Marcus & Millichap, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Selected Balance Sheet Data

Selected Balance Sheet Data

6 Months Ended

Jun. 30, 2019

Organization, Consolidation and Presentation of Financial Statements [Abstract]

7.	Selected Balance Sheet Data

Other Assets

Other assets consisted of the following (in thousands):


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

	$	6,233	$	6,368	$	50,845	$	31,778

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

(2)

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

wrote-off

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

wrote-off

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

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

MSRs

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


	June 30, 2019			December 31, 2018
Beginning balance	$	2,209		$	—
Additions from acquisition		—			2,121
Additions		165			391
Amortization		(275	)		(303	)

Ending balance	$	2,099		$	2,209

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

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

Deferred Compensation and Commissions

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


	Current				Non-Current
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
Stock appreciation rights (“SARs”) liability (1)	$	1,969	$	1,810	$	17,856	$	19,299
Commissions payable to investment sales and financing professionals		28,218		44,812		13,939		23,983
Deferred compensation liability (1)		1,451		1,288		7,169		6,605

	$	31,638	$	47,910	$	38,964	$	49,887

(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, 2019 and 2018 were 4.684% and 4.409%, respectively. MMI recorded interest expense related to this liability of $226,000 and $224,000 for the three months ended June 30, 2019 and 2018, respectively, and $452,000 and $449,000 for the six months ended June 30, 2019 and 2018, respectively.

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

Commissions Payable

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

Deferred Compensation Liability

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

non-qualified

deferred compensation plan that is intended to comply with Section 409A of the Internal Revenue Code and permits participants to defer compensation up to 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, 2019 and 2018, the Company made total payments to participants of $786,000 and $387,000, respectively.

The net change in the carrying value of the assets held in the rabbi trust and the net change in the carrying value of the deferred compensation liability, each exclusive of additional contributions, distributions and trust expenses, consisted of the following (in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Increase in the carrying value of the assets held in the rabbi trust (1)	$	225	$	176	$	928	$	190
Increase in the net carrying value of the deferred compensation obligation (2)	$	227	$	188	$	912	$	188

(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.

Deferred Rent and Other Liabilities

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


	Non-Current
	June 30, 2019		December 31, 2018
Deferred rent (1)	$	—	$	5,445
Contingent consideration and other (2)		2,001		2,054

	$	2,001	$	7,499

(1)	The Company does not have deferred rent in 2019 due to adoption of the new lease standard on January 1, 2019.

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