Marcus & Millichap, Inc. - Quarter Report: 2018 September (Form 10-Q)

 

 

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 September 30, 2018

OR

 

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

For the transition period from                      to                     

Commission File Number: 001-36155

 

 

MARCUS & MILLICHAP, INC.

(Exact name of registrant as specified in its Charter)

 

 

 

Delaware		35-2478370
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer 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)

 

 

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 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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer		☐		Accelerated filer		☒
Non-accelerated filer		☐		Smaller reporting company		☐
Emerging growth company		☒

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Number of shares of common stock, par value $0.0001 per share, of the registrant issued and outstanding as of November 1, 2018 was 38,651,360 shares.

 

 

 

MARCUS & MILLICHAP, INC.

TABLE OF CONTENTS

 

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at September  30, 2018 (Unaudited) and December 31, 2017			3
Condensed Consolidated Statements of Net and Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)			4
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2018 (Unaudited)			5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)			6
Notes to Condensed Consolidated Financial Statements (Unaudited)			8
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
Item 3. Quantitative and Qualitative Disclosures About Market Risk			40
Item 4. Controls and Procedures			41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 3. Defaults upon Senior Securities			42
Item 4. Mine Safety Disclosures			42
Item 5. Other Information			43
Item 6. Exhibits			43
SIGNATURES

 

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollar amounts in thousands, except per share amounts)

 

		September 30, 2018 (Unaudited)				December 31, 2017
Assets
Current assets:
Cash and cash equivalents		$	181,020			$	220,786
Commissions receivable			5,548				9,586
Prepaid expenses			6,516				9,661
Income tax receivable			—				1,308
Marketable securities, available-for-sale			120,701				73,560
Other assets, net			7,572				5,529
Total current assets			321,357				320,430
Prepaid rent			14,517				15,392
Property and equipment, net			18,169				17,153
Marketable securities, available-for-sale			85,135				52,099
Assets held in rabbi trust			9,115				8,787
Deferred tax assets, net			23,635				22,640
Goodwill and other intangible assets, net			5,639				—
Other assets			32,568				23,163
Total assets		$	510,135			$	459,664
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable and other liabilities		$	8,780			$	9,202
Notes payable to former stockholders			1,087				1,035
Deferred compensation and commissions			29,839				49,180
Income tax payable			5,963				—
Accrued bonuses and other employee related expenses			23,103				23,842
Total current liabilities			68,772				83,259
Deferred compensation and commissions			45,418				49,361
Notes payable to former stockholders			6,564				7,651
Deferred rent and other liabilities			6,690				4,505
Total liabilities			127,444				144,776
Commitments and contingencies			—				—
Stockholders’ equity:
Preferred stock, $0.0001 par value:
Authorized shares – 25,000,000; issued and outstanding shares – none at September 30, 2018 and December 31, 2017, respectively			—				—
Common stock, $0.0001 par value:
Authorized shares – 150,000,000; issued and outstanding shares – 38,651,360 and 38,374,011 at September 30, 2018 and December 31, 2017, respectively			4				4
Additional paid-in capital			97,375				89,877
Stock notes receivable from employees			(4	)			(4	)
Retained earnings			285,116				224,071
Accumulated other comprehensive income			200				940
Total stockholders’ equity			382,691				314,888
Total liabilities and stockholders’ equity		$	510,135			$	459,664

See accompanying notes to condensed consolidated financial statements.

 

3

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF NET AND COMPREHENSIVE INCOME

(dollar and share amounts in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Revenues:
Real estate brokerage commissions		$	191,980			$	169,357			$	536,145			$	472,069
Financing fees			15,947				11,368				41,234				34,131
Other revenues			2,663				2,616				7,154				10,724
Total revenues			210,590				183,341				584,533				516,924
Operating expenses:
Cost of services			132,896				114,803				354,414				314,827
Selling, general and administrative expense			48,659				42,480				145,792				129,393
Depreciation and amortization expense			1,651				1,375				4,529				3,975
Total operating expenses			183,206				158,658				504,735				448,195
Operating income			27,384				24,683				79,798				68,729
Other income (expense), net			2,127				1,172				5,060				3,005
Interest expense			(342	)			(370	)			(1,054	)			(1,126	)
Income before provision for income taxes			29,169				25,485				83,804				70,608
Provision for income taxes			8,315				10,010				22,772				27,564
Net income			20,854				15,475				61,032				43,044
Other comprehensive (loss) income:
Unrealized (losses) gains on marketable securities, net of tax of $(38), $66, $(259) and $242 for the three months ended September 30, 2018 and 2017 and the nine months ended September 30, 2018 and 2017, respectively			(115	)			104				(771	)			325
Foreign currency translation (loss) gain, net of tax of $0 for each of the three months ended September 30, 2018 and 2017 and each of the nine months ended September 30, 2018 and 2017			(29	)			(40	)			44				(65	)
Total other comprehensive (loss) income			(144	)			64				(727	)			260
Comprehensive income		$	20,710			$	15,539			$	60,305			$	43,304
Earnings per share:
Basic		$	0.53			$	0.40			$	1.56			$	1.10
Diluted		$	0.53			$	0.39			$	1.55			$	1.10
Weighted average common shares outstanding:
Basic			39,191				39,033				39,147				38,995
Diluted			39,484				39,204				39,359				39,136

See accompanying notes to condensed consolidated financial statements.

 

4

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(dollar amounts in thousands)

(Unaudited)

 

		Preferred Stock								Common Stock								Additional Paid-In Capital				Stock Notes Receivable From Employees				Retained Earnings				Accumulated Other Comprehensive Income				Total
		Shares				Amount				Shares				Amount
Balance at December 31, 2017			—			$	—				38,374,011			$	4			$	89,877			$	(4	)		$	224,071			$	940			$	314,888
Cumulative effect of a change in accounting principle			—				—				—				—				—				—				13				(13	)			—
Balance at January 1, 2018, as adjusted			—				—				38,374,011				4				89,877				(4	)			224,084				927				314,888
Net and comprehensive income			—				—				—				—				—				—				61,032				(727	)			60,305
Stock-based award activity
Stock-based compensation			—				—				—				—				8,919				—				—				—				8,919
Shares issued pursuant to employee stock purchase plan			—				—				13,028				—				356				—				—				—				356
Issuance of common stock for vesting of restricted stock units			—				—				305,975				—				—				—				—				—				—
Issuance of common stock for unvested restricted stock awards			—				—				12,852				—				—				—				—				—				—
Shares withheld related to net share settlement of stock-based awards			—				—				(54,506	)			—				(1,777	)			—				—				—				(1,777	)
Balance as of September 30, 2018			—			$	—				38,651,360			$	4			$	97,375			$	(4	)		$	285,116			$	200			$	382,691

See accompanying notes to condensed consolidated financial statements.

 

5

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollar amounts in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2018				2017
Cash flows from operating activities
Net income		$	61,032			$	43,044
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization expense			4,529				3,975
Provision for bad debt expense			52				33
Stock-based compensation			8,919				6,173
Deferred taxes, net			(735	)			1,541
Net realized (gains) losses on marketable securities, available-for-sale			(12	)			(2	)
Other non-cash items			(148	)			(46	)
Changes in operating assets and liabilities:
Commissions receivable			4,183				594
Prepaid expenses			3,145				2,266
Prepaid rent			875				(1,831	)
Asset held in rabbi trust			—				(700	)
Other assets			(9,066	)			(12,780	)
Accounts payable and other liabilities			(1,552	)			(1,359	)
Income tax receivable/payable			7,271				2,477
Accrued bonuses and other employee related expenses			(558	)			(1,763	)
Deferred compensation and commissions			(23,739	)			(16,760	)
Deferred rent and other liabilities			817				476
Net cash provided by operating activities			55,013				25,338
Cash flows from investing activities
Acquisitions, net of cash received			(6,990	)			—
Purchases of marketable securities, available-for-sale			(168,672	)			(37,561	)
Proceeds from sales and maturities of marketable securities, available-for-sale			88,027				14,950
Issuances of employee notes receivable			(126	)			(432	)
Payments received on employee notes receivable			12				9
Proceeds from sale of property and equipment			—				10
Purchase of property and equipment			(4,574	)			(4,987	)
Net cash used in investing activities			(92,323	)			(28,011	)
Cash flows from financing activities
Taxes paid related to net share settlement of stock-based awards			(1,777	)			(1,442	)
Proceeds from issuance of shares pursuant to employee stock purchase plan			356				392
Principal payments on notes payable to former stockholders			(1,035	)			(986	)
Net cash used in financing activities			(2,456	)			(2,036	)
Net decrease in cash and cash equivalents			(39,766	)			(4,709	)
Cash and cash equivalents at beginning of period			220,786				187,371
Cash and cash equivalents at end of period		$	181,020			$	182,662

 

6

MARCUS & MILLICHAP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(dollar amounts in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2018				2017
Supplemental disclosures of cash flow information
Interest paid during the period		$	2,180			$	1,896
Income taxes paid, net		$	16,237			$	23,546
Supplemental disclosures of noncash investing and financing activities
Reduction of accrued bonuses and other employee related expenses in settlement of employee notes receivable		$	192			$	243
Change in property and equipment included in accounts payable and other liabilities		$	708			$	(203	)

See accompanying notes to condensed consolidated financial statements.

 

7

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 September 30, 2018, MMI operates 79 offices in the United States and Canada through its wholly-owned subsidiary, Marcus & Millichap Real Estate Investment Services, Inc. (“MMREIS”), which primarily includes the operations of Marcus & Millichap Capital Corporation (“MMCC”).

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, MMREIS (“Spin-Off”). Prior to the initial public offering (“IPO”) of MMI, all of the preferred and common stockholders of MMREIS (including MMC and employees of MMREIS) contributed all of their outstanding shares to MMI, in exchange for new MMI common stock. As a result, MMREIS became a wholly-owned subsidiary of MMI. Thereafter, MMC distributed 80.0% of the shares of MMI common stock to MMC’s shareholders and exchanged the remaining portion of its shares of MMI common stock for cancellation of indebtedness of MMC. MMI completed its IPO on October 30, 2013.

Basis of Presentation

The financial information presented in the accompanying unaudited condensed consolidated financial statements, has been prepared in accordance with rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the condensed consolidated financial position, results of operations and cash flows for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and notes thereto for the year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed on March 16, 2018 with the SEC. The results of the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018, or for other interim periods or future years.

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. Actual results could differ from those estimates.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and cash equivalents, due from independent contractors (included under other assets, net current and other assets non-current), investments in marketable securities, available-for-sale, security deposits (included under other assets, non-current) and commissions receivable. 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 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 that hold the Company’s 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 requires collateral on a case-by-case basis. The Company maintains allowances, as needed, for estimated credit losses based on management’s assessment of the likelihood of collection. For the three and nine months ended September 30, 2018 and 2017, no transaction represented 10% or more of total revenues. Further, while one transaction 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.

 

8

During the three and nine months ended September 30, 2018 and 2017, the Company’s Canadian operations represented less than 1% of total revenues.

During the three and nine months ended September 30, 2018 and 2017, no office represented 10% or more of total revenues.

 

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 16, 2018 with the SEC. The following are updated or new accounting policies.

Revenue Recognition

The Company generates real estate brokerage commissions by acting as a broker for real estate owners or investors seeking to buy or sell commercial properties. The Company generates financing fees from securing financing on purchase transactions as well as fees earned from refinancing its clients’ existing mortgage debt and other financing activities, including mortgage servicing. Other revenues include fees generated from consulting and advisory services, as well as referral fees from other real estate brokers. The Company’s contracts contain one performance obligation related to its real estate brokerage, financing and consulting and advisory services offered to buyers and sellers of commercial real estate and provide that it is operating as a principal in all its revenue generating activities. The Company does not have multiple-element arrangements, variable consideration, financing components, significant noncash consideration, licenses, long-term contracts with customers or other items affecting the transaction price. Accordingly, the Company determined that the transaction price is fixed and determinable and collectability is reasonably assured. The Company recognizes revenue in principally all cases at the close of escrow for real estate brokerage, close of loan for financing and when services are provided or upon closing of the transaction for other revenues.

Mortgage Servicing Rights and Fees

Mortgage servicing rights (“MSRs”) are recorded at fair value upon acquisition of a servicing contract. The estimated net cash flows on the contracts are discounted over the estimated life of the underlying loan. The life of the underlying loan is estimated giving consideration to the prepayment provisions in the loan. The Company’s model assumes full prepayment of the loan at or near the point where the prepayment provisions have expired. The MSRs have principally similar risk characteristics.

The assumptions used to estimate the fair value of MSRs are based on internal models and are periodically compared to assumptions used by other market participants. Due to the relatively few transactions in the MSR market, we have experienced little volatility in the assumptions we use during the periods presented. Additionally, we do not expect to see much volatility in the assumptions for the foreseeable future. Management actively monitors the assumptions used and makes adjustments to those assumptions when market conditions change or other factors indicate such adjustments are warranted. We carry MSRs at the lower of the amortized cost or fair value and evaluate the carrying value for impairment quarterly. We engage a third party to assist in determining the estimated fair value of our existing MSRs quarterly.

All MSRs are amortized using the interest method over the period that servicing income is expected to be received. MSRs are included in other assets non-current in the accompanying condensed consolidated balance sheets. See Note 5 – “Selected Balance Sheet Data” for additional information. Amortization related to the MSRs is included in depreciation and amortization expense in the accompanying condensed consolidated statements of net and comprehensive income.

We recognize mortgage servicing revenues upon the acquisition of a servicing contract. The Company records servicing fees when earned provided the loans are current and the debt service payments are made by the borrowers. MSRs and related servicing fees are recorded in financing fees in the accompanying condensed consolidated statements of net and comprehensive income.

Capitalization of Internal Labor

Certain costs related to the development or purchases of internal-use software are capitalized. Internal computer software costs that are incurred in the preliminary project stage are expensed as incurred. Direct consulting costs and certain payroll and related costs that are incurred during the development stage of a project are capitalized and amortized using the straight-line method over a useful life of five years. Capitalized costs are recorded in property and equipment, net and depreciation is recorded in the depreciation and amortization in the condensed consolidated financial statements. Depreciation begins for software that has been placed into production and is ready for its intended use. Post-implementation costs such as training, maintenance and support are expensed as incurred. The Company evaluates the carrying value of capitalized software for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable.

 

9

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, under which the consideration for the acquisition is allocated to the assets acquired and liabilities assumed. The Company recognizes identifiable assets acquired and liabilities assumed (both specific and contingent) at their acquisition date fair values as determined by management as of the acquisition date. Acquisition-related costs, such as due diligence, legal and accounting fees, are expensed as incurred and not considered in determining the fair value of the acquired assets. The excess of the consideration over the assets acquired net of liabilities assumed is recognized as goodwill.

Goodwill

The Company evaluates goodwill for impairment annually in the fourth quarter. In addition to the annual impairment evaluation, the Company evaluates at least quarterly whether events or circumstances have occurred in the period subsequent to the annual impairment testing which indicate that it is more likely than not an impairment loss has occurred. The Company currently has only one reporting unit; therefore, all goodwill is allocated to that one reporting unit.

Intangible Assets

The Company’s intangible assets primarily include non-compete agreements and customer relationships that resulted from its business combinations. These intangible assets are amortized on a straight-line basis using a useful life between one and six years. The Company evaluates its intangible assets for impairment at least annually, or as events or changes in circumstances indicate the carrying value may be impaired.

Stock-Based Compensation

The Company follows the accounting guidance for share-based payments which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, independent contractors and non-employee directors. Awards are issued under the Amended and Restated 2013 Omnibus Equity Incentive Plan and 2013 Employee Stock Purchase Plan (“ESPP Plan”).

After adoption of Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”) on January 1, 2017, the Company accounts for forfeitures as they occur.

For awards made to the Company’s employees and directors, the Company initially values restricted stock units and restricted stock awards based on the grant date closing price of the Company’s common stock. For awards with periodic vesting, the Company recognizes the related expense on a straight-line basis over the requisite service period for the entire award, subject to periodic adjustments to ensure that the cumulative amount of expense recognized through the end of any reporting period is at least equal to the portion of the grant date value of the award that has vested through that date.

The Company adopted ASU No. 2018-7, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting awards (“ASU 2018-7”) on July 1, 2018. As a result, awards made to independent contractors will be measured based on the grant date closing price of the Company’s common stock consistent with awards made to the Company’s employees and directors. Unvested awards issued to independent contractors as of the adoption date of July 1, 2018 were remeasured at the adoption date stock price. The Company will recognize the remaining unrecognized value of unvested awards over the remaining performance period based on the adoption date stock price, with no further remeasurement through the performance completion date. Prior to the adoption of ASU 2018-7, the Company determined that the fair value of the awards made to independent contractors shall be measured based on the fair value of the equity instrument as it is more reliably measurable than the fair value of the consideration received. The Company used the grant date as the performance commitment date, and the measurement date was the date the services were completed, which was the vesting date. As a result, the Company recorded stock-based compensation for these awards over the vesting period on a straight-line basis with periodic adjustments during the vesting period for changes in the fair value of the awards.

If there are any modifications or cancellations of the underlying unvested share-based awards, the Company may be required to accelerate, increase or cancel any remaining unrecognized or previously recorded stock-based compensation expense.

For awards issued under the ESPP Plan, the Company determined that the plan was a compensatory plan and is required to expense the fair value of the awards over each six-month offering period. The Company estimates the fair value of these awards using the Black-Scholes option pricing model. The Company calculates the expected volatility based on the historical volatility of the Company’s common stock and the risk-free interest rate based on the U.S. Treasury yield curve in effect at the time of grant, both consistent with the term of the offering period. The Company incorporates no forfeiture rate and includes no expected dividend yield as the Company has not, and currently does not intend to pay a regular dividend.

 

10

Recent Accounting Pronouncements

Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes virtually all of the existing revenue recognition guidance under U.S. GAAP, and requires entities to recognize revenue for the transfer to a customer of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled to receive in exchange for those goods or services. Subsequent to the issuance of ASU 2014-09, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, ASU 2016-08, Revenue from Contacts with Customers: Principal Versus Agent Considerations, ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, and ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. The additional ASUs clarified certain provisions of ASU 2014-09 in response to recommendations from the Transition Resources Group established by the FASB and extended the required adoption of ASU 2014-09 which is now effective for reporting periods beginning after December 15, 2017. The Company adopted the new standard on January 1, 2018 using the modified retrospective method.

The Company assessed the impact of the standard and determined that its contracts contain one performance obligation related to its real estate brokerage, financing and consulting and advisory services offered to buyers and sellers of commercial real estate and provide that it is operating as a principal in all of its revenue generating activities. The Company does not have multiple-element arrangements, variable consideration, financing components, significant noncash consideration, licenses, long-term contracts with customers or other items affecting the transaction price. The Company determined the transaction price is generally fixed and determinable and collectability is reasonably assured. Revenue was and will continue to be recognized in principally all cases at the close of escrow for real estate brokerage, close of loan for financing and when services are provided upon closing of the transaction for other revenues. Accordingly, the adoption of ASU 2014-09, as clarified, did not have an effect on the manner or timing of the recognition of the Company’s revenue.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 changed the definition of a business in an effort to assist entities with evaluating whether a set of transferred assets and activities is a business. ASU 2017-01 was effective for the Company on January 1, 2018.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other: Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating Step 2 from the goodwill impairment test. ASU 2017-04 is effective for the Company on January 1, 2020, with early adoption permitted. The qualitative assessment remains optional and is unchanged. The Company prospectively adopted ASU 2017-04 in the second quarter of 2018. There was no impact to the Company as the Company was not required to evaluate goodwill for impairment.

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”). ASU 2018-02 is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. ASU 2018-02 permits companies that elect to make the reclassification adjustment the option to apply the guidance retrospectively or to record the reclassification as of the beginning of the period of adoption. The Company adopted the new standard on January 1, 2018 and elected to make the reclassification adjustment pertaining to the stranded tax effects resulting from the enactment of the Tax Cuts and Jobs Act (the “Act”) from accumulated other comprehensive income to retained earnings as of the beginning of the period, which was in the amount of $13,000.

In June 2018, the FASB issued ASU No. 2018-7. ASU 2018-7 is effective for reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted, including in interim periods, but no earlier than an entity’s adoption of ASC 606, Revenue from Contracts with Customers. For the Company, the new standard would have been effective during the first quarter of 2019 with early adoption permitted and will require equity-classified share-based payment awards issued to non-employees to be measured based on the grant date price, instead of the previous requirement to remeasure the awards through the performance completion date. The Company early adopted ASU 2018-7 during the third quarter of 2018. As a result of the adoption, awards issued to non-employees prior to the adoption date of July 1, 2018 were remeasured at the adoption date stock price with no further remeasurement through the performance completion date. Awards issued to nonemployees subsequent to the adoption date are based on the grant date stock price. The Company will recognize the remaining unrecognized value of unvested non-employee awards over the remaining performance period based on the adoption date stock price with no further remeasurement through the performance completion date.

 

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Pending Adoption

In February 2016, the FASB issued ASU No. 2016-02, Leases, to increase transparency and comparability by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The Company will be required to adopt the new standard effective January 1, 2019, and the Company’s condensed consolidated balance sheets will be impacted by the recording of a lease liability and right of use asset for virtually all of its current operating leases. As of September 30, 2018, the Company had remaining contractual obligations for operating leases (autos and office) that aggregate approximately $89.6 million. Accordingly, the Company anticipates that the adoption of the new standard will have a material impact on the Company’s condensed consolidated balance sheets. The amount of which and the potential impact on the condensed consolidated statements of net and comprehensive income and condensed consolidated statements of cash flows has yet to be determined.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (“ASU 2016-13”). ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective January 1, 2020. Under ASU 2016-13, the Company will be required to use an expected-loss model for its marketable securities, available-for sale, which requires that credit losses be presented as an allowance rather than as an impairment write-down. Reversals of credit losses (in situations in which the estimate of credit losses declines) is permitted in the reporting period that the change occurs. Current U.S. GAAP prohibits reflecting reversals of credit losses in current period earnings. At September 30, 2018, the Company had $205.8 million in marketable securities, available for sale which would be subject to this new standard. As of September 30, 2018, these marketable securities, available for sale have an average credit rating of AA+ and no impairment write-downs have been recorded. The Company is currently evaluating the impact of this new standard on its investment policy and investments.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 is effective for reporting periods beginning after December 15, 2019 and early adoption is permitted. For the Company, the new standard will be effective January 1, 2020. ASU 2018-13 modifies prior disclosure requirements for fair value measurement. The modification removes certain disclosure requirements related to the fair value hierarchy, such as removing the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2, modifying existing disclosure requirements related to measurement uncertainty and adds new disclosure requirements, such as disclosing the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurement. As of September 30, 2018, the Company had contingent consideration liability of $1.8 million measured as Level 3. The Company is currently evaluating the impact of this new standard and does not expect ASU 2018-13 to have a material effect on its condensed consolidated financial statements.

 

3.	Acquisitions, Goodwill and Intangible Assets

During the nine months ended September 30, 2018, the Company completed three acquisitions and the results of each of the acquisitions have been included in the condensed consolidated financial statements beginning on their respective acquisition date. The acquisitions expand the Company’s network of its real estate sales and financing professionals and loan originators and provides further diversification to its loan origination platform and financing services. Aggregate terms of these acquisitions included: (i) cash paid at closing of approximately $7.0 million, net of cash received and (ii) the fair value of contingent consideration which may be paid over the next five-year period after the related acquisition based on achievement of certain EBITDA targets or service requirements. The Company determined the fair value of the contingent consideration was $1.7 million using a probability-weighted, discounted cash flow estimate based on achieving EBITDA targets. See Note 9 – “Fair Value Measurements” for additional information on contingent consideration.

The acquisitions were accounted for as business combinations. Based on preliminary purchase price allocations, $2.0 million, net, was allocated to mortgage servicing assets ($2.1 million) and liabilities ($0.1 million), $1.6 million was allocated to the fair values of intangible assets, $0.8 million to other assets noncurrent and $0.1 million to acquired working capital, with the remainder of $4.2 million allocated to goodwill.

The goodwill recorded as part of the acquisitions primarily arose from the acquired assembled workforce and commercial sales, lending and servicing platforms. The Company expects all of the goodwill to be tax deductible, with the tax-deductible amount of goodwill related to the contingent consideration to be determined once the cash payments are made to settle the contingent consideration. The goodwill resulting from these acquisitions is allocated to the Company’s one reporting unit.

 

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

 

		September 30, 2018												December 31, 2017
		Gross Carrying Amount				Accumulated Amortization				Net Book Value				Gross Carrying Amount				Accumulated Amortization				Net Book Value
Goodwill and intangible assets:
Goodwill (1)		$	4,186			$	—			$	4,186			$	—			$	—			$	—
Intangible assets (1)			1,571				(118	)			1,453				—				—				—
		$	5,757			$	(118	)		$	5,639			$	—			$	—			$	—

(1)	Represents additions from acquisition.

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

 

		September 30, 2018				December 31, 2017
Beginning balance		$	—			$	—
Additions from acquisition			1,571				—
Amortization			(118	)			—
		$	1,453			$	—

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

 

		September 30, 2018
Remainder of 2018		$	88
2019			340
2020			327
2021			245
2022			184
Thereafter			269
		$	1,453

 

4.	Property and Equipment

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

 

		September 30, 2018				December 31, 2017
Computer software and hardware equipment		$	18,311			$	16,247
Furniture, fixtures, and equipment			23,527				21,695
Less: accumulated depreciation and amortization			(23,669	)			(20,789	)
		$	18,169			$	17,153

During the nine months ended September 30, 2018 and 2017, the Company wrote off approximately $1.4 million and $2.9 million, respectively, of fully depreciated computer software and hardware equipment and furniture, fixtures and equipment.

 

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5.	Selected Balance Sheet Data

Other Assets

Other assets consisted of the following (in thousands):

 

		Current								Non-Current
		September 30, 2018				December 31, 2017				September 30, 2018				December 31, 2017
MSRs, net of amortization		$	—			$	—			$	2,329			$	—
Due from independent contractors, net (1) (2)			3,236				3,672				28,032				21,726
Security deposits			—				—				1,170				1,158
Employee notes receivable (3)			184				366				139				255
Customer trust accounts and other			4,152				1,491				898				24
		$	7,572			$	5,529			$	32,568			$	23,163

 

(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 $474 and $494 as of September 30, 2018 and December 31, 2017, respectively. The Company recorded a provision for bad debt expense of $81 and $87 and wrote off $17 and $4 of these receivables for the three months ended September 30, 2018 and 2017, respectively. The Company recorded a provision for bad debt expense of $52 and $33 and wrote off $72 and $14 of these receivables for the nine months ended September 30, 2018 and 2017, respectively. Any cash receipts on notes are applied first to unpaid principal balance prior to any income being recognized.

(3)	See Note 8 – “Related-Party Transactions” for additional information.

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

 

		September 30, 2018				December 31, 2017
Beginning balance		$	—			$	—
Additions from acquisition			2,121				—
Additions			373				—
Amortization			(165	)			—
		$	2,329			$	—

See Note 9 – “Fair Value Measurements” for additional information about MSRs.

Deferred Compensation and Commissions

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

 

		Current								Non-Current
		September 30, 2018				December 31, 2017				September 30, 2018				December 31, 2017
Stock appreciation rights (“SARs”) liability (1)		$	1,735			$	1,662			$	19,150			$	20,217
Commissions payable to investment sales and financing professionals			26,843				46,257				18,583				21,924
Deferred compensation liability (1)			1,261				1,261				7,685				7,220
		$	29,839			$	49,180			$	45,418			$	49,361

 

(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.

 

14

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, 2018 and 2017 were 4.409% and 4.446%, respectively. MMI recorded interest expense related to this liability of $220,000 and $233,000, for the three months ended September 30, 2018 and 2017, respectively, and $669,000 and $699,000 for the nine months ended September 30, 2018 and 2017, respectively.

Estimated payouts within the next twelve months for participants that have separated from service have been classified as current. During the nine months ended September 30, 2018, the Company made total payments (consisting of accumulated interest) of $1.7 million classified as an operating cash flow in the deferred compensation and commissions caption in the accompanying condensed consolidated statements of cash flows.

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 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 as determined by the 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 MMI’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 have been classified as current. During the nine months ended September 30, 2018, the Company made total payments to participants of $946,000.

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 September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Increase in the carrying value of the assets held in the rabbi trust (1)		$	266			$	202			$	456			$	571
Increase in the net carrying value of the deferred compensation obligation (2)		$	267			$	219			$	455			$	618

 

(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.

 

15

6.	Investments in Marketable Securities

Amortized cost and fair value of marketable securities, available-for-sale, by type of security consisted of the following (in thousands):

 

		September 30, 2018																December 31, 2017
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value				Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Short-term investments:
U.S. treasuries		$	106,291			$	—			$	(150	)		$	106,141			$	57,712			$	—			$	(88	)		$	57,624
U.S. government sponsored entities			3,502				—				(17	)			3,485				7,016				—				(8	)			7,008
Corporate debt securities			10,988				—				(13	)			10,975				8,931				—				(3	)			8,928
Asset-backed securities and other			100				—				—				100				—				—				—				—
		$	120,881			$	—			$	(180	)		$	120,701			$	73,659			$	—			$	(99	)		$	73,560
Long-term investments:
U.S. treasuries		$	52,865			$	—			$	(343	)		$	52,522			$	18,111			$	7			$	(164	)		$	17,954
U.S. government sponsored entities			1,603				—				(83	)			1,520				5,306				—				(62	)			5,244
Corporate debt securities			25,374				4				(471	)			24,907				22,505				268				(54	)			22,719
Asset-backed securities and other			6,252				1				(67	)			6,186				6,180				17				(15	)			6,182
		$	86,094			$	5			$	(964	)		$	85,135			$	52,102			$	292			$	(295	)		$	52,099

The amortized cost and fair value of the Company’s investments in available-for-sale securities that have been in a continuous unrealized loss position consisted of the following (in thousands):

 

		September 30, 2018								December 31, 2017
		Unrealized Loss				Fair Value				Unrealized Loss				Fair Value
Less than 12 months		$	(730	)		$	187,177			$	(158	)		$	63,229
12 months or longer		$	(414	)		$	17,099			$	(236	)		$	44,961

Gross realized gains and gross realized losses from the sales of the Company’s available-for-sale securities consisted of the following (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Gross realized gains (1)		$	—			$	1			$	12			$	2
Gross realized losses (1)		$	—			$	—			$	—			$	—

 

(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.

As of September 30, 2018, the Company considers the declines in market value of its marketable securities, available-for-sale to be temporary in nature and does not consider any of its investments other-than-temporarily impaired. The Company typically invests in highly-rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss and matching long-term liabilities. When evaluating an investment for other-than-temporary impairment the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer and any changes thereto, changes in market interest rates and the Company’s intent to sell, or whether it is more likely than not that it will be required to sell the investment before recovery of the investment’s cost basis. The Company has no current intent to sell, and it is not more likely than not that the Company will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity. The Company may sell certain of its marketable securities, available-for-sale prior to their stated maturities for strategic reasons including, but not limited to, anticipated liquidity and capital requirements, anticipated credit deterioration, duration management or when a security no longer meets the criteria of the Company’s investment policy.

 

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Amortized cost and fair value of marketable securities, available-for-sale, by contractual maturity consisted of the following (in thousands):

 

		September 30, 2018								December 31, 2017
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
Due in one year or less		$	120,881			$	120,701			$	73,659			$	73,560
Due after one year through five years			63,511				63,236				30,644				30,517
Due after five years through ten years			16,451				15,955				15,090				15,200
Due after ten years			6,132				5,944				6,368				6,382
		$	206,975			$	205,836			$	125,761			$	125,659
Weighted average contractual maturity			2.0 years								2.6 years

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

 

7.	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 are unsecured and bear interest at 5% with annual principal and interest installments with a final principal payment due during the second quarter of 2020. During each of the nine months ended September 30, 2018 and 2017, the Company made total payments on the Notes of $1.5 million, including principal and interest.

Accrued interest included in accounts payable and other liabilities in the accompanying condensed consolidated balance sheets pertaining to the Notes consisted of the following (in thousands):

 

		September 30, 2018				December 31, 2017
Accrued interest		$	175			$	305

Interest expense pertaining to the Notes consisted of the following (in thousands):

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2018				2017				2018				2017
Interest expense		$	96			$	110			$	307			$	345

 

8.	Related-Party Transactions

Shared and Transition Services

Prior to October 2013, the Company operated under a shared services arrangement with MMC whereby the Company was charged for actual costs specifically incurred on behalf of the Company or allocated to the Company on a pro rata basis. Beginning in October 2013, certain services are provided to the Company under a Transition Services Agreement (“TSA”) between MMC and the Company, which replaced the pre-IPO shared services arrangement. The TSA is intended to provide certain services until the Company acquires the services separately. During the three months ended September 30, 2018 and 2017, the Company incurred net costs of $20,000 and $43,000 under the TSA, respectively. During the nine months ended September 30, 2018 and 2017, the Company incurred net costs of $147,000 and $168,000 under the TSA, respectively. These amounts are included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income.

 

17

Brokerage and Financing Services with the Subsidiaries of MMC

MMC has wholly or majority owned subsidiaries that buy and sell commercial real estate properties. The Company performs certain brokerage and financing services related to transactions of the subsidiaries of MMC. For the three months ended September 30, 2018 and 2017, the Company earned real estate brokerage commissions and financing fees of $1.8 million and $309,000, respectively, from transactions with subsidiaries of MMC related to these services. The Company incurred cost of services of $1.1 million and $181,000, respectively, related to these revenues. For the nine months ended September 30, 2018 and 2017, the Company earned real estate brokerage commissions and financing fees of $4.9 million and $632,000, respectively, from subsidiaries of MMC related to these services. The Company incurred cost of services of $2.9 million and $368,000, 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. Rent expense for this lease aggregated $257,000 and $253,000 for the three months ended September 30, 2018 and 2017 respectively. Rent expense for this lease aggregated $765,000 and 759,000 for the nine months ended September 30, 2018 and 2017 respectively. Rent expense is included in selling, general and administrative expense in the accompanying condensed consolidated statements of net and comprehensive income.

Accounts Payable and Other Liabilities with MMC

For each of the periods ended September 30, 2018 and December 31, 2017, accounts payable and other liabilities with MMC totaling $91,000 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 September 30, 2018 and December 31, 2017, the aggregate principal amount for employee notes receivable was $323,000 and $621,000, respectively, which is included in other assets (current and non-current), in the accompanying condensed consolidated balance sheets. See Note 5 – “Selected Balance Sheet Data” for additional information.

As of September 30, 2018, George M. Marcus, the Company’s founder and Co-Chairman, beneficially owned approximately 42% of the Company’s issued and outstanding common stock, including shares owned by Phoenix Investments Holdings, LLC and the Marcus Family Foundation II.

 

9.	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 the value of the investment carried at fair value and the supporting methodologies and assumptions. The Company uses various pricing sources and third parties to 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 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: 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 3: 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.

 

18

Recurring Fair Value Measurements

The Company values its investments including assets held in rabbi trust, commercial paper, money market funds, investments in marketable securities, available-for-sale and contingent consideration at fair value on a recurring basis. Fair values for assets held in rabbi trust were determined based on the underlying investments in the trust. For marketable securities, available-for-sale fair values were determined for each individual security in the investment portfolio and all these securities are measured as Levels 1 or 2 as appropriate. Contingent consideration in connection with acquisitions is carried at fair value based on a probability weighted discounted cash flow based on achieving EBITDA and other service requirements and is measured as Level 3.

Assets and liabilities carried at fair value are categorized into one of the three categories described above and consisted of the following (in thousands):

 

		September 30, 2018																December 31, 2017
		Fair Value				Level 1				Level 2				Level 3				Fair Value				Level 1				Level 2				Level 3
Assets:
Assets held in rabbi trust		$	9,115			$	—			$	9,115			$	—			$	8,787			$	—			$	8,787			$	—
Cash equivalents (1):
Commercial paper		$	8,496			$	—			$	8,496			$	—			$	11,441			$	—			$	11,441			$	—
Money market funds			110,231				110,231				—				—				157,788				157,788				—				—
		$	118,727			$	110,231			$	8,496			$	—			$	169,229			$	157,788			$	11,441			$	—
Marketable securities, available-for-sale:
Short-term investments:
U.S. treasuries		$	106,141			$	106,141			$	—			$	—			$	57,624			$	57,624			$	—			$	—
U.S. government sponsored entities			3,485				—				3,485				—				7,008				—				7,008				—
Corporate debt securities			10,975				—				10,975				—				8,928				—				8,928				—
Asset-backed securities and other			100				—				100				—				—				—				—				—
		$	120,701			$	106,141			$	14,560			$	—			$	73,560			$	57,624			$	15,936			$	—
Long-term investments:
U.S. treasuries		$	52,522			$	52,522			$	—			$	—			$	17,954			$	17,954			$	—			$	—
U.S. government sponsored entities			1,520				—				1,520				—				5,244				—				5,244				—
Corporate debt securities			24,907				—				24,907				—				22,719				—				22,719				—
Asset-backed securities and other			6,186				—				6,186				—				6,182				—				6,182				—
		$	85,135			$	52,522			$	32,613			$	—			$	52,099			$	17,954			$	34,145			$	—
Liabilities:
Contingent consideration		$	1,806			$	—			$	—			$	1,806			$	—			$	—			$	—			$	—

 

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

At September 30, 2018, the fair value of the contingent consideration was $1.8 million. Assuming the achievement of the applicable performance criteria, the Company anticipates these earn-out payments will be made over the next five-year period. Adjustments to earn-out liabilities in periods subsequent to the completion of acquisitions are reflected 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):

 

		September 30, 2018				December 31, 2017
Beginning balance		$	—			$	—
Contingent consideration in connection with acquisitions			1,720				—
Change in fair value of contingent consideration			86				—
Payments of contingent consideration			—				—
		$	1,806			$	—

 

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There were no transfers in or out of Level 1, Level 2 and Level 3 during the nine months ended September 30, 2018.

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. These assets include MSRs. MSRs are initially recorded at fair value based on internal models using contractual information and assumptions of a market participant and are measured as Level 3. The Company’s MSRs do not trade in an active, open market with readily observable prices. The Company has elected the amortization method for the subsequent measurement of MSRs. The estimated fair value of the Company’s MSRs were developed using discounted cash flow models that calculate the present value of estimated future net servicing income. The model considers contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges, other ancillary revenue, costs to service, and other economic factors. The Company periodically reassesses and adjusts, when necessary, the underlying inputs and assumptions used in the model to reflect observable market conditions and assumptions that a market participant would consider in valuing an MSR asset. MSRs are carried at the lower of amortized cost or fair value. The fair value of the MSRs approximated the carrying value at September 30, 2018.

 

10.	Stockholders’ Equity

Common Stock

As of September 30, 2018 and December 31, 2017, there were 38,651,360 and 38,374,011 shares of common stock, $0.0001 par value, issued and outstanding, which includes unvested restricted stock awards issued to non-employee directors, respectively. See Note 13 – “Earnings per Share” for additional information.

Preferred Stock

The Company has 25,000,000 authorized shares of preferred stock with a par value $0.0001 per share. At September 30, 2018 and December 31, 2017, there were no preferred shares issued or outstanding.

Accumulated Other Comprehensive (Loss) Income

The components of accumulated other comprehensive income as of September 30, 2018, by component, net of income taxes consisted of the following (in thousands):

 

		Unrealized gains and (losses) of available-for- sale securities				Foreign currency translation (3)				Total
Beginning balance, December 31, 2017		$	(62	)		$	1,002			$	940
Cumulative effect of change in accounting principle (1)			(13	)			—				(13	)
Balance at January 1, 2018, as adjusted			(75	)			1,002				927
Other comprehensive (loss) income before reclassifications			(779	)			44				(735	)
Amounts reclassified from accumulated other comprehensive (loss) income (2)			8				—				8
Net current-period other comprehensive (loss) income			(771	)			44				(727	)
		$	(846	)		$	1,046			$	200

 

(1)	Relates to reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings as a result of adoption of ASU 2018-02. See Note 2 – “Accounting Policies and Recent Accounting Pronouncements” for additional information.

(2)	Included as a component of other income (expense), net in the condensed consolidated statements of net and comprehensive income. The reclassifications were determined on a specific identification basis.

(3)	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.

 

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11.	Stock-Based Compensation Plans

2013 Omnibus Equity Incentive Plan

The 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. Upon adoption of the 2013 Plan, 5,500,000 shares of common stock were initially reserved for the issuance of awards. Pursuant to the automatic increases previously provided for in the 2013 Plan, the board of directors approved share reserve increases aggregating 3,300,000. Pursuant to the amendment and restatement of the 2013 Plan referenced above, the automatic share increase provision was removed. As of September 30, 2018, there were 5,401,371 shares available for future grants under the 2013 Plan.

Awards Granted and Settled

Under the 2013 Plan, the Company has issued restricted stock awards (“RSAs”) to non-employee directors and restricted stock units (“RSUs”) to employees and independent contractors. RSAs vest in equal annual installments over a one-year or three-year period from the date of grant. All RSUs vest in equal annual installments over a five-year period from the date of grant. Any unvested awards are canceled upon termination as a service provider. Awards accelerate upon death subject to approval by the compensation committee. As of September 30, 2018, there were no issued or outstanding options, SARs, performance units or performance shares awards under the 2013 Plan.

During the nine months ended September 30, 2018, 305,975 shares of RSUs vested and were delivered and 54,506 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.

Outstanding Awards

Activity under the 2013 Plan consisted of the following (dollars in thousands, except 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, 2017			30,732				500,859				450,264				981,855			$	23.90
Granted
February 2018			—				106,419				20,293				126,712
March 2018			—				15,000				—				15,000
May 2018			12,852				4,854				14,280				31,986
August 2018			—				10,407				63,651				74,058
Total Granted			12,852				136,680				98,224				247,756				34.92
Vested			(16,488	)			(142,433	)			(163,542	)			(322,463	)			22.06
Transferred			—				(7,356	)			7,356				—				26.52
Forfeited/canceled			—				(1,960	)			(5,744	)			(7,704	)			28.76
Nonvested shares at September 30, 2018 (1)			27,096				485,790				386,558				899,444			$	27.56
Unrecognized stock-based compensation expense as of September 30, 2018 (2)		$	526			$	10,884			$	10,621			$	22,031
Weighted average remaining vesting period (years) as of September 30, 2018			0.95				3.27				3.27				3.22

 

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

(2)	The total unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately 3.22 years.

 

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