10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM

10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

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

For the transition period from

Commission File Number:

001-36155

MARCUS & MILLICHAP, INC.

(Exact name of registrant as specified in its Charter)


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

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

(818)

212-2250

(Registrant’s telephone number, including area code)

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


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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

S-T

(§232.405 of this chapter) during the preceding 12 months (or for such shorter time period that the registrant was required to submit such files). Yes ☒ No ☐

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

non-accelerated

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

12b-2

of the Exchange Act.

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

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

12b-2

of the Exchange Act). Yes ☐ No ☒

Number of shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding as of August 4, 2020 was 39,328,017 shares.

Table of Contents

MARCUS & MILLICHAP, INC.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Page

Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2020 (Unaudited) and December 31, 2019		3
Condensed Consolidated Statements of Net and Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)		4
Condensed Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)		5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited)		7
Notes to Condensed Consolidated Financial Statements (Unaudited)		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		29
Item 3. Quantitative and Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		44

PART II. OTHER INFORMATION
Item 1. Legal Proceedings		45
Item 1A. Risk Factors		45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		46
Item 3. Defaults Upon Senior Securities		46
Item 4. Mine Safety Disclosures		46
Item 5. Other Information		46
Item 6. Exhibits		46

SIGNATURES

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Description of Business and Basis of Presentation

Description of Business

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

Reorganization and Initial Public Offering

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

spin-off

its majority owned subsidiary, Marcus & Millichap Real Estate Investment Services, Inc. (“MMREIS”). Prior to the initial public offering (“IPO”) of MMI, all of the preferred and common stockholders of MMREIS (including MMC and employees of MMREIS) contributed all of their outstanding shares to MMI, in exchange for new MMI common stock. As a result, MMREIS became a wholly-owned subsidiary of MMI. Thereafter, MMC distributed 80.0% of the shares of MMI common stock to MMC’s shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness of MMC. MMI completed its IPO in November 2013.

Basis of Presentation

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

10-Q

and

Article 10-01

Regulation S-X.

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

10-K

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

for

future years.

Considerations Related to the

COVID-19

Pandemic

The

COVID-19

pandemic and resultant shutdown of economic activity across much of the world has led to sharp increases in unemployment, dislocations in debt and equity markets and businesses instituting cost-cutting and capital-preservation measures. There has been a significant impact on commercial real estate markets in the United States and Canada that started at the end of first quarter 2020 and continued through the end of the second quarter of 2020, as many property owners and occupiers have put transactions on hold, driving significantly lower sales volumes. The Company expects the effects of the COVID-19 pandemic to continue to adversely impact its financial position, results of operations, and cash flows for the remainder of 2020.

See Note 3 – “Property and Equipment, Net”, Note 6 – “Acquisitions, Goodwill and Other Intangible Assets”, Note 10 – “Fair Value Measurements” and Note 15 – “Commitments and Contingencies”

for further discussion on

COVID-19.

Consolidation

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

Use of Estimates

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

COVID-19

may have on our business. Actual results could differ from those estimates.

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Segment Reporting

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

Reclassifications

Certain prior-period amounts in the condensed consolidated balance sheet and statement of cash flows, Note 7 – “Selected Balance Sheet Data” and Note 10 – “Fair Value Measurements” have been reclassified to conform to the current period presentation. These changes had no impact on the previously reported condensed consolidated results of operations.

2.	Accounting Policies and Recent Accounting Pronouncements

Accounting Policies

The complete list of the Company’s accounting policies is included in the Company’s Annual Report 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 paper for impairment in connection with investments in marketable debt securities,

available-for-sale.

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

Commissions Receivable, Net

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

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.

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company, from time to time, enters into various agreements with certain of its investment sales and financing professionals whereby these individuals receive loans. The notes receivable along with stated interest, are typically collected from future commissions or repaid based on the terms stipulated in the respective agreements that are generally between 1 and 7 years. The Company evaluates the need for an allowance for credit losses for the loans based on historical experience, current conditions

and

reasonable forecasts of future economic conditions. Estimated credit losses, net of any reversals, are charged to credit loss expense included in selling, general and administrative expense. Amounts are generally written off when amounts are determined to be no longer collectable.

Investments in Marketable Debt Securities,

Available-for-Sale

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

available-for-sale,

and accordingly are recorded at their fair values. The Company determines the appropriate classification of investments in marketable debt securities at the time of purchase. Interest along with amortization of purchase premiums and accretion of discounts from the purchase date through the estimated maturity date, including consideration of variable maturities and contractual call provisions, are included in other income (expense), net in the condensed consolidated statements of net and comprehensive income. The Company typically invests in highly-rated debt securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy requires substantially all investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities.

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

available-for-sale,

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

write-off

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

Determining whether a credit loss exists requires a high degree of judgment and the Company considers both qualitative and quantitative factors in making its determination. The Company evaluates its intent to sell, or whether the Company will more likely than not be required to sell, the security before recovery of its amortized cost basis. For all securities in an unrealized loss position, the Company evaluates, among other items, the extent and length of time the fair market value of a security is less than its amortized cost, time to maturity, duration, seniority, the financial condition of the issuer including credit ratings, any changes thereto and relative default rates, leverage ratios, availability of liquidity to make principle and interest payments, performance indicators of the underlying assets, analyst reports and 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,

security deposits (included under other assets,

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

are limited by the approved investment policy.

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

States

and

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

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

During the three and six months ended June 30, 2020 and 2019, no 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

Credit

Losses

(“ASU

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,

which was adopted using a prospective transition approach as required by the new standard. On the adoption date, the Company recorded a cumulative-effect adjustment related to an allowance for credit losses

associated with

commissions receivable and advances and loans, net of tax in the amount of $33,000 with the offset to retained earnings as of the beginning of the period presented after adoption. The adoption of ASU

2016-13

did not have a material impact on the Company’s investment policy and impairment model for marketable debt securities,

available-for-sale.

The Company elected the practical expedient to exclude accrued interest from both the fair value and the amortized cost basis of marketable debt securities,

available-for-sale,

for the purposes of identifying and measuring an impairment.

In August 2018, the FASB issued ASU

No. 2018-15,

Internal-Use

Software

(Subtopic 350-40

) -

Customer’s

Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract

(“ASU

2018-15”).

ASU

2018-15

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

internal-use

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

internal-use

software project. The Company adopted the new standard effective January 1, 2020

using the prospective method. The adoption of ASU

2018-15

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

Pending Adoption

In December 2019, the FASB issued ASU

No. 2019-12,

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

(“ASU

2019-12”).

ASU

2019-12

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

2019-12

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

step-up

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

2019-12

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

In March 2020, the FASB issued ASU

No. 2020-04,

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

(“ASU

2020-04”).

ASU

2020-04

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

2020-04

is effective for all entities upon issuance and may be applied prospectively to contract modifications through December 31, 2022. The guidance applies to the Company’s Credit Agreement (see Note 15 – “Commitments and Contingencies”), which references LIBOR, and will generally allow it to account for and present a modification as an event that does not require contract remeasurement at the modification date or reassessment of a previous accounting determination. As of June 30, 2020, the Company has not drawn funds from the credit facility. The Company continues to evaluate the impact of this new standard and does not expect ASU

2020-04

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

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MARCUS &

MILLICHAP

, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

3.	Property and Equipment, Net

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


	June 30, 2020			December 31, 2019
Computer software and hardware equipment	$	28,445		$	25,252
Furniture, fixtures, and equipment		23,114			23,468
Less: accumulated depreciation and amortization		(28,130	)		(26,077	)

	$	23,429		$	22,643

During the six months ended June 30, 2020 and 2019, the Company

wrote-off

approximately $966,000 and $3.1 million, respectively, of fully depreciated computer software and hardware equipment and furniture, fixtures and equipment.

As of June 30, 2020 and 2019, property and equipment additions incurred but not yet paid included in accounts payable and other liabilities were $197,000 and $466,000, respectively.

The Company evaluates its fixed assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of June 30, 2020, the Company considered the

impact o

COVID-19

pandemic and evaluated its property and equipment for potential indicators of impairment. The Company concluded that as of June 30, 2020, there was no indicators of impairment of its property and equipment.

4.	Operating Leases

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

right-of-use

(“ROU”) assets were $117.7 million and $111.1 million, respectively, and the related accumulated amortization was $31.7 million and $20.6 million, respectively.

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Operating lease cost:
Lease cost (1)	$	6,341		$	6,106		$	12,604		$	12,015
Variable lease cost (2)		1,215			1,284			2,611			2,490
Sublease income		(89	)		(43	)		(166	)		(131	)

	$	7,467		$	7,347		$	15,049		$	14,374

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

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

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


	June 30, 2020
Remainder of 2020	$	10,505
2021		20,891
2022		15,681
2023		12,286
2024		10,081
Thereafter		15,368

Total future minimum lease payments		84,812
Less imputed interest		(6,670	)

Present value of operating lease liabilities	$	78,142

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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):


	Six Months Ended June 30,
	2020		2019
Operating cash flow information:
Cash paid for amounts included in the measurement of operating lease liabilities	$	10,456	$	9,973
Noncash activity:
ROU assets obtained in exchange for operating lease liabilities	$	6,334	$	16,264
Tenant improvements owned by lessor related to ROU assets (1)	$	317	$	2,532

(1)	Reclassification from other assets current.

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


	June 30, 2020	December 31, 2019
Weighted average remaining operating lease term	4.87 years	5.04 years
Weighted average discount rate	3.3%	3.8%

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5.	Investments in Marketable Debt Securities

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

available-for-sale,

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


	June 30, 2020
	Amortized Cost		Allowance for Credit Losses		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Short-term investments:
U.S. treasuries	$	108,982	$	—	$	498	$	(1	)	$	109,479
U.S. government sponsored entities		37,699		—		14		—			37,713
Corporate debt		22,514		—		62		—			22,576

	$	169,195	$	—	$	574	$	(1	)	$	169,768

Long-term investments:
U.S. treasuries	$	3,892	$	—	$	319	$	—		$	4,211
U.S. government sponsored entities		1,218		—		36		—			1,254
Corporate debt		28,139		—		1,758		(181	)		29,716
ABS and other		7,559		—		128		(87	)		7,600

	$	40,808	$	—	$	2,241	$	(268	)	$	42,781


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

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

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

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

The Company’s investments in

available-for-sale

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


	June 30, 2020
	Less than 12 months					12 months or greater				Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
U.S. treasuries	$	16,889	$	(1	)	$	—	$	—	$	16,889	$	(1	)
Corporate debt		2,073		(181	)		—		—		2,073		(181	)
ABS and other		2,256		(87	)		—		—		2,256		(87	)

	$	21,218	$	(269	)	$	—	$	—	$	21,218	$	(269	)

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


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

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

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

available-for-sale

debt securities consisted of the following (in thousands):


	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Gross realized gains (1)	$	79		$	24	$	132		$	59

Gross realized losses (1)	$	(15	)	$	—	$	(15	)	$	(47	)

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

The Company invests its excess cash in a diversified portfolio of fixed and variable rate debt securities to meet current and future cash flow needs. All investments are made in accordance with the Company’s approved investment policy. As of June 30, 2020, the portfolio had an average credit rating of AA+ and weighted term to final maturity of 1.7 years, with 21 securities in the portfolio with an unrealized loss aggregating $269,000, or 0.1% of amortized cost, and a weighted average credit rating of AA+.

As of June 30, 2020, the Company performed an impairment analysis and determined an allowance for credit losses was not required. The Company determined that it did not have an intent to sell and it was not more likely than not that the Company would be required to sell any security based on its current liquidity position, or to maintain compliance with its investment policy, specifically as it relates to minimum credit ratings. The Company evaluated the securities with an unrealized loss considering severity of loss, credit ratings, specific credit events during the period since acquisition, overall likelihood of default, market sector, potential impact from the current economic situation and a review of an issuer’s and securities liquidity and financial strength, as needed. The Company concluded that it would receive all scheduled interest and principle payments. The Company, therefore, determined qualitatively that the unrealized loss was related to changes in interest rates and other market factors and therefore no allowance for credit losses was required.

Amortized cost and fair value of marketable debt securities,

available-for-sale,

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


	June 30, 2020				December 31, 2019
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	169,195	$	169,768	$	150,517	$	150,752
Due after one year through five years		25,166		26,426		41,123		41,794
Due after five years through ten years		10,709		11,395		12,813		13,467
Due after ten years		4,933		4,960		5,532		5,548

	$	210,003	$	212,549	$	209,985	$	211,561

Weighted average contractual maturity				1.7 years				1.7 years

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

6.	Acquisitions, Goodwill and Other Intangible Assets

During the six months ended June 30, 2020, the Company expanded its network of its real estate sales and financing professionals and provided further diversification to its real estate brokerage and financing services.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company completed an acquisition of two businesses that were accounted for as business combination

and the results have been included in the condensed consolidated financial statements beginning on the acquisition date

. Aggregate terms of these acquisitions included: (i) cash paid at closing of approximately $11.8 million, net of cash received, (ii) the fair value of contingent consideration of $1.8 million using a probability-weighted, discounted cash flow estimate on achieving certain financial metrics

and (iii) the fair value of deferred consideration of $3.9 million using a discounted cash flow estimate with

the

only remaining condition on such payments

being

the passage of time. Contingent consideration and deferred consideration are included in accounts payable and other liabilities and other liabilities captions in the condensed consolidated balance sheets. See Note 10 – “Fair Value Measurements” for additional information on contingent and deferred consideration.

Based on preliminary purchase price allocations, $8.3 million was allocated to the fair values of intangible assets with the remainder of $9.2 million allocated to goodwill. The Company recorded acquisition related costs of $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 platforms. The Company expects all of the goodwill to be tax deductible, with the

tax-deductible

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

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


	June 30, 2020							December 31, 2019
	Gross Carrying Amount		Accumulated Amortization			Net Book Value		Gross Carrying Amount		Accumulated Amortization			Net Book Value
Goodwill and intangible assets:
Goodwill	$	24,319	$	—		$	24,319	$	15,072	$	—		$	15,072
Intangible assets (1)		17,291		(3,781	)		13,510		9,050		(1,810	)		7,240

	$	41,610	$	(3,781	)	$	37,829	$	24,122	$	(1,810	)	$	22,312

(1)	Total weighted average amortization period was 5.08 years and 4.37 years as of June 30, 2020 and December 31, 2019, respectively.

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


	Six Months Ended June 30,
	2020		2019
Beginning balance	$	15,072	$	11,459
Additions from acquisitions		9,247		—
Impairment losses		—		—

Ending balance	$	24,319	$	11,459

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


	June 30, 2020
Remainder of 2020	$	1,924
2021		2,972
2022		2,585
2023		2,582
2024		2,013
Thereafter		1,434

	$	13,510

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

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

loss has occurred. As of June 30, 2020, the Company considered the impact of

COVID-19

pandemic and evaluated its goodwill and intangible assets for impairment testing. The Company considered qualitative 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 June 30, 2020, there was no impairment of its goodwill and intangible assets.

7.	Selected Balance Sheet Data

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):


	Advances and Loans			Commissions Receivable		Total
Beginning balance as of January 1, 2020	$	512		$	32	$	544
Credit loss (recovery) expense		(79	)		1		(78	)
Write-offs		(32	)		—		(32	)

Ending balance as of June 30, 2020	$	401		$	33	$	434


	Advances and Loans			Commissions Receivable		Total
Beginning balance as of January 1, 2019	$	514		$	—	$	514
Credit loss recovery		(13	)		—		(13	)
Write-offs		(103	)		—		(103	)

Ending balance as of June 30, 2019	$	398		$	—	$	398

Other Assets

Other assets consisted of the following (in thousands):


	Current				Non-Current
	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Mortgage servicing rights (“MSRs”), net of amortization	$	—	$	—	$	2,133	$	2,002
Security deposits		—		—		1,388		1,345
Employee notes receivable (1)		170		65		406		323
Customer trust accounts and other		3,449		3,120		574		677

	$	3,619	$	3,185	$	4,501	$	4,347

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

MSRs

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


	Six Months Ended June 30,
	2020			2019
Beginning balance	$	2,002		$	2,209
Additions		384			165
Amortization		(253	)		(275	)

Ending balance	$	2,133		$	2,099

The portfolio of loans serviced by the Company aggregated $1.7 billion and $1.6 billion as of June 30, 2020 and December 31, 2019, respectively. See Note 10 – “Fair Value Measurements” for additional information on MSRs.

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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 $2.7 million and $2.6 million as of June 30, 2020 and December 31, 2019, respectively, and the offsetting obligations are not presented in the Company’s condensed consolidated financial statements as they do not represent assets and liabilities of the Company.

Deferred Compensation and Commissions

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


	Current				Non-Current
	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Stock appreciation rights (“SARs”) liability (1)	$	2,162	$	2,080	$	16,316	$	18,122
Commissions payable to investment sales and financing professionals		21,693		40,235		8,641		20,818
Deferred compensation liability (1)		1,433		1,553		6,431		6,688
Other		261		433		—		—

	$	25,549	$	44,301	$	31,388	$	45,628

(1)

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

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 $177,000 and $226,000 for the three months ended June 30, 2020 and 2019, respectively, and $355,000 and $452,000 for the six months ended June 30, 2020 and 2019, respectively.

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

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.

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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, an

in-service

payout election is available to participants. Participants may elect to receive payouts as a lump sum or quarterly over a two to fifteen-year period. The Company elected to fund the Deferred Compensation Plan through company owned variable life insurance policies. The Deferred Compensation Plan is managed by a third-party institutional fund manager, and the deferred compensation and investment earnings are held as a Company asset in a rabbi trust, which is recorded in assets held in rabbi trust in the accompanying condensed consolidated balance sheets. The assets in the trust are restricted unless the Company becomes insolvent, in which case the trust assets are subject to the claims of the Company’s creditors. The Company may also, in its sole and absolute discretion, elect to withdraw at any time a portion of the trust assets by an amount by which the fair market value of the trust assets exceeds 110% of the aggregate deferred compensation liability represented by the participants’ accounts. Estimated payouts within the next twelve months for participants that have separated from service or elected in service payout have been classified as current. During the six months ended June 30, 2020 and 2019, the Company made total payments to participants of $821,000 and $786,000, respectively.

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
Increase (decrease) in the carrying value of the assets held in the rabbi trust (1)	$	1,124	$	225	$	(264	)	$	928

Increase (decrease) in the net carrying value of the deferred compensation obligation (2)	$	973	$	227	$	(300	)	$	912

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

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

Other Liabilities

Other liabilities consisted of the following (in thousands):


	Non-Current
	June 30, 2020		December 31, 2019
Deferred consideration (1) (2)	$	3,372	$	830
Contingent consideration (1) (2)		3,805		2,709
Other		521		—

	$	7,698	$	3,539

(1)

The current portions of deferred consideration in the amounts of $1,845 and $560 as of June 30, 2020 and December 31, 2019, respectively, are included in accounts payable and other liabilities in the condensed consolidated balance sheets. The current portions of contingent consideration in the amounts of $1,403 and $678 as of June 30, 2020 and December 31, 2019, respectively, are included in accounts payable and other liabilities in the condensed consolidated balance sheets.

(2)	Deferred consideration in the aggregate amount of $1,401 as of December 31, 2019 was reclassified from contingent consideration during the six months ended June 30, 2020 and of this amount, $560 and $841 pertained to the current and non-current portions, respectively.

8.	Notes Payable to Former Stockholders

In conjunction with the

spin-off

and IPO, notes payable to certain former stockholders of MMREIS were issued in settlement of restricted stock and SARs awards that were redeemed by MMREIS upon the termination of employment by the former stockholders (“the Notes”). Such Notes had been previously assumed by MMC and were transferred to the Company. The Notes were fully paid in April 2020 in the amount of $6.9 million ($6.6 million principal and $333,000 interest).

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

9.	Related-Party Transactions

Shared and Transition Services

Certain services are provided to the Company under a Transition Services Agreement (“TSA”) between MMC and the Company. The TSA is intended to provide certain services until the Company acquires the services separately. Under the TSA, the Company incurred net costs during the three months ended June 30, 2020 and 2019 of $16,000 and $32,000, respectively, and during the six months ended June 30, 2020 and 2019 of $42,000 and $75,000, respectively. These amounts are included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income.

Brokerage and Financing Services with the Subsidiaries of MMC

MMC has wholly or majority owned subsidiaries that buy and sell commercial real estate properties. The Company performs certain brokerage and financing services related to transactions of the subsidiaries of MMC. For the three months ended June 30, 2020 and 2019, the Company earned real estate brokerage commissions and financing fees of $880,000 and $1.9 million, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of $536,000 and $1.1 million, respectively, related to these revenues. For the six months ended June 30, 2020 and 2019, the Company earned real estate brokerage commissions and financing fees of $1.6 million and $2.8 million, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of $988,000 and $1.6 million, respectively, related to these revenues.

Operating Lease with MMC

The Company has an operating lease with MMC for a single-story office building located in Palo Alto, California, which expires on May 31, 2022. The related operating lease cost was $332,000 and $333,000 for the three months ended June 30, 2020 and 2019, respectively, and $665,000 and $666,000 for the six months ended June 30, 2020 and 2019, respectively. Operating lease cost is included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income. See Note 4 – “Operating Leases” for additional information.

Accounts Payable and Other Liabilities with MMC

As of June 30, 2020, and December 31, 2019, accounts payable and other liabilities with MMC totaling $94,000 and $88,000, respectively, remain unpaid and are included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets.

Other

The Company makes advances to

non-executive

employees from

time-to-time.

At June 30, 2020 and December 31, 2019, the aggregate principal amount for employee notes receivable was $576,000 and $388,000, respectively, which is included in other assets (current and

non-current)

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

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

Co-Chairman,

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

10.	Fair Value Measurements

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:

•

Level

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

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MARCUS &

MILLICHAP

INC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

•

Level

Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

•

Level

Unobservable inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model. Management estimates include certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

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,

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

available-for-sale

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

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

basis, calculated using a probability weighted discounted cash flow model based on the probability of achieving EBITDA and other performance and service requirements, and is a Level 3 measurement. During the six months ended June 30, 2020, the Company considered the economic impact of

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.

MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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


	June 30, 2020								December 31, 2019
	Fair Value		Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3
Assets:
Assets held in rabbi trust	$	9,081	$	—	$	9,081	$	—	$	9,452	$	—	$	9,452	$	—

Cash equivalents (1) :
Commercial paper and other	$	5,751	$	—	$	5,751	$	—	$	5,087	$	—	$	5,087	$	—
Money market funds		114,909		114,909		—		—		185,513		185,513		—		—

	$	120,660	$	114,909	$	5,751	$	—	$	190,600	$	185,513	$	5,087	$	—

Marketable debt securities, available-for-sale:
Short-term investments:
U.S. treasuries	$	109,479	$	109,479	$	—	$	—	$	124,580	$	124,580	$	—	$	—
U.S. government sponsored entities		37,713		—		37,713		—		—		—		—		—
Corporate debt		22,576		—		22,576		—		26,172		—		26,172		—

	$	169,768	$	109,479	$	60,289	$	—	$	150,752	$	124,580	$	26,172	$	—

Long-term investments:
U.S. treasuries	$	4,211	$	4,211	$	—	$	—	$	24,423	$	24,423	$	—	$	—
U.S. government sponsored entities		1,254		—		1,254		—		1,355		—		1,355		—
Corporate debt		29,716		—		29,716		—		26,471		—		26,471		—
ABS and other		7,600		—		7,600		—		8,560		—		8,560		—

	$	42,781	$	4,211	$	38,570	$	—	$	60,809	$	24,423	$	36,386	$	—

Liabilities:
Contingent consideration	$	5,208	$	—	$	—	$	5,208	$	3,387	$	—	$	—	$	3,387

Deferred consideration	$	5,217	$	—	$	5,217	$	—	$	1,390	$	—	$	1,390	$	—

Deferred compensation liability	$	7,864	$	7,864	$	—	$	—	$	8,241	$	8,241	$	—	$	—

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

There were no transfers in or out of Level 3 during the six months ended June 30, 2020 and 2019.

As of June 30, 2020 and December 31, 2019, contingent

and deferred

consideration has a maximum undiscounted payment of $17.3 million and $7.3 million, respectively. Assuming the achievement of the applicable performance criteria and/or service and time requirements, the Company anticipates these

earn-out

and deferred

payments will be made over the next one to seven-year period. Changes in fair value are included in selling, general and administrative expense in the condensed consolidated statements of net and comprehensive income.

A reconciliation of contingent consideration measured at fair value on a recurring basis consisted of the following (in thousands):


	Six Months Ended June 30,
	2020		2019
Beginning balance (1)	$	3,387	$	2,875
Contingent consideration in connection with acquisitions (2)		1,800		—
Change in fair value of contingent consideration		21		(16	)
Payments of contingent consideration		—		—

Ending balance	$	5,208	$	2,859

(1)	Beginning balance for 2020 reflects the reclassification of $1,401 from contingent consideration related to deferred consideration. See Note 7 – “Selected Balance Sheet Data – Other Liabilities” for additional information.

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

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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):

Fair Value at
June 30, 2020

Valuation Technique

Unobservable inputs

Range (Weighted Average)

(1)

Contingent consideration

5,208

Discounted cash flow

Expected life of cash flows

0.3-5.3 years

(2.1 years)

Discount rate

4.8%-5.0%

(4.9%)

Probability of achievement

0%-100.0%

(86.7%)

Fair Value at
December 31, 2019

Valuation Technique

Unobservable inputs

Range (Weighted Average)

(1)

Contingent consideration

3,387

Discounted cash flow

Expected life of cash flows

0.4-5.8 years

(2.4 years)

Discount rate

3.6%-4.9%

(4.1%)

Probability of achievement

33.0%-100.0%

(74.3%)

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

Nonrecurring Fair Value Measurements

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

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):

Fair Value at
June 30, 2020

Valuation Technique

Unobservable inputs

Range (Weighted

Average)

(1)

MSRs

2,316

Discounted cash flow

Constant prepayment rates

0.0%-20.0% (10.0%)

Constant default rate

0.4%-5.0%

(1.5%)

Loss severity

24.2%-50.0% (30.1%)

Discount rate

10.0%-10.0%

(10.0%)

Fair Value at
December 31, 2019

Valuation Technique

Unobservable inputs

Range (Weighted

Average)

(1)

MSRs

2,204

Discounted cash flow

Constant prepayment rates

0.0%-20.0% (10.0%)

Constant default rate

2.0%-2.0%

(2.0%)

Loss severity

40.0%-40.0% (40.0%)

Discount rate

9.5%-9.7%

(9.7%)

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

11.	Stockholders’ Equity

Common Stock

As of June 30, 2020 and December 31, 2019, there were 39,328,017 and 39,153,195 shares of common stock, $0.0001 par value, issued and outstanding, which include unvested restricted stock awards (“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 June 30, 2020 and December 31, 2019, there were no preferred shares issued or outstanding.

Accumulated Other Comprehensive Income/Loss

Amounts reclassified from accumulated other comprehensive income/loss include marketable debt securities, available for sale are included as a component of other income (expense), net or selling, general and administrative expense, as applicable, in the condensed consolidated statements of net and comprehensive income. The reclassifications were determined on a specific identification basis.

The Company has not provided for U.S. taxes on unremitted earnings of its foreign subsidiary as it is operating at a loss and has no earnings and profits to remit. As a result, deferred taxes were not provided related to the cumulative foreign currency translation adjustments.

12.	Stock-Based Compensation Plans

2013 Omnibus Equity Incentive Plan

The Company’s board of directors adopted the 2013 Omnibus Equity Incentive Plan (the “2013 Plan”), which became effective upon the Company’s IPO. In February 2017, the board of directors amended and restated the 2013 Plan, which was approved by the Company’s stockholders in May 2017. Grants are made from time to time by the compensation committee of the Company’s board of directors at its discretion

subject to certain restrictions as to the number and value of shares that may be granted to any individual. In addition,

non-employee

directors receive annual grants under a director compensation policy. As of June 30, 2020, there were 4,994,198 shares available for future grants under the 2013 Plan.

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 a

one-year

period from the date of grant. RSUs generally vest in equal annual installments over a five-year period from the date of grant or earlier as approved by the compensation committee of the Company’s board of directors. Any unvested awards are canceled upon termination as a service provider. As of June 30, 2020, there were no issued or outstanding options, SARs, performance units or performance share awards under the 2013 Plan.

During the six months ended June 30, 2020, 197,479 shares of RSUs vested and 58,096 shares of common stock were withheld to pay applicable required employee statutory withholding taxes based on the market value of the shares on the vesting date. The shares withheld for taxes were returned to the share reserve and are available for future issuance in accordance with provisions of the 2013 Plan. During the six months ended June 30, 2020, there were no deferred stock units (“DSUs”) that settled.

Outstanding Awards

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


	RSA Grants to Non-employee Directors			RSU Grants to Employees			RSU Grants to Independent Contractors			Total			Weighted- Average Grant Date Fair Value Per Share
Nonvested shares at December 31, 2019		17,480			525,115			257,480			800,075		$	33.91
Granted		19,516			282,104			32,462			334,082			34.25
Vested		(18,004	)		(158,007	)		(39,472	)		(215,483	)		32.48
Transferred		—			(19,059	)		19,059			—			33.37
Forfeited/canceled		—			(12,874	)		(1,575	)		(14,449	)		36.16

Nonvested shares at June 30, 2020		18,992			617,279			267,954			904,225		$	34.35

Unrecognized stock-based compensation expense as of June 30, 2020 (1)	$	386		$	19,687		$	7,778		$	27,851

Weighted average remaining vesting period (years) as of June 30, 2020		0.84			3.92			3.20			3.68

(1)	The total unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 3.68 years.

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 each

6-month

offering period.

The ESPP initially had 366,667 shares of common stock reserved, and 188,550 shares of common stock remain available for issuance as of June 30, 2020. The ESPP provides for annual increases in the number of shares available for issuance under the ESPP, equal to the least of (i) 366,667 shares, (ii) 1% of the outstanding shares on such date, or (iii) an amount determined by the compensation committee of the board of directors. Pursuant to the provisions of the ESPP, the board of directors has determined to not provide for any annual increases to date. At June 30, 2020, total unrecognized compensation cost related to the ESPP was $92,000 and is expected to be recognized over a weighted average period of

0.38

years.

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 June 30, 2020, the remaining future share settlements of fully vested DSUs by year consisted of the following:


	June 30, 2020
2021		60,373
2022		281,193

		341,566

Summary of Stock-Based Compensation

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


	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
ESPP	$	36	$	38	$	83	$	68
RSAs – non-employee directors		213		154		373		324
RSUs – employees		1,514		1,622		3,170		2,967
RSUs – independent contractors		773		771		1,542		1,567

	$	2,536	$	2,585	$	5,168	$	4,926

13.	Income Taxes

The Company’s effective tax rate for the three and six months ended June 30, 2020 was 28.4% and 31.1%, respectively, compared to 28.5% and 27.7% for the three and six months ended June 30, 2019, respectively. The Company provides for the effects of income taxes in interim financial statements based on the Company’s estimate of its annual effective tax rate for the full year, which is based on forecasted income by jurisdiction where the Company operates, adjusted for the tax effects of items that relate discretely to the period, if any.

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


	Three Months Ended June 30,											Six Months Ended June 30,
	2020						2019					2020					2019
	Amount			Rate			Amount		Rate			Amount		Rate			Amount			Rate
Income tax expense at the federal statutory rate	$	31			21.0	%	$	6,249		21.0	%	$	4,018		21.0	%	$	10,721			21.0	%
State income tax expense, net of federal benefit		(69	)		(46.8	)%		1,346		4.5	%		950		5.0	%		2,240			4.4	%
Shortfall (windfall) tax benefits, net related to stock-based compensation		90			61.2	%		11		—			73		0.4	%		(254	)		(0.5	)%
Change in valuation allowance		96			65.4	%		200		0.7	%		460		2.4	%		466			0.9	%
Permanent and other items (1)		(106	)		(72.4	)%		672		2.3	%		458		2.3	%		962			1.9	%

	$	42			28.4	%	$	8,478		28.5	%	$	5,959		31.1	%	$	14,135			27.7	%

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

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MARCUS & MILLICHAP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

14.	Earnings per Share

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Numerator (Basic and Diluted):
Net income	$	106		$	21,279		$	13,176		$	36,917

Denominator:
Basic
Weighted average common shares issued and outstanding		39,306			39,073			39,261			39,035
Deduct: Unvested RSAs (1)		(19	)		(20	)		(18	)		(24	)
Add: Fully vested DSUs (2)		342			342			342			342

Weighted Average Common Shares Outstanding		39,629			39,395			39,585			39,353

Basic earnings per common share	$	—		$	0.54		$	0.33		$	0.94

Diluted
Weighted Average Common Shares Outstanding from above		39,629			39,395			39,585			39,353
Add: Dilutive effect of RSUs, RSAs & ESPP		44			132			77			171

Weighted Average Common Shares Outstanding		39,673			39,527			39,662			39,524

Diluted earnings per common share	$	—		$	0.54		$	0.33		$	0.93

Antidilutive shares excluded from diluted earnings per common share (3)		738			272			636			260

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

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

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

15.	Commitments and Contingencies

Credit Agreement

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 June 30, 2020. Borrowings under the Credit Facility will bear interest, at the Company’s option, at either (i) a fluctuating rate per annum 2.00% below the Base Rate (defined as the highest of (a) the Bank’s prime rate,

(b) one-month

LIBOR plus 1.50%, and (c) the federal funds rate plus 1.50%), or (ii) at a fixed rate per annum determined by Bank to be 0.875% above LIBOR. In connection with the amendment of the Credit Agreement, the Company paid bank fees and other expenses, which are being amortized over the remaining term of the Credit Agreement. The Company pays a commitment fee of up to 0.1% per annum, payable quarterly, based on the amount of unutilized commitments under the Credit Facility. The amortization and commitment fee is included in interest expense in the accompanying condensed consolidated statements of net and comprehensive income and was $21,000 and $26,000 during the three months ended June 30, 2020 and 2019, respectively, and $43,000 and $52,000 during the six months ended June 30, 2020 and 2019, respectively. As of June 30, 2020, there were no amounts outstanding under the Credit Agreement.

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 limits investments in foreign entities and certain other loans. The Credit Facility is secured by substantially all assets of the Company, including pledges of 100% of the stock or other equity interest of each subsidiary except for the capital stock of a controlled foreign corporation (as defined in the Internal Revenue Code), in which case no such pledge is required. As of June 30, 2020, the Company was in compliance with all financial and

non-financial

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

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 June 30, 2020 aggregated $15.6 million.

COVID-19

The Company could experience other potential impacts as a result of the

COVID-19

pandemic. Actual results may differ from the Company’s current estimates as there is considerable uncertainty around the scope and duration of the

COVID-19

pandemic, and, as a result, the extent of the impact of

COVID-19

on our operational and financial performance is uncertain and cannot be predicted.

Table of Contents

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

10-Q

and in conjunction with our Annual Report on Form

10-K

for the year ended December 31, 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 June 30, 2020, we had 2,048 investment sales and financing professionals that are primarily exclusive independent contractors operating in 82 offices, who provide real estate brokerage and financing services to sellers and buyers of commercial real estate. We also offer market research, consulting and advisory services to our clients. During the three and six months ended June 30, 2020, we closed 1,587 and 3,837 investment sales, financing and other transactions with total sales volume of approximately $6.9 billion and $18.7 billion, respectively. During the year ended December 31, 2019, we closed 9,726 investment sales, financing and other transactions with total sales volume of approximately $49.7 billion.

We generate revenues by collecting real estate brokerage commissions upon the sale, and fees upon the financing of, commercial properties and by providing consulting, advisory and 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 June 30, 2020, approximately 88% of our revenues were generated from real estate brokerage commissions, 11% from financing fees and 1% from other real estate related services. During the six months ended June 30, 2020, approximately 89% of our revenues were generated from real estate brokerage commissions, 9% from financing fees and 2% from other real estate related services. During the year ended December 31, 2019, approximately 91% of our revenues were generated from real estate brokerage commissions, 8% from financing fees and 1% from other real estate related services.

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

•

Properties priced less than $1 million;

•

Private client market:

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

•

Middle market:

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

•

Larger transaction market:

properties priced from $20 million and above.

Our strength is in serving private clients in the

$1-$10 million

private client market segment, which contributed approximately 69% and 68% of our real estate brokerage commissions during the three months ended June 30, 2020 and 2019, respectively, and approximately 67% of our real estate brokerage commissions during each of the six months ended June 30, 2020 and 2019, respectively. The following table sets forth the number of transactions, sales volume and revenues by commercial real estate market segment for real estate brokerage:


	Three Months Ended June 30,
	2020						2019						Change
Real Estate Brokerage	Number		Volume		Revenues		Number		Volume		Revenues		Number			Volume			Revenues
			(in millions)		(in thousands)				(in millions)		(in thousands)					(in millions)			(in thousands)
<$1 million		192	$	118	$	4,518		258	$	170	$	7,137		(66	)	$	(52	)	$	(2,619	)
Private client market ($1—$10 million)		793		2,614		70,817		1,392		4,582		128,526		(599	)		(1,968	)		(57,709	)
Middle market ( ³ $10—$20 million)		43		618		11,591		111		1,523		26,944		(68	)		(905	)		(15,353	)
Larger transaction market ( ³ $20 million)		47		2,074		16,445		73		2,958		26,073		(26	)		(884	)		(9,628	)

		1,075	$	5,424	$	103,371		1,834	$	9,233	$	188,680		(759	)	$	(3,809	)	$	(85,309	)

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	Six Months Ended June 30,
	2020						2019						Change
Real Estate Brokerage	Number		Volume		Revenues		Number		Volume		Revenues		Number			Volume			Revenues
			(in millions)		(in thousands)				(in millions)		(in thousands)					(in millions)			(in thousands)
<$1 million		408	$	254	$	10,260		459	$	301	$	12,425		(51	)	$	(47	)	$	(2,165	)
Private client market ($1—$10 million)		2,035		6,615		185,081		2,452		7,902		224,584		(417	)		(1,287	)		(39,503	)
Middle market ( ³ $10—$20 million)		134		1,840		34,259		203		2,768		50,524		(69	)		(928	)		(16,265	)
Larger transaction market ( ³ $20 million)		113		5,157		45,600		125		5,365		46,084		(12	)		(208	)		(484	)

		2,690	$	13,866	$	275,200		3,239	$	16,336	$	333,617		(549	)	$	(2,470	)	$	(58,417	)

Acquisitions

We continue to increase our market presence through execution of our growth strategies by targeting markets based on population, employment, level of commercial real estate sales, inventory and competitive opportunities where we believe the markets will benefit from our business model. During the six months ended June 30, 2020, we completed two acquisitions that expanded our market presence in financing services in the Southwest and in real estate brokerage services in the Southeast.

COVID-19

In March 2020, the World Health Organization characterized

COVID-19

as a pandemic. Many states and cities, including where we conduct our business activities, have reacted by instituting quarantines, restrictions on travel, “shelter in place” rules, and restrictions on types of business that may continue to operate, which may limit the activity of our sales and financing professionals in engaging with our clients. We have implemented measures such as increased sanitizing, physical distancing and remote work arrangements, with the goal of protecting our employees, sales and financing professionals and clients. We continue to follow the local guidelines in cities where our offices are located and many of our offices have

re-opened

and are available to our employees and sales and financing professionals on an as needed basis.

We are closely monitoring the impact of

COVID-19

pandemic on all aspects of our business and in the regions we operate. Since the start of the pandemic, we have seen significant slowing of our real estate brokerage and financing transaction activity, difficulty in pricing assets and, in certain cases, restrictions on the ability of borrowers to access the capital markets and other sources of financing. Overall, the economic shut-down and “shelter in place” mandates during most of the second quarter of 2020 adversely impacted our business, with the number of transactions and total revenues declining 37.4% and 44.0% in the three months ended June 30, 2020, respectively, compared the same period in 2019. Further, we believe that the effect of the

COVID-19

restrictions, including the effects of preventative and precautionary health measures mandated to us by federal, state and local governments will likely continue to affect our ability to identify and close commercial real estate transactions, which could significantly impact our revenue during the second half of 2020.

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

the COVID-19 pandemic

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

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 expense reduction initiatives, including but not limited to, total compensation reductions for senior executives, management and key personnel, reductions in events and travel, suspension of company matching contributions in our 401(k) plan and furloughs and layoffs to preserve our balance sheet and financial position. These reductions were strategically decided upon to ensure proper allocation of capital and human resources to support our sales force’s ability to conduct business as well as develop strategic investments in tools, technology and infrastructure vital to our long-term competitiveness. We expect real estate sales and financing volumes to improve and eventually post solid growth after the market is able to assess the impact of the economic shut down on property occupancies, rent collections and values and when financing flows improve. Due to a high degree of uncertainty, the timing of this recovery in real estate transactions and therefore, our revenues are difficult to forecast. Our priority is to support our team’s efforts to increase client contact, provide expanded content and advisory services to investors and clients and preserve our financial position through expense reductions. Given our significant liquidity, we expect our company to be well positioned to benefit from and contribute to the real estate transaction recovery when it emerges.

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

has dramatically impacted the global, U.S. and key local economies in which we operate. The movement of most of the U.S. population to

“sheltering-in-place”

and the associated shutdown of numerous businesses has taken a heavy toll on employment, consumption and many other segments of the economy in 2020. The significant economic toll of the pandemic-driven shutdown was most acute in March and April, forcing the loss of more than 22 million jobs. Though the early reopening of several states in May brought a third of those jobs back, the resurgence of the

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 in

COVID-19

cases. Numerous retail

sub-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 have temporarily sustained financial market liquidity by delivering resources to support local governments, the healthcare sector, businesses of all sizes and the general public, but we believe that the Federal Government’s ability to sustain the economy is limited and economic growth will likely continue to be at risk until a medical solution emerges. With the magnitude and duration of the pandemic still in question, the severity and length of the economic impact remains unclear. The broad range of unknowns, including health, economic and public policy have increased investor uncertainty. We believe these and other factors that raise uncertainty caused many investors to step to the sidelines until additional clarity emerges.

Commercial Real Estate Supply and Demand

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

The impact of

COVID-19

on both the hotel and retail sectors has been significant with many retailers withholding rental payments in locations with

shelter-in-place

orders. Office and apartment properties have experienced a more limited impact thus far, and industrial property performance has generally remained stable. To date, occupancy has remained elevated for most property types on a technical level, but rent collections remain an issue for operators. While retail properties have highly variable collections depending on their tenant mix, office and industrial property collections have largely been in the

mid-90 percent

range since the onset of the pandemic. Apartment collections vary significantly by state, but have been in the

low-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, eviction moratorium rules and momentum toward reopening the economy may all impact property performance and investor sentiment. This could result in very fragmented market results as different states follow different protocols and trajectories.

Capital Markets

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

Financial markets, particularly commercial real estate lending, went through a period of turbulence in the second quarter as lenders grappled with uncertainty. Although the

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 some withdrew funding offers in the midst of transactions. This contributed to a particularly challenging transactional climate, but in June, lenders began to tighten their spreads while making capital more readily available. Distress levels, as measured by commercial mortgage-backed securities (“CMBS”), increased substantively with the volume of loans making payments 30+ days late rising from 2 percent in March to 10 percent in June. The majority of the late payments were in the hospitality and retail sectors. The Federal Reserve and Congress are working on adjustments that could give CMBS lenders more latitude in granting forbearance. Government agency multifamily lenders have been active but cautious. They increased their reserve requirements in the second quarter, but they continue to actively recalibrate their underwriting based on market performance. Local community banks and credit unions have been the most active capital source, and they have also tended to give borrowers more latitude on repayment schedules. Although lending processes have been impeded by the

COVID-19

pandemic, we believe that capital flow may be improving and sufficient capital could be available to meet market needs for most property types.

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. Investors continue to seek price discovery, and are trying to adapt to the new climate. It appears that many investors remain on the sidelines, while a wide range of well-funded investors seem to be awaiting opportunistic acquisitions. However, substantive distressed sales activity may not emerge for a prolonged period. Despite the significant toll the

COVID-19

pandemic has had on the U.S. economy, strong underwriting practices and sturdy investor balance sheets appear to be helping mitigate some of the pressure felt by property owners. In addition, a number of impacted investors, including many hotel owners, appear to have been able to achieve various levels of lender forbearance to bridge the impact of the imposed economic downturn.

Seasonality

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

quarter-by-quarter

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

COVID-19

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

COVID-19

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

Operating Segments

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

Key Financial Measures and Indicators

Revenues

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

Because our business is transaction oriented, we rely on investment sales and financing professionals to continually develop leads, identify properties to sell 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

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

period-to-period

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

$1-$10 million

private client market segment. These factors may result in

period-to-period

variations in our revenues that differ from historical patterns.

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

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 assets. Amortization expense consists of (i) amortization recorded on our mortgage servicing rights (“MSRs”) using the interest method over the period that servicing income is expected to be received and (ii) amortization recorded on intangible assets amortized on a straight-line basis using a useful life between one and six years.

Other Income (Expense), Net

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

available-for-sale,

foreign currency gains and losses and other

non-operating

gains and losses.

Interest Expense

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

Provision for Income Taxes

We are subject to U.S. and Canadian federal taxes and individual state and local taxes based on the income generated in the jurisdictions in which we operate. Our effective tax rate fluctuates as a result of the change in the mix of our activities in the jurisdictions we operate due to differing tax rates in those jurisdictions and 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.

Comparison of Three Months Ended June 30, 2020 and 2019

Below are key operating results for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 (dollars in thousands):


	Three Months Ended June 30, 2020			Percentage of Revenue			Three Months Ended June 30, 2019			Percentage of Revenue			Change
	Three Months Ended June 30, 2020			Percentage of Revenue			Three Months Ended June 30, 2019			Percentage of Revenue			Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	103,371			88.1	%	$	188,680			90.0	%	$	(85,309	)		(45.2	)%
Financing fees		12,703			10.8			17,742			8.5			(5,039	)		(28.4	)%
Other revenues		1,326			1.1			3,171			1.5			(1,845	)		(58.2	)%

Total revenues		117,400			100.0			209,593			100.0			(92,193	)		(44.0	)%

Operating expenses:
Cost of services		73,743			62.8			127,847			61.0			(54,104	)		(42.3	)%
Selling, general and administrative		43,519			37.1			52,836			25.2			(9,317	)		(17.6	)%
Depreciation and amortization		2,752			2.3			1,932			0.9			820			42.4	%

Total operating expenses		120,014			102.2			182,615			87.1			(62,601	)		(34.3	)%

Operating (loss) income		(2,614	)		(2.2	)		26,978			12.9			(29,592	)		(109.7	)%
Other income (expense), net		2,975			2.5			3,119			1.5			(144	)		(4.6	)%
Interest expense		(213	)		(0.2	)		(340	)		(0.2	)		127			(37.4	)%

Income before provision for income taxes		148			0.1			29,757			14.2			(29,609	)		(99.5	)%
Provision for income taxes		42			0.0			8,478			4.0			(8,436	)		(99.5	)%

Net income	$	106			0.1	%	$	21,279			10.2	%	$	(21,173	)		(99.5	)%

Adjusted EBITDA (1)	$	4,150			3.5	%	$	32,016			15.3	%	$	(27,866	)		(87.0	)%

(1)

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

“Non-GAAP

Financial Measure.”

Revenues

Our total revenues were $117.4 million for the three months ended June 30, 2020 compared to $209.6 million for the same period in 2019, a decrease of $92.2 million, or 44.0%. Total revenues decreased as a result of decreases in real estate brokerage commissions, financing fees and other revenues, as described below.

Real estate brokerage commissions.

Revenues from real estate brokerage commissions decreased to $103.4 million for the three months ended June 30, 2020 from $188.7 million for the same period in 2019, a decrease of $85.3 million, or 45.2%. The decrease was driven by a 41.3% reduction in sales volume and 13 basis points reduction in average commission rates primarily as a result of the

shelter-in-place

orders, economic uncertainty and other transactional impediments surrounding the

COVID-19

pandemic. Sales volume was primarily impacted by a 41.4% decrease in the number of transactions. The average transaction size remained comparable.

Financing fees.

Revenues from financing fees decreased to $12.7 million for the three months ended June 30, 2020 from $17.7 million for the same period in 2019, a decrease of $5.0 million, or 28.4%. The decrease was driven by a 38.3% reduction in financing volume, partially offset by an 8 basis points increase in average fee rates. Financing volume was primarily impacted by a 21.3% decrease in the number of financing transactions and a 21.6% decrease in average transaction size as a result of the

shelter-in-place

orders, economic uncertainty and other transactional impediments surrounding the

COVID-19

pandemic.

Other revenues.

Other revenues decreased to $1.3 million for the three months ended June 30, 2020 from $3.2 million for the same period in 2019, a decrease of $1.8 million, or 58.2%. The decrease was primarily driven by decreases in consulting and advisory services during the three months ended June 30, 2020 compared to the same period in 2019.

Total operating expenses

Our total operating expenses were $120.0 million for the three months ended June 30, 2020 compared to $182.6 million for the same period in 2019, a decrease of $62.6 million, or 34.3%. 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.

Cost of services.

Cost of services decreased to $73.7 million for the three months ended June 30, 2020 from $127.8 million for the same period in 2019, a decrease of $54.1 million, or 42.3%. The decrease was primarily due to decreased commission expenses driven by the related decreased revenues noted above. Cost of services as a percent of total revenues increased to 62.8% compared to 61.0% for the same period in 2019 primarily due to a higher proportion of transactions closed by our more senior investment sales and financing professionals. Due to the uncertainty surrounding

COVID-19,

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

Selling, general and administrative expense.

Selling, general and administrative expense for the three months ended June 30, 2020 decreased $9.3 million, or 17.6%, to $43.5 million from $52.8 million for the same period in 2019. Decreases in our selling, general and administrative expense have been driven by our various expense reduction initiatives. The decrease was primarily due to (i) a $7.5 million decrease in compensation related costs, primarily driven by management performance compensation and salaries and related benefits, partially offset by an increase in deferred compensation obligation; (ii) a $1.0 million decrease in sales operations support, events and promotional marketing expenses; (iii) a $0.6 million decrease in net other expense categories, including increases in acquisition related costs, offset by decreases in travel and other related expenses and (iv) a $0.4 million decrease in legal costs. These decreases were partially offset by a $0.2 million increase in facilities expenses.

Depreciation and amortization expense.

Depreciation and amortization expense increased to $2.8 million for the three months ended June 30, 2020 from $1.9 million for the same period in 2019, an increase of $0.8 million, or 42.4%. The increase was primarily driven by the increase in amortization of intangible assets resulting from the increase in intangible assets due to our acquisition activities.

Other Income (Expense), Net

Other income (expense), net decreased to $3.0 million for the three months ended June 30, 2020 from $3.1 million for the same period in 2019. The decrease was primarily driven by a $1.3 million reduction in interest income on our investments in marketable debt securities,

available-for-sale.

The decrease was partially offset by (i) a $0.9 million favorable change in the value of our deferred compensation plan assets that are held in a rabbi trust; and (ii) a $0.3 million increase in net other categories, including foreign currency gain related to our Canadian operations.

Interest Expense

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

Provision for Income Taxes

The provision for income taxes was $42,000 for the three months ended June 30, 2020 compared to $8.5 million in the same period in 2019, a decrease of $8.4 million, due to the significant decline in income before provision for income taxes. The effective income tax rate for the three months ended June 30, 2020 was 28.4% compared to 28.5% for the same period in 2019.

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):


	Six Months Ended June 30, 2020			Percentage of Revenue			Six Months Ended June 30, 2019			Percentage of Revenue			Change
	Six Months Ended June 30, 2020			Percentage of Revenue			Six Months Ended June 30, 2019			Percentage of Revenue			Dollar			Percentage
Revenues:
Real estate brokerage commissions	$	275,200			89.3	%	$	333,617			90.1	%	$	(58,417	)		(17.5	)%
Financing fees		28,054			9.1			31,474			8.5			(3,420	)		(10.9	)%
Other revenues		4,863			1.6			5,209			1.4			(346	)		(6.6	)%

Total revenues		308,117			100.0			370,300			100.0			(62,183	)		(16.8	)%

Operating expenses:
Cost of services		187,500			60.9			219,535			59.3			(32,035	)		(14.6	)%
Selling, general and administrative		98,379			31.9			101,754			27.5			(3,375	)		(3.3	)%
Depreciation and amortization		5,216			1.7			3,764			1.0			1,452			38.6	%

Total operating expenses		291,095			94.5			325,053			87.8			(33,958	)		(10.4	)%

Operating income		17,022			5.5			45,247			12.2			(28,225	)		(62.4	)%
Other income (expense), net		2,609			0.8			6,494			1.8			(3,885	)		(59.8	)%
Interest expense		(496	)		(0.1	)		(689	)		(0.2	)		193			(28.0	)%

Income before provision for income taxes		19,135			6.2			51,052			13.8			(31,917	)		(62.5	)%
Provision for income taxes		5,959			1.9			14,135			3.8			(8,176	)		(57.8	)%

Net income	$	13,176			4.3	%		36,917			10.0	%	$	(23,741	)		(64.3	)%

Adjusted EBITDA (1)	$	26,528			8.6	%	$	55,175			14.9	%	$	(28,647	)		(51.9	)%

(1)

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

“Non-GAAP

Financial Measure.”

Revenues

Our total revenues were $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.

Revenues from real estate brokerage commissions decreased to $275.2 million for the six months ended June 30, 2020 from $333.6 million for the same period in 2019, a decrease of $58.4 million, or 17.5%. The decrease was driven by a 15.1% reduction in sales volume and 6 basis points reduction in average commission rates. Sales volume was impacted by a 16.9% decrease in the number of transactions, partially offset by a 2.2% increase in the average transaction size.

Financing fees.

Revenues from financing fees decreased to $28.1 million for the six months ended June 30, 2020 from $31.5 million for the same period in 2019, a decrease of $3.4 million, or 10.9%. The decrease was driven by a 12.6% reduction in financing volume as the average commission rates remained comparable. Financing volume was impacted by a 11.3% decrease in average transaction size and a 1.5% decrease in the number of financing transactions.

Other revenues.

Other revenues decreased to $4.9 million for the six months ended June 30, 2020 from $5.2 million for the same period in 2019, a decrease of $0.3 million, or 6.6%. The decrease was primarily driven by a decrease in consulting and advisory services during the six months ended June 30, 2020 compared to the same period in 2019.

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.

Cost of services.

Cost of services decreased to $187.5 million for the six months ended June 30, 2020 from $219.5 million for the same period in 2019, a decrease of $32.0 million, or 14.6%. The decrease was primarily due to decreased commission expenses driven by the related decreased revenues noted above. Cost of services as a percent of total revenues increased to 60.9% compared to 59.3% for the same period in 2019 primarily due to a higher proportion of transactions closed by our more senior investment sales and financing professionals.

Selling, general and administrative expense.

Selling, general and administrative expense for the six months ended June 30, 2020 decreased $3.4 million, or 3.3%, to $98.4 million from $101.8 million for the same period in 2019. Decreases in our selling, general and administrative expense have been driven by our various expense reduction initiatives. The decrease was primarily due to a $8.5 million decrease in compensation related costs, primarily driven by decreases in management performance compensation and deferred compensation obligation. This decrease was partially offset by (i) a $3.1 million increase in sales operations support, events and promotional marketing expenses; (ii) a $1.1 million increase in facilities expenses; (iii) a $0.7 million increase in legal costs; and (iv) a $0.2 million increase in net other expense categories, including increases in acquisition related costs, certain licensing fees and stock-based compensation expense, offset by decreases in travel and other related expenses.

Depreciation and amortization expense.

Depreciation and amortization expense increased to $5.2 million for the six months ended June 30, 2020 from $3.8 million for the same period in 2019, an increase of $1.5 million, or 38.6%. The increase was primarily driven by the increase in amortization of intangible assets resulting from the increase in intangible assets due to our acquisition activities.

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

(ii) a $1.2 million unfavorable change in the value of our deferred compensation plan assets that are held in a rabbi trust; (iii) a $0.8 million foreign currency loss related to our Canadian operations; and (iv) a $0.1 million reduction in net other categories.

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 income before provision for income taxes.

Non-GAAP

Financial Measure

In this quarterly report on Form

10-Q,

we include a

non-GAAP

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

non-cash

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

available-for-sale

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

(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 and

non-cash

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

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Net income	$	106		$	21,279		$	13,176		$	36,917
Adjustments:
Interest income and other (1)		(1,198	)		(2,562	)		(3,201	)		(5,103	)
Interest expense		213			340			496			689
Provision for income taxes		42			8,478			5,959			14,135
Depreciation and amortization		2,752			1,932			5,216			3,764
Stock-based compensation		2,536			2,585			5,168			4,926
Non-cash MSR activity (2)		(301	)		(36	)		(286	)		(153	)

Adjusted EBITDA (3)	$	4,150		$	32,016		$	26,528		$	55,175

(1)	Other includes net realized gains (losses) on marketable debt securities available-for-sale.

(2)	Non-cash MSR activity includes the assumption of servicing obligations.

(3)	The decrease in Adjusted EBITDA for the three and six months ended June 30, 2020 compared to the same periods in 2019 is primarily due to a decrease in total revenues and a higher proportion of operating expenses compared to total revenues.

Liquidity and Capital Resources

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

available-for-sale

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

available-for-sale

or availability under our credit agreement.

Cash Flows

Our total cash and cash equivalents balance decreased by $77.8 million to $154.9 million at June 30, 2020, compared to $232.7 million at December 31, 2019. The following table sets forth our summary cash flows for the six months ended June 30, 2020 and 2019 (in thousands):


	Six Months Ended June 30,
	2020			2019
Net cash used in operating activities	$	(51,849	)	$	(24,363	)
Net cash (used in) provided by investing activities		(16,459	)		19,626
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

Operating Activities

Cash flows used in operating activities were $51.8 million for the six months ended June 30, 2020 compared to $24.4 million for the same period in 2019. Net cash used in operating activities is driven by our net income adjusted for

non-cash

items and changes in operating assets and liabilities. The $27.5 million increased usage in operating cash flows for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to lower total revenues and a higher proportion of operating expenses compared to total revenues, differences in timing of certain payments and receipts, an increase in advances to our investment sales and financing professionals and a reduction in the deferral of certain discretionary commissions.

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 of $19.6 million for the same period in 2019. The $36.1 million increase in cash flows used in investing activities for the six months ended June 30, 2020 compared to the same period in 2019 was primarily due to a $24.0 million reduction in net proceeds from sales and maturities of marketable debt securities and a net $11.8 million outflow for acquisitions during the six months ended June 30, 2020 with no such comparable outflow for the same period in 2019.

Financing Activities

Cash flows used in financing activities were $9.3 million for the six months ended June 30, 2020 compared to $3.2 million for the same period in 2019. The change in cash flows used in financing activities for the six months ended June 30, 2020 compared to the same period in 2019 was primarily impacted by principal payments on notes payable to former stockholders and payments related to stock appreciation rights liability, partially offset by lower taxes paid related to net share settlement of stock-based awards. See Note 12 – “Stock-Based Compensation Plans” of our Notes to Condensed Consolidated Financial Statements for additional information.

Liquidity

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

available-for-sale

and borrowings available under the Credit Agreement (defined below) will be sufficient to satisfy our operating requirements for at least the next 12 months. As of June 30, 2020, cash on hand and core-cash investments aggregated $322.1 million, and we had $60.0 million of borrowing capacity under our credit agreement. In response to this period of business disruption, we have assessed our cost structure and instituted various expense reduction initiatives as discussed in “Overview –

COVID-19”

section above.

Credit Agreement

We have a Credit Agreement with Wells Fargo Bank, National Association for a $60.0 million principal amount senior secured revolving credit facility that is guaranteed by all of our domestic subsidiaries and matures on June 1, 2022 (the “Credit Agreement”). See Note 15 – “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements for additional information on the Credit Agreement.

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 issued other than (i) increases in contingent and deferred consideration in connection with acquisitions of $5.6 million; (ii) increases in amounts that may be advanced to certain investment sales and financing professionals upon reaching time requirements of $14.3 million and (iii) commitment to invest up to $5.0 million in a limited liability company that invests in highly rated asset-based securities in accordance with our investment policy.

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,

and accordingly are recorded at their fair values. We determine the appropriate classification of investments in marketable debt securities at the time of purchase. Interest along with accretion and amortization of purchase premiums and discounts from the purchase date through the estimated maturity date, including consideration of variable maturities and contractual call provisions, are included in other income (expense), net in the condensed consolidated statements of net and comprehensive income. We typically invest in highly-rated debt securities, and our investment policy generally limits the amount of credit exposure to any one issuer. The policy requires substantially all investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities.

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

available-for-sale,

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

write-off

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

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

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

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 June 30, 2020, the fair value of investments in marketable debt securities,

available-for-sale

was $212.5 million. The primary objective of our investment activity is to maintain the safety of principal, and to provide for future liquidity requirements while maximizing yields without significantly increasing risk. While some investments may be securities of companies in foreign countries, all investments are denominated and payable in U.S. Dollars. We do not enter into investments for trading or speculative purposes. While our intent is not to sell these investment securities prior to their stated maturities, we may choose to sell any of the securities for strategic reasons including, but not limited to, anticipated capital requirements, anticipation of credit deterioration, duration management and because a security no longer meets the criteria of our investment policy. We do not use derivatives or similar instruments to manage our interest rate risk. We seek to invest in high quality investments. The weighted average rating (exclusive of cash and cash equivalents) was AA+ as of June 30, 2020. Maturities are maintained consistent with our short-, medium- and long-term liquidity objectives.

Currently, our portfolio of investments predominantly consists of fixed interest rate debt securities; however, a portion of our investment portfolio may consist of variable interest rate debt securities. Our investments in fixed interest rate debt securities are subject to various market 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 six months ended June 30, 2020, increased demand for treasury securities caused a significant decrease in the yields on treasury securities and unbalanced demand and supply factors created significant liquidity shortfalls until the Federal Reserve initiated market intervention programs to stabilize the market. The following table sets forth the impact on the fair value of our investments as of June 30, 2020 from changes in interest rates based on the weighted average duration of the debt securities in our portfolio (in thousands):


Change in Interest Rates	Approximate Change in Fair Value of Investments Increase (Decrease)
2% Decrease	$	2,502
1% Decrease	$	1,626
1% Increase	$	(2,330	)
2% Increase	$	(4,658	)

Table of Contents

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) and

15d-

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

10-Q,

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

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)

and

15d-15(f)

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

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

the year ended December 31, 2019, other than the new risk factor below relating to the

COVID-19

pandemic.

The

COVID-19

pandemic has adversely affected and could continue to adversely affect how we operate our business, and the duration and extent to which it will impact our future results of operations and overall financial performance is unknown.

The

COVID-19

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

Government imposed restrictions intended to slow the community spread of

COVID-19

have, and the possible resumption of any state or local

shelter-in-place

orders may, affect our clients or potential clients’ ability or willingness to purchase properties with limited or no ability to view properties; delay the closing of real estate sales and financing transactions; increase the borrowing cost and reduce the availability of debt financing; impact our ability to provide or deliver services to our clients or potential clients; and/or temporarily delay our expansion efforts. In addition, the current

COVID-19

pandemic, the reoccurrence of the

COVID-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,

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

•

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

•

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

•

If we need to raise additional capital through public or private debt or equity financings, strategic relationships or other arrangements, this capital might not be available to us in a timely manner, on acceptable terms, or at all due to various risks and uncertainties. Our failure to raise sufficient capital when needed could prevent us from, among other factors, to fund acquisitions or to otherwise finance our growth or operations. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

The long-term potential economic impact of a pandemic may be difficult to assess or predict. The

COVID-19

pandemic has resulted in significant disruption of global financial markets, and on June 8, 2020, the National Bureau of Economic Research announced that the United States was in a recession. A long-term recession or long-term market correction could have a long-term impact on the flow of capital to the commercial real estate market and/or the willingness of investors to invest in or sell commercial real estate. This may adversely impact the demand for our services as well as the value of our common stock and our access to capital.

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

the COVID-19 pandemic,

our business was materially adversely impacted during the three months ended June 30, 2020. To date, we have seen a significant increase in closing timelines, a dramatic slowing of our real estate brokerage and financing transaction activity, difficulty in pricing assets and, in certain cases, restricted ability of borrowers to access the capital markets and other sources of financing. Further, the effect of the

COVID-19

restrictions on our operations, including preventative and precautionary health measures mandated to us by federal, state and local governments will likely continue to affect our ability to identify and close commercial real estate transactions.


	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 (includes amortized cost of $169,195 and $150,517 at June 30, 2020 and December 31, 2019, respectively, and $0 allowance for credit losses)		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 assets, net		86,035		90,535
Marketable debt securities, available-for-sale (includes amortized cost of $40,808 and $59,468 at June 30, 2020 and December 31, 2019, respectively, and $0 allowance for credit losses)		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 – none 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


	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 assets		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


	Three Months Ended June 30,						Six Months Ended June 30,
Real Estate Brokerage	2020			2019			2020			2019
Average Number of Investment Sales Professionals		1,926			1,834			1,908			1,826
Average Number of Transactions per Investment Sales Professional		0.56			1.00			1.41			1.77
Average Commission per Transaction	$	96,159		$	102,879		$	102,305		$	103,000
Average Commission Rate		1.91	%		2.04	%		1.98	%		2.04	%
Average Transaction Size (in thousands)	$	5,045		$	5,034		$	5,155		$	5,044
Total Number of Transactions		1,075			1,834			2,690			3,239
Total Sales Volume (in millions)	$	5,423		$	9,233		$	13,866		$	16,336

	Three Months Ended June 30,						Six Months Ended June 30,
Financing (1)	2020			2019			2020			2019
Average Number of Financing Professionals		87			104			88			106
Average Number of Transactions per Financing Professional		4.38			4.65			9.76			8.23
Average Fee per Transaction	$	30,260		$	35,406		$	30,616		$	34,576
Average Fee Rate		1.00	%		0.92	%		0.91	%		0.91	%
Average Transaction Size (in thousands)	$	3,021		$	3,851		$	3,382		$	3,812
Total Number of Transactions		381			484			859			872
Total Financing Volume (in millions)	$	1,151		$	1,864		$	2,905		$	3,324


Exhibit No.		Description

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

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

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

101		The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Net and Comprehensive Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags.

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)


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

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


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

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