degree experienced in prior years.Operating Segments We follow the guidance for segment reporting, which requires reporting information on operating segments in interim and annual financial statements. Substantially all of our operations involve the delivery of commercial real estate services to our customers including real estate investment sales, financing, consulting, advisory and other real estate related services. Management makes operating decisions, assesses performance and allocates resources based on an ongoing review of these integrated operations, which constitute only one operating segment for financial reporting purposes. 32 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 we would have received had the transaction closed. Real Estate Brokerage Commissions We earn real estate brokerage commissions by acting as a broker for commercial real estate owners seeking to sell or investors seeking to buy properties. Revenues from real estate brokerage commissions are typically recognized at the close of escrow. Financing Fees We earn financing fees by securing financing on purchase transactions or by securing refinancing of our clients’ existing mortgage debt. We recognize financing fee revenues at the time the loan closes, and we have no remaining significant obligations for performance in connection with the transaction. To a lesser extent, we also earn mortgage servicing revenue, mortgage servicing fees and ancillary fees associated with financing activities. We recognize mortgage servicing revenues upon the acquisition of a servicing obligation. We generate mortgage servicing fees through the provision of collection, remittance, recordkeeping, reporting and other related mortgage servicing functions, activities and services. Other Revenues Other revenues include fees generated from consulting, advisory and other real estate services performed by our investment sales professionals, as well as referral fees from other real estate brokers. Revenues from these services are recognized as they are performed and completed. 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. 33 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) Other income (expense) 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 the impact of permanent items, including principally compensation charges, qualified transportation fringe benefits, reversal of uncertain tax positions, meals and entertainment and tax-exempt deferred compensation plan assets. Our provision for income taxes includes the windfall tax benefits, net, from shares issued in connection with our 2013 Plan and ESPP.We record deferred taxes, net based on the tax rate expected to be in effect at the time those items are expected to be recognized for tax purposes. Results of Operations Following is a discussion of our results of operations for the three and six months ended 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 the three months ended
35 Comparison of Three Months Ended Below are key operating results for the three months ended
Revenues Our total revenues were Real estate brokerage commissions. shelter-in-place COVID-19 pandemic. Sales volume was primarily Financing fees. shelter-in-place COVID-19 pandemic.Other revenues. Total Our total operating expenses were 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. Depreciation and amortization expense. Other Income (Expense) Other income (expense) available-for-sale. Interest Expense There were no significant changes in interest expense for the three months ended Provision for Income Taxes The provision for income taxes was 37 Comparison of Six Months Ended June 30, 2020 and 2019 Below are key operating results for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 (dollars in thousands):
Revenues Our total revenues were $308.1 million for the six months ended June 30, 2020 compared to $370.3 million for the same period in 2019, a decrease of $62.2 million, or 16.8%. Total revenues decreased as a result of decreases in real estate brokerage commissions, financing fees and to a lesser extent, other revenues, as described below. Real estate brokerage commissions. Financing fees. Other revenues. Total operating expenses Our total operating expenses were $291.1 million for the six months ended June 30, 2020 compared to $325.1 million for the same period in 2019, a decrease of $34.0 million, or 10.4%. 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, and a decrease in selling, general and administrative costs, partially offset by an increase in depreciation and amortization expense, as described below. 38 Cost of services. Selling, general and administrative expense. Depreciation and amortization expense. Other Income (Expense), Net Other income (expense), net decreased to $2.6 million for the six months ended June 30, 2020 from $6.5 million for the same period in 2019. The decrease was primarily driven by (i) a $1.8 million reduction in interest income on our investments in marketable debt securities, available-for-sale Interest expense There were no significant changes in interest expense for the six months ended June 30, 2020 compared to the same period in 2019. Provision for income taxes The provision for income taxes was $6.0 million for the six months ended June 30, 2020 compared to $14.1 million in the same period in 2019, a decrease of $8.2 million, or 57.8%. The effective income tax rate for the six months ended June 30, 2020 was 31.1% compared to 27.7% for the same period in 2019. The effective income tax rate increased primarily due to the effect of permanent items driven by the decrease in 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, stock-based compensation and othernon-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 Cash Flows Our total cash and cash equivalents balance decreased by
Operating Activities Cash flows used in operating activities were non-cash items and changes in operating assets and liabilities. The Investing Activities Cash flows used in investing activities were $16.5 million for the six months ended June 30, 2020 compared to cash flows provided by investing activities 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 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, 2019 through the date the condensed consolidated financial statements were 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 uncertain or changing economic and market conditions, including inflation/deflation arising in connection with and in response to the COVID-19 pandemic. The economic impacts from inflation/deflation to our business remain unknown at this time.Critical Accounting Policies; Use of Estimates We prepare our financial statements in accordance with U.S. GAAP. In applying many of these accounting principles, we make assumptions, estimates and/or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our condensed consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates and/or judgments, however, are often subjective and our actual results may change based on changing circumstances or changes in our analyses. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. There were no significant changes in our critical accounting policies, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 except for the following:Investments in Marketable Debt Securities, Available-for-Sale We maintain a portfolio of investments in a variety of fixed and variable rate debt securities, including U.S. treasuries, U.S. government sponsored entities, corporate debt, asset-backed securities and other. We consider our investments in marketable debt securities to be available-for-sale, We review quarterly our investment portfolio of all securities in an unrealized loss position to determine if an impairment charge or credit reserve is required. We exclude accrued interest from both the fair value and the amortized cost basis of marketable debt securities, available-for-sale, 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 recommendations and changes in base and market interest rates. If qualitative and quantitative analysis is sufficient to conclude that an impairment related to credit losses does not exist, we typically do not perform further quantitative analysis to estimate the present value of cash flows expected to be collected from the debt security. Estimates of expected future cash flows are our best estimate based on past events, current conditions and reasonable and supportable economic forecasts. Recent Accounting Pronouncements For information regarding recent accounting pronouncements, see Note 2 – “Accounting Policies and Recent Accounting Pronouncements” of our Notes to Condensed Consolidated Financial Statements. Other than changing certain accounting processes and disclosures, the accounting pronouncement related to Accounting Standards Update 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, corporate debt, asset-backed securities and other. As of 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 risks. Changes in prevailing interest rates may adversely or positively impact their fair market value should interest rates generally rise or fall. Accordingly, we also may have interest rate risk with variable interest rate debt securities as the income produced may decrease if interest rates fall. Contraction in market liquidity may adversely affect the value of portions of our portfolio and affect our ability to sell securities in the time frames required and at acceptable prices. Uncertainty in future market conditions may raise market participant’s expectations of returns, thus impacting the value of securities in our portfolio as well. During the
43 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. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f), including maintenance of (i) records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets, and (ii) policies and procedures that provide reasonable assurance that (a) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, (b) our receipts and expenditures are being made only in accordance with authorizations of management and our board of directors and (c) we will prevent or timely detect unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.Our management, with the supervision and participation of our chief executive officer (“CEO”) and chief financial officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a- 15(e) and15d- 15(e) under the Exchange Act, as of the end of the period covered by this Form10-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 on such evaluation, our management has concluded that as of Changes in Internal Control over Financial Reporting There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended 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 an accrual for loss contingencies quarterly and record an accrual for litigation related losses where the likelihood of loss is both probable and estimable. We do not believe, based on information currently available to us, that the final outcome of these proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows. Item 1A. 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 pandemichas 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 COVID-19 have, and the possible resumption of any state shelter-in-place COVID-19 pandemic, the reoccurrence of theCOVID-19 pandemic or a future pandemic, could materially affect our future sales, operating results, liquidity and overall financial performance due to, among other factors: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. COVID-19 pandemic the COVID-19 pandemic, COVID-19 restrictions on our operations, including 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
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