Company Quick10K Filing
Medley
Price1.00 EPS-1,050,000
Shares-0 P/E-0
MCap-0 P/FCF-0
Net Debt-12 EBIT12
TEV-12 TEV/EBIT-1
TTM 2018-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-16
10-Q 2019-11-07 Filed 2019-11-14
10-Q 2019-09-30 Filed 2019-11-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-06-30 Filed 2019-08-14
10-Q 2019-03-31 Filed 2019-05-15
10-Q 2019-03-31 Filed 2019-05-15
10-K 2018-12-31 Filed 2019-04-01
10-K 2018-12-31 Filed 2019-04-01
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-15
10-K 2017-12-31 Filed 2018-03-29
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-10
10-Q 2017-06-30 Filed 2017-08-10
10-Q 2017-03-31 Filed 2017-05-12
10-Q 2017-03-31 Filed 2017-05-12
10-K 2016-12-31 Filed 2017-03-16
10-K 2016-12-31 Filed 2017-03-16
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-09-30 Filed 2016-11-14
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-06-30 Filed 2016-08-11
8-K 2019-11-14
8-K 2019-10-28
8-K 2019-08-14
8-K 2019-07-29
8-K 2019-07-29
8-K 2019-05-29
8-K 2019-05-15
8-K 2019-04-18
8-K 2019-04-15
8-K 2019-04-01
8-K 2019-03-29
8-K 2019-03-27
8-K 2019-03-15
8-K 2019-03-08
8-K 2019-02-08
8-K 2019-02-05
8-K 2019-01-02
8-K 2018-12-18
8-K 2018-11-14

MDLY 10Q Quarterly Report

Part I.
Item 1. Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II.
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.1 johnfredericksseperationag.htm
EX-31.1 mdly-093020xex311.htm
EX-31.2 mdly-093020xex312.htm
EX-31.3 mdly-093020xex313.htm
EX-32.1 mdly-093020xex321.htm
EX-32.2 mdly-093020xex322.htm
EX-32.3 mdly-093020xex323.htm

Medley Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
1451056525-15-552016201720182019
Assets, Equity
25191371-42016201720182019
Rev, G Profit, Net Income
20100-10-20-302016201720182019
Ops, Inv, Fin

10-Q 1 mdlyform10qq32020.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2020
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: 001-36638

Medley Management Inc.
(Exact name of registrant as specified in its charter)

Delaware
47-1130638
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
280 Park Avenue, 6th Floor East
New York, New York 10017
(Address of principal executive offices)(Zip Code)
 
(212) 759-0777
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12 (b) of the Act:
(Title of each class)
Trading Symbol
(Name of each exchange on which registered)
Class A Common Stock, $0.01 par value per share
MDLY
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
 
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 check mark 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 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 the 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 7(a)(2)(B) of the Securities Act. ☐ 

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

The number of shares of the registrant’s Class A common stock, par value $0.01 per share, outstanding as of November 10, 2020 was 669,753. The number of shares of the registrant’s Class B common stock, par value $0.01 per share, outstanding as of November 10, 2020 was 10.








TABLE OF CONTENTS 
 

 
 
 Page
Part I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
 
 
Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019
 
 
 
 
Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2020 and 2019
 
 
 
 
Condensed Consolidated Statements of Changes in Equity (unaudited) for the Three and Nine Months Ended September 30, 2020 and 2019
 
 
 
 
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2020 and 2019
 
 
 
 
Notes to the Condensed Consolidated Financial Statements (unaudited)
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
Part II.
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 3.
Defaults Upon Senior Securities
 
 
 
Item 4.
Mine Safety Disclosures
 
 
 
Item 5.
Other Information
 
 
 
Item 6.
Exhibits, Financial Statement Schedules
 
 
 
 
Signatures






FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “may,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019, available on the SEC’s website at www.sec.gov, which include, but are not limited to, the following:
difficult market and political conditions may adversely affect our business in many ways, including by reducing the value or hampering the performance of the investments made by our funds, each of which could materially and adversely affect our business, results of operations and financial condition;
our business may be adversely affected by the ongoing COVID-19 pandemic;
we derive a substantial portion of our revenues from funds managed pursuant to advisory agreements that may be terminated or fund partnership agreements that permit fund investors to remove us as the general partner;
we may not be able to maintain our current fee structure as a result of industry pressure from fund investors to reduce fees, which could have an adverse effect on our profit margins and results of operations;
a change of control of us could result in termination of our investment advisory agreements;
the historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in Medley Management Inc.'s Class A common stock ("Class A common stock");
if we are unable to consummate or successfully integrate development opportunities, acquisitions or joint ventures, we may not be able to implement our growth strategy successfully;
we depend on third-party distribution sources to market our investment strategies;
an investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies;
our funds’ investments in investee companies may be risky, and our funds could lose all or part of their investments;
prepayments of debt investments by our investee companies could adversely impact our results of operations;
our funds’ investee companies may incur debt that ranks equally with, or senior to, our funds’ investments in such companies;
subordinated liens on collateral securing loans that our funds make to their investee companies may be subject to control by senior creditors with first priority liens and, if there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and our funds;
there may be circumstances where our funds’ debt investments could be subordinated to claims of other creditors or our funds could be subject to lender liability claims;
our funds may not have the resources or ability to make additional investments in our investee companies;
economic recessions or downturns could impair our investee companies and harm our operating results;
a covenant breach by our investee companies may harm our operating results;
the investment management business is competitive;
our funds operate in a competitive market for lending that has recently intensified, and competition may limit our funds’ ability to originate or acquire desirable loans and investments and could also affect the yields of these assets and have a material adverse effect on our business, results of operations and financial condition;

i





dependence on leverage by certain of our funds and by our funds’ investee companies subjects us to volatility and contractions in the debt financing markets and could adversely affect our ability to achieve attractive rates of return on those investments;
some of our funds may invest in companies that are highly leveraged, which may increase the risk of loss associated with those investments;
we generally do not control the business operations of our investee companies and, due to the illiquid nature of our investments, may not be able to dispose of such investments;
a substantial portion of our investments may be recorded at fair value as determined in good faith by or under the direction of our respective funds’ boards of directors or similar bodies and, as a result, there may be uncertainty regarding the value of our funds’ investments;
we may need to pay “clawback” obligations if and when they are triggered under the governing agreements with respect to certain of our funds and SMAs;
our funds may face risks relating to undiversified investments;
third-party investors in our private funds may not satisfy their contractual obligation to fund capital calls when requested, which could adversely affect a fund’s operations and performance;
our funds may be forced to dispose of investments at a disadvantageous time;
hedging strategies may adversely affect the returns on our funds’ investments;
our business depends in large part on our ability to raise capital from investors. If we were unable to raise such capital, we would be unable to collect management fees or deploy such capital into investments, which would materially and adversely affect our business, results of operations and financial condition;
we depend on our senior management team, senior investment professionals and other key personnel, and our ability to retain them and attract additional qualified personnel is critical to our success and our growth prospects;
our failure to appropriately address conflicts of interest could damage our reputation and adversely affect our business;
potential conflicts of interest may arise between our Class A common stockholders and our fund investors;
rapid growth of our business may be difficult to sustain and may place significant demands on our administrative, operational and financial resources;
we may enter into new lines of business and expand into new investment strategies, geographic markets and business, each of which may result in additional risks and uncertainties in our business;
extensive regulation affects our activities, increases the cost of doing business and creates the potential for significant liabilities and penalties that could adversely affect our business and results of operations;
failure to comply with “pay to play” regulations implemented by the SEC and certain states, and changes to the “pay to play” regulatory regimes, could adversely affect our business;
new or changed laws or regulations governing our funds’ operations and changes in the interpretation thereof could adversely affect our business;
present and future business development companies for which we serve as investment adviser are subject to regulatory complexities that limit the way in which they do business and may subject them to a higher level of regulatory scrutiny;
we are subject to risks in using custodians, counterparties, administrators and other agents;
a portion of our revenue and cash flow is variable, which may impact our ability to achieve steady earnings growth on a quarterly basis and may cause the price of our Class A common stock to decline;
we may be subject to litigation risks and may face liabilities and damage to our professional reputation as a result;
employee misconduct could harm us by impairing our ability to attract and retain investors and subjecting us to significant legal liability, regulatory scrutiny and reputational harm, and fraud and other deceptive practices or other misconduct at our investee companies could similarly subject us to liability and reputational damage and also harm our business;

ii





our substantial indebtedness could adversely affect our financial condition, our ability to pay our debts or raise additional capital to fund our operations, our ability to operate our business and our ability to react to changes in the economy or our industry and could divert our cash flow from operations for debt payments;
servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are not within our control;
despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate the risks to our financial condition;
operational risks may disrupt our business, result in losses or limit our growth;
Medley Management Inc.’s only material asset is its interest in Medley LLC, and it is accordingly dependent upon distributions from Medley LLC to pay taxes, make payments under the tax receivable agreement or pay dividends;
Medley Management Inc. is controlled by our pre-IPO owners, whose interests may differ from those of our public stockholders;
Medley Management Inc. will be required to pay exchanging holders of LLC Units for most of the benefits relating to any additional tax depreciation or amortization deductions that we may claim as a result of the tax basis step-up we receive in connection with sales or exchanges of LLC Units and related transactions;
in certain cases, payments under the tax receivable agreement may be accelerated and/or significantly exceed the actual benefits Medley Management Inc. realizes in respect of the tax attributes subject to the tax receivable agreement;
anti-takeover provisions in our organizational documents and Delaware law might discourage or delay acquisition attempts for us that you might consider favorable;
our ability to realize anticipated cost savings and efficiencies from consolidating our business activities to our New York office;
the impact of the termination of the Amended MDLY Merger Agreement and the Amended MCC Merger Agreement on our business, financial results, ability to pay dividends and distributions, if any, to our stockholders, and our stock price; and
risks and uncertainties relating to the possibility that MCC may explore strategic alternatives, including, but are not limited to: the timing, benefits and outcome of any exploration of strategic alternatives by MCC; potential disruptions in MCC’s business and stock price as a result of its exploration of any strategic alternatives and the impact of the foregoing on the Company’s business and stock price; and the risk that any exploration of strategic alternatives may have an adverse effect on MCC’s existing business arrangements or relationships, including its relationship with the Company and its ability to retain or hire key personnel. There is no assurance that any exploration of strategic alternatives will result in a transaction or other strategic change or outcome.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, the risk factors and other cautionary statements in our Annual Report on Form 10-K for the year ended December 31, 2019 and other reports we file with the Securities and Exchange Commission. Forward-looking statements speak as of the date on which they are made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Unless the context suggests otherwise, references herein to the “Company,” “Medley,” "MDLY," “we,” “us” and “our” refer to Medley Management Inc., Medley LLC, and their consolidated subsidiaries.
The “pre-IPO owners” refers to the senior professionals who were the owners of Medley LLC immediately prior to the Offering Transactions. The “Offering Transactions” refer to Medley Management Inc.’s purchase upon the consummation of its IPO of 6,000,000 newly issued limited liability company units (the “LLC Units”) from Medley LLC, which correspondingly diluted the ownership interests of the pre-IPO owners in Medley LLC and resulted in Medley Management Inc.’s holding a number of LLC Units in Medley LLC equal to the number of shares of Class A common stock it issued in its IPO.
Unless the context suggests otherwise, references herein to:
“Aspect” refers to Aspect-Medley Investment Platform A LP;
“Aspect B” refers to Aspect-Medley Investment Platform B LP;

iii





“AUM” refers to the assets of our funds, which represents the sum of the NAV of such funds, the drawn and undrawn debt (at the fund level, including amounts subject to restrictions) and uncalled committed capital (including commitments to funds that have yet to commence their investment periods);
“base management fees” refers to fees we earn for advisory services provided to our funds, which are generally based on a defined percentage of fee earning AUM or, in certain cases, a percentage of originated assets in the case of certain of our SMAs;
“BDC” refers to business development company;
“Consolidated Funds” refers to, with respect to periods after December 31, 2013 and before January 1, 2015, MOF II, with respect to periods prior to January 1, 2014, MOF I LP, MOF II and MOF III, subsequent to its formation; and, with respect to periods after May 31, 2017 and prior to April 6, 2020, Sierra Total Return Fund;
“fee earning AUM” refers to the assets under management on which we directly earn base management fees;
“hurdle rates” refers to the rates above which we earn performance fees, as defined in the long-dated private funds’ and SMAs’ applicable investment management or partnership agreements;
“investee company” refers to a company to which one of our funds lends money or in which one of our funds otherwise makes an investment;
“long-dated private funds” refers to MOF II, MOF III, MOF III Offshore, MCOF, Aspect, Aspect B and any other private funds we may manage in the future;
“management fees” refers to base management fees, other management fees and Part I incentive fees;
“MCOF” refers to Medley Credit Opportunity Fund LP;
“MDLY” refers to Medley Management Inc.;
“Medley LLC” refers to Medley LLC and its consolidated subsidiaries;
“MOF II” refers to Medley Opportunity Fund II LP;
“MOF III” refers to Medley Opportunity Fund III LP;
"MOF III Offshore" refers to Medley Opportunity Fund Offshore III LP;
“our funds” refers to the funds, alternative asset companies and other entities and accounts that are managed or co-managed by us and our affiliates;
“our investors” refers to the investors in our permanent capital vehicles, our private funds and our SMAs;
“Part I incentive fees” refers to fees that we receive from our permanent capital vehicles, and since 2017, MCOF and Aspect, which are paid in cash quarterly and are driven primarily by net interest income on senior secured loans subject to hurdle rates. As it relates to Medley Capital Corporation (NYSE: MCC) (TASE:MCC) (“MCC”), these fees are subject to netting against realized and unrealized losses;
“Part II incentive fees” refers to fees related to realized capital gains in our permanent capital vehicles;
“performance fees” refers to incentive allocations in our long-dated private funds and incentive fees from our SMAs, which are typically 15% to 20% of the total return after a hurdle rate, accrued quarterly, but paid after the return of all invested capital and in an amount sufficient to achieve the hurdle rate;
“permanent capital” refers to capital of funds that do not have redemption provisions or a requirement to return capital to investors upon exiting the investments made with such capital, except as required by applicable law, which funds currently consist of MCC, Sierra Total Return Fund ("STRF") and Sierra Income Corporation (“SIC” or "Sierra"). Such funds may be required, or elect, to return all or a portion of capital gains and investment income. In certain circumstances, the investment adviser of such a fund may be removed;
“SMA” refers to a separately managed account; and
"standalone" refers to our financial results without the consolidation of any fund(s).


iv





PART I.
Item 1. Financial Statements (Unaudited)
Medley Management Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except share and per share amounts)

 
As of

September 30, 2020

December 31, 2019
Assets
 


 

Cash and cash equivalents
$
6,048

 
$
10,558

Investments, at fair value
9,637

 
13,287

Management fees receivable
5,799

 
8,104

Right-of-use assets under operating leases
5,206

 
6,564

Other assets
12,021

 
10,283

Total Assets
$
38,711


$
48,796

 



 
Liabilities, Redeemable Non-controlling Interests and Equity
 


 

Liabilities
 
 
 
Senior unsecured debt, net
$
118,958

 
$
118,382

Loans payable
10,000

 
10,000

Due to former minority interest holder, net
7,233

 
8,145

Operating lease liabilities
7,420

 
8,267

Accounts payable, accrued expenses and other liabilities
27,080

 
22,835

Total Liabilities
170,691


167,629





 
Commitments and Contingencies (Note 12)









 
Redeemable Non-controlling Interests


(748
)
 



 
Equity
 


 

Class A common stock, $0.01 par value, 5,000,000 shares authorized; 669,753 and 620,981 issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
7

 
6

Class B common stock, $0.01 par value, 1,000 shares authorized; 10 shares issued and outstanding

 

Additional paid in capital
16,657

 
13,835

Accumulated deficit
(24,796
)
 
(22,960
)
Total stockholders' deficit, Medley Management Inc.
(8,132
)
 
(9,119
)
Non-controlling interests in consolidated subsidiaries
(477
)
 
(391
)
Non-controlling interests in Medley LLC
(123,371
)
 
(108,575
)
Total deficit
(131,980
)

(118,085
)
Total Liabilities, Redeemable Non-controlling Interests and Equity
$
38,711


$
48,796

  

See accompanying notes to unaudited condensed consolidated financial statements
F- 1


Medley Management Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(in thousands, except share and per share amounts)



For the Three Months Ended
September 30,

For the Nine Months Ended September 30,
 
2020

2019

2020

2019
Revenues
 


 


 


 

Management fees (there were no Part I incentive fees during the periods presented)
$
6,275


$
9,607

 
$
19,807

 
$
30,728

Other revenues and fees
1,635


2,621

 
6,269

 
7,731

Investment income (loss):
 
 
 
 
 
 
 
Carried interest
(3
)
 
(142
)
 
83

 
651

Other investment income (loss), net
419

 
(550
)
 
(1,384
)
 
(922
)
Total Revenues
8,326


11,536


24,775


38,188

 
 
 
 
 
 
 
 
Expenses
 


 


 

 
 

Compensation and benefits
4,040

 
7,090

 
17,119

 
22,069

General, administrative and other expenses
3,599

 
5,403

 
11,682

 
12,763

Total Expenses
7,639

 
12,493

 
28,801

 
34,832

 
 
 
 
 
 
 
 
Other Income (Expenses)
 


 


 

 
 

Dividend income

 
182

 
137

 
942

Interest expense
(2,535
)
 
(2,874
)
 
(7,950
)
 
(8,646
)
Other (expenses) income, net
(167
)
 
1,768

 
(5,592
)
 
(641
)
Total expenses, net
(2,702
)
 
(924
)
 
(13,405
)
 
(8,345
)
Loss before income taxes
(2,015
)
 
(1,881
)

(17,431
)
 
(4,989
)
Benefit from income taxes
(320
)
 
(188
)

(1,637
)
 
(281
)
Net Loss
(1,695
)

(1,693
)

(15,794
)

(4,708
)
Net income attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries
1


1,619

 
60

 
140

Net loss attributable to non-controlling interests in Medley LLC
(1,574
)

(2,796
)
 
(13,788
)
 
(4,078
)
Net Loss Attributable to Medley Management Inc.
$
(122
)
 
$
(516
)

$
(2,066
)

$
(770
)
Dividends declared per share of Class A common stock
$


$


$


$
0.03

 






 
 
 
Net Loss Per Share of Class A Common Stock:
 


 


 

 
 

Basic (Note 14)
$
(0.19
)
 
$
(0.86
)
 
$
(3.39
)
 
$
(1.32
)
Diluted (Note 14)
$
(0.19
)
 
$
(0.86
)
 
$
(3.39
)
 
$
(1.32
)
Weighted average shares outstanding - Basic and Diluted
639,216

 
589,933

 
631,620

 
583,449




See accompanying notes to unaudited condensed consolidated financial statements
F- 2

Medley Management Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
(in thousands, except share amounts)




For the Three Months Ended September 30, 2020:
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional
Paid in
Capital
 

Accumulated
Deficit
 
Non-
controlling
Interests in
Consolidated
Subsidiaries
 
Non-
controlling
Interests in
Medley
LLC
 
Total
Deficit
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
 
 
 
Balance at June 30, 2020
637,082

 
$
6

 
10

 
$

 
$
15,473

 
$
(24,674
)
 
$
(364
)
 
$
(121,797
)
 
$
(131,356
)
Net (loss) income

 

 

 

 

 
(122
)
 
1

 
(1,574
)
 
(1,695
)
Stock-based compensation

 

 

 

 
1,208

 

 

 

 
1,208

Issuance of Class A common stock related to the vesting of restricted stock units, net of tax withholdings
32,671

 
1

 

 

 
(24
)
 

 

 

 
(23
)
Distributions

 

 

 

 

 

 
(114
)
 

 
(114
)
Reclassification of cumulative dividends on forfeited restricted stock units to compensation and benefits expense


 

 

 

 

 

 

 

 

Balance at September 30, 2020
669,753

 
$
7

 
10

 

 
$
16,657

 
$
(24,796
)
 
$
(477
)
 
$
(123,371
)
 
$
(131,980
)
 



For the Nine Months Ended September 30, 2020:
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional
Paid in
Capital
 

Accumulated
Deficit
 
Non-
controlling
Interests in
Consolidated
Subsidiaries
 
Non-
controlling
Interests in
Medley
LLC
 
Total
Deficit
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
 
 
 
Balance at December 31, 2019
620,981

 
$
6

 
10

 
$

 
$
13,835

 
$
(22,960
)
 
$
(391
)
 
$
(108,575
)
 
$
(118,085
)
Net (loss) income

 

 

 

 

 
(2,066
)
 
64

 
(13,788
)
 
(15,790
)
Stock-based compensation

 

 

 

 
2,946

 

 

 

 
2,946

Issuance of Class A common stock related to the vesting of restricted stock units, net of tax withholdings
48,772

 
1

 

 

 
(124
)
 

 

 

 
(123
)
Distributions

 

 

 

 

 

 
(150
)
 
(401
)
 
(551
)
Fair value adjustment to redeemable non-controlling interests
(Note 17)

 

 

 

 

 
(145
)
 

 
(607
)
 
(752
)
Reclassification of cumulative dividends on forfeited restricted stock units to compensation and benefits expense


 

 

 

 

 
375

 

 

 
375

Balance at September 30, 2020
669,753

 
$
7

 
10

 
$

 
$
16,657

 
$
(24,796
)
 
$
(477
)
 
$
(123,371
)
 
$
(131,980
)







See accompanying notes to unaudited condensed consolidated financial statements
F- 3

Medley Management Inc.
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
(in thousands, except share amounts)





For the Three Months Ended September 30, 2019:
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional
Paid in
Capital
 

Accumulated
Deficit
 
Non-
controlling
Interests in
Consolidated
Subsidiaries
 
Non-
controlling
Interests in
Medley
LLC
 
Total
Deficit
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
 
 
 
Balance at June 30, 2019
587,081

 
$
6

 
10

 
$

 
$
10,487

 
$
(19,812
)
 
$
(416
)
 
$
(99,856
)
 
$
(109,591
)
Net loss

 

 

 

 

 
(516
)
 
(93
)
 
(2,796
)
 
(3,405
)
Stock-based compensation

 

 

 

 
2,005

 

 

 

 
2,005

Reclass of cumulative dividends on forfeited restricted stock units to compensation and benefits expense

 

 

 

 

 
38

 

 

 
38

Issuance of Class A common stock related to vesting of restricted stock units, net of tax withholdings
10,155

 

 

 

 
(196
)
 

 

 

 
(196
)
Balance at September 30, 2019
597,236

 
$
6

 
10

 
$

 
$
12,296

 
$
(20,290
)
 
$
(509
)
 
$
(102,652
)
 
$
(111,149
)


For the Nine Months Ended September 30, 2019:
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional
Paid in
Capital
 

Accumulated
Deficit
 
Non-
controlling
Interests in
Consolidated
Subsidiaries
 
Non-
controlling
Interests in
Medley
LLC
 
Total
Deficit
 
Shares
 
Dollars
 
Shares
 
Dollars
 
 
 
 
 
Balance at December 31, 2018
570,100

 
$
6

 
10

 
$

 
$
7,580

 
$
(19,618
)
 
$
(747
)
 
$
(97,842
)
 
$
(110,621
)
Net (loss) income

 

 

 

 

 
(770
)
 
461

 
(4,078
)
 
(4,387
)
Stock-based compensation

 

 

 

 
5,227

 

 

 

 
5,227

Dividends declared on Class A common stock ($0.03 per share)

 

 

 

 

 
(238
)
 

 

 
(238
)
Reclass of cumulative dividends on forfeited restricted stock units to compensation and benefits expense

 

 

 

 

 
336

 

 

 
336

Distributions

 

 

 

 

 

 
(223
)
 
(732
)
 
(955
)
Issuance of Class A common stock related to vesting of restricted stock units, net of tax withholdings
27,136

 

 

 

 
(511
)
 

 

 

 
(511
)
Balance at September 30, 2019
597,236

 
$
6

 
10

 
$

 
$
12,296

 
$
(20,290
)
 
$
(509
)
 
$
(102,652
)
 
$
(111,149
)


See accompanying notes to unaudited condensed consolidated financial statements
F- 4

Medley Management Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)



 
Nine Months Ended September 30,
 
2020
 
2019
Cash flows from operating activities
 

 
 

Net loss
$
(15,794
)
 
$
(4,708
)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
 

 
 

Stock-based compensation
2,946

 
5,227

Amortization of debt issuance costs
519

 
580

Accretion of debt discount
720

 
994

Provision for (benefit from) deferred taxes
107

 
(535
)
Depreciation and amortization
539

 
528

Net unrealized depreciation on investments
1,288

 
1,368

Losses (income) from equity method investments
330

 
(257
)
Reclassification of cumulative dividends paid on forfeited restricted stock units to compensation and benefits expense
375

 
336

Non-cash lease costs
1,823

 
1,823

Other non-cash amounts
330

 

Changes in operating assets and liabilities:
 

 
 

Management fees receivable
2,305

 
1,748

Income distributions received from equity method investments
772

 
648

Purchase of investments

 
(706
)
Sale of investments
95

 
822

Other assets
(2,181
)
 
(207
)
Operating lease liabilities
(1,313
)
 
(2,042
)
Accounts payable, accrued expenses and other liabilities
5,338

 
(4,329
)
Net cash (used in) provided by operating activities
(1,801
)

1,290

Cash flows from investing activities
 

 
 

Purchases of fixed assets
(16
)
 
(37
)
Distributions received from investment held at cost less impairment
27

 
222

Decrease in cash resulting from the deconsolidation of STRF
(471
)
 

Capital contributions to equity method investments

 
(3
)
Net cash (used in) provided by investing activities
(460
)

182

Cash flows from financing activities
 

 
 

Payments to former minority interest holder
(1,575
)
 
(3,500
)
Distributions to non-controlling interests and redeemable
non-controlling interests
(551
)
 
(3,317
)
Dividends paid

 
(238
)
Payments of tax withholdings related to net share settlement of restricted stock units
(123
)
 
(511
)
Net cash used in financing activities
(2,249
)

(7,566
)
Net decrease in cash and cash equivalents
(4,510
)
 
(6,094
)
Cash and cash equivalents, beginning of period
10,558

 
17,219

Cash and cash equivalents, end of period
$
6,048


$
11,125

 
 
 
 
Supplemental disclosure of non-cash operating and financing activities:
 
 
 
Recognition of right-of-use assets under operating leases upon adoption of new leasing standard
$

 
$
8,233

Recognition of operating lease liabilities arising from obtaining right-of-use assets under operating leases upon adoption of new leasing standard

 
10,229

Accretion of operating lease liabilities recorded against right-of-use assets

 
586

Fair value adjustment to redeemable non-controlling interest in STRF Advisors LLC (Note 17)
752

 

 

See accompanying notes to unaudited condensed consolidated financial statements
F- 5

Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




1. ORGANIZATION AND BASIS OF PRESENTATION
Medley Management Inc. (“MDLY”) is an alternative asset management firm offering yield solutions to retail and institutional investors. The Company's national direct origination franchise provides capital to the middle market in the United States of America. Medley Management Inc., through its consolidated subsidiary, Medley LLC, provides investment management services to permanent capital vehicles, long-dated private funds and separately managed accounts and serves as the general partner to the private funds, which are generally organized as pass-through entities. Medley Management Inc., Medley LLC and its consolidated subsidiaries (collectively “Medley” or the “Company”) is headquartered in New York City.
Medley's business is currently comprised of only one reportable segment, the investment management segment, and substantially all of the Company operations are conducted through this segment. The investment management segment provides investment management services to permanent capital vehicles, long-dated private funds and separately managed accounts. The Company conducts its investment management business in the U.S., where substantially all its revenues are generated.
Reverse Stock Split and Reclassification of Prior Periods
The Company effected a reverse stock split at a ratio of 1-for-10 of all classes of the Company’s common stock (“Common Stock”), effective as of 5:00 p.m. on October 30, 2020. As a result of the reverse stock split, each ten shares of the outstanding Common Stock were combined into one share of the respective class of Common Stock without any change to the par value per share. Simultaneously with the reverse stock split, the Company implemented a reduction in the number of authorized shares of all classes of the Company's capital stock, including a reduction in the number of authorized shares of Class A Common Stock from 3,000,000,000 shares to 5,000,000 shares, a reduction in the number of authorized shares of Class B Common Stock from 1,000,000 shares to 1,000 shares, and a reduction in the number of authorized shares of Preferred Stock from 300,000,000 shares to 1,000,000 shares.
As a result of this reverse stock split, all references in these consolidated financial statements and notes thereto to all share amounts, per share amounts, restricted stock units, LLC Units (as defined below) and restricted LLC Units data reflect the effect of the reverse stock split and Authorized Share Reduction for all periods presented (See Note 19).
The stated equity attributable to Common Stock on the Company’s condensed consolidated balance sheets was reduced proportionately to the Reverse Stock Split ratio, and the additional paid-in capital account was credited with the amount by which the stated equity was reduced. Prior periods have been reclassified to reflect this change.
Initial Public Offering of Medley Management Inc.
Medley Management Inc. was incorporated on June 13, 2014 and commenced operations on September 29, 2014 upon the completion of its initial public offering (“IPO”) of its Class A common stock. Medley Management Inc. raised $100.4 million, net of underwriting discount, through the issuance of 600,000 shares of Class A common stock. Medley Management Inc. used the offering proceeds to purchase 600,000 newly issued LLC Units (as defined below) from Medley LLC. Prior to the IPO, Medley Management Inc. had not engaged in any business or other activities except in connection with its formation and IPO.
In connection with the IPO, Medley Management Inc. issued 10 shares of Class B common stock to Medley Group LLC (“Medley Group”), an entity wholly owned by the pre-IPO members of Medley LLC. For as long as the pre-IPO members and then-current Medley personnel hold at least 10% of the aggregate number of shares of Class A common stock and LLC Units (excluding those LLC Units held by Medley Management Inc.) then outstanding, the Class B common stock entitles Medley Group to a number of votes that is equal to 10 times the aggregate number of LLC Units held by all non-managing members of Medley LLC that do not themselves hold shares of Class B common stock and entitle each other holder of Class B common stock, without regard to the number of shares of Class B common stock held by such other holder, to a number of votes that is equal to 10 times the number of membership units held by such holder. The Class B common stock does not participate in dividends and does not have any liquidation rights.
 Medley LLC Reorganization
In connection with the IPO, Medley LLC amended and restated its limited liability agreement to modify its capital structure by reclassifying the 2,333,333 interests held by the pre-IPO members into a single new class of units (“LLC Units”). The pre-IPO members also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, subject to the terms of an exchange agreement, to exchange their LLC Units for shares of Medley Management Inc.’s Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. In addition, pursuant to the amended and restated limited liability agreement, Medley Management Inc. became the sole managing member of Medley LLC.

F- 6


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Termination of Agreement and Plan of Merger
On July 29, 2019, the Company entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among the Company, Sierra Income Corporation (“Sierra”), and Sierra Management, Inc., a wholly owned subsidiary of Sierra (“Merger Sub”), pursuant to which the Company would have, on the terms and subject to the conditions set forth in the Amended MDLY Merger Agreement, merged with and into Merger Sub, with Merger Sub as the surviving company in the merger (the “MDLY Merger”). In addition, on July 29, 2019, Medley Capital Corporation (“MCC”) and Sierra entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MCC Merger Agreement”), by and between MCC and Sierra, pursuant to which MCC would have, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merged with and into Sierra, with Sierra as the surviving company in the merger (the “MCC Merger”).

On May 1, 2020, the Company received a written notice of termination from Sierra in accordance with Sections 9.1 and 10.2 of the Amended MDLY Merger Agreement. Section 9.1(c) of the Amended MDLY Merger Agreement permits both the Company and Sierra to terminate the Amended MDLY Merger Agreement if the MDLY Merger had not been consummated on or before March 31, 2020 (the “Outside Date”).

As a result, the Amended MDLY Merger Agreement had been terminated effective as of May 1, 2020. Sierra terminated the Amended MDLY Merger Agreement effective as of May 1, 2020 as the Outside Date had passed and the MDLY Merger had not been consummated. Representatives of Sierra informed the Company that in determining to terminate the Amended MDLY Merger Agreement, Sierra considered a number of factors, including, among other factors, changes in the relative valuation of the Company and Sierra, the changed circumstances and the unpredictable economic conditions resulting from the global health crisis caused by the coronavirus (COVID-19) pandemic, and the uncertainty regarding the parties’ ability to satisfy the conditions to closing the MDLY Merger in a timely manner.

In addition, on May 1, 2020, MCC received a notice of termination from Sierra of the Amended MCC Merger Agreement. Under the Amended MCC Merger Agreement, either party may have, subject to certain conditions, terminated the Amended MCC Merger Agreement if the MCC Merger was not consummated by March 31, 2020. Sierra elected to do so on May 1, 2020. Representatives of Sierra informed MCC that in determining to terminate the Amended MCC Merger Agreement, Sierra considered a number of factors, including, among other factors, changes in the relative valuation of MCC and Sierra, the changed circumstances and the unpredictable economic conditions resulting from the global health crisis caused by the COVID-19 pandemic, and the uncertainty regarding the parties’ ability to satisfy the conditions to closing the MCC Merger in a timely manner.

Transaction expenses related to the MDLY Merger are included in general, administrative and other expenses and consist primarily of professional fees. Such expenses amounted to $1.0 million and $2.1 million for the three months ended September 30, 2020 and 2019, respectively, and $3.5 million for each of the nine months ended September 30, 2020 and 2019.
Basis of Presentation
The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and includes the accounts of Medley Management Inc., Medley LLC and its consolidated subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
In accordance with Accounting Standards Codification (“ASC”) 810, Consolidation, the Company consolidates those entities where it has a direct and indirect controlling financial interest based on either a variable interest model or voting interest model. As such, the Company consolidates entities that the Company concludes are variable interest entities (“VIEs”), for which the Company is deemed to be the primary beneficiary and entities in which it holds a majority voting interest or has majority ownership and control over the operational, financial and investing decisions of that entity.
For legal entities evaluated for consolidation, the Company must determine whether the interests that it holds and fees paid to it qualify as a variable interest in an entity. This includes an evaluation of the management fee and performance fee paid to the Company when acting as a decision maker or service provider to the entity being evaluated. If fees received by the Company are customary and commensurate with the level of services provided, and the Company does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, the interest that the Company holds would not be considered a variable interest. The Company factors in all economic interests including proportionate interests through related parties, to determine if fees are considered a variable interest.

F- 7


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




An entity in which the Company holds a variable interest is a VIE if any one of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk have the right to direct the activities of the entity that most significantly impact the legal entity’s economic performance, or (c) the voting rights of some investors are disproportionate to their obligation to absorb losses or rights to receive returns from a legal entity. For limited partnerships and other similar entities, non-controlling investors must have substantive rights to either dissolve the fund or remove the general partner (“kick-out rights”) in order to not qualify as a VIE.
For those entities that qualify as a VIE, the primary beneficiary is generally defined as the party who has a controlling financial interest in the VIE. The Company is generally deemed to have a controlling financial interest if it has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes initially involved with the VIE and reconsiders that conclusion continuously. The primary beneficiary evaluation is generally performed qualitatively on the basis of all facts and circumstances. However, quantitative information may also be considered in the analysis, as appropriate. These assessments require judgment. Each entity is assessed for consolidation on a case-by-case basis. 
For those entities evaluated under the voting interest model, the Company consolidates the entity if it has a controlling financial interest. The Company has a controlling financial interest in a voting interest entity (“VOE”) if it owns a majority voting interest in the entity.
Consolidated Variable Interest Entities
Medley Management Inc. is the sole managing member of Medley LLC and, as such, it operates and controls all of the business and affairs of Medley LLC and, through Medley LLC, conducts its business. Under ASC 810, Medley LLC meets the definition of a VIE because the equity of Medley LLC is not sufficient to permit business activities without additional subordinated financial support. Medley Management Inc. has the obligation to absorb expected losses that could be significant to Medley LLC and holds 100% of the voting power, therefore Medley Management Inc. is considered to be the primary beneficiary of Medley LLC.
As a result, Medley Management Inc. consolidates the financial results of Medley LLC and its subsidiaries and records a non-controlling interest for the economic interest in Medley LLC held by the non-managing members. As of September 30, 2020, Medley Management Inc.’s and the non-managing members’ economic interests in Medley LLC were 20.2% and 79.8%, respectively, and as of December 31, 2019, were 19.3% and 80.7%, respectively. Net loss attributable to the non-controlling interests in Medley LLC on the consolidated statements of operations represents the portion of earnings or losses attributable to the economic interest in Medley LLC held by its non-managing members. Non-controlling interests in Medley LLC on the consolidated balance sheets represents the portion of net assets of Medley LLC attributable to the non-managing members based on total LLC Units and participating restricted LLC Units of Medley LLC owned by such non-managing members.
As of September 30, 2020, Medley LLC had four subsidiaries, Medley Caddo Investors Holdings 1 LLC, Medley Avantor Investors LLC, Medley Cloverleaf Investors LLC and Medley Real D Investors LLC, which are consolidated VIEs. Each of these entities was organized as a limited liability company and was legally formed to either manage a designated fund or to strategically invest capital as well as isolate business risk. As of September 30, 2020, total assets and total liabilities, after eliminating entries, of these VIEs reflected in the consolidated balance sheets were $0.9 million and less than $0.1 million, respectively. As of December 31, 2019, Medley LLC had seven subsidiaries, Medley Seed Funding I LLC, Medley Seed Funding II LLC, STRF Advisors LLC, Medley Caddo Investors Holdings 1 LLC, Medley Avantor Investors LLC, Medley Cloverleaf Investors LLC and Medley Real D Investors LLC. As of December 31, 2019, total assets and total liabilities, after eliminating entries, of these VIEs reflected in the consolidated balance sheets were $1.2 million and less than $0.1 million, respectively. Except to the extent of the assets of these VIEs that are consolidated, the holders of the consolidated VIEs’ liabilities generally do not have recourse to the Company.

F- 8


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Seed Investments and Deconsolidation of Consolidated Fund
The Company accounts for seed investments through the application of the voting interest model under ASC 810-10-25-1 through 25-14 and consolidates a seed investment when the investment advisor holds a controlling interest, which is, in general, 50% or more of the equity in such investment. For seed investments in which the Company does not hold a controlling interest, the Company accounts for such seed investment under the equity method of accounting, at its ownership percentage of such seed investment’s net asset value.
The Company seed funded $2.1 million to Sierra Total Return Fund ("STRF"), which commenced investment operations in June 2017. Since inception through April 6, 2020, the date of deconsolidation, the Company owned 100% of the equity of STRF and, as such, consolidated STRF in its consolidated financial statements.
The condensed balance sheet of STRF as of December 31, 2019 is presented in the table below.
 
As of
 
December 31, 2019
 
 
Assets
(in thousands)
Cash and cash equivalents
$
682

Investments, at fair value
1,441

Other assets
29

    Total assets
$
2,152

Liabilities and Equity
 
  Accounts payable, accrued expenses and other liabilities
$
342

  Equity
1,810

   Total liabilities and equity
$
2,152

As of December 31, 2019, the Company's condensed consolidated balance sheet reflects the elimination of $0.2 million of other assets and $1.8 million of equity as a result of the consolidation of STRF. During the nine months ended September 30, 2020 and 2019 this fund did not generate any significant income or losses from operations.
In connection with the exercise of DB Med Investors put option right in October 2019, as further discussed in Notes 11 and 17 to these condensed consolidated financial statements, STRF filed an application with the Securities and Exchange Commission ("SEC") on December 26, 2019, and an amendment on February 24, 2020, requesting an order under section 8(f) of the Investment Company Act of 1940 (the "Act") declaring that it has ceased to be an investment company. On March 25, 2020, the SEC ordered, under the Act, that STRF's application registration under the Act shall forthwith cease to be in effect. All shares of STRF held by the Company were transferred to DB Med Investors as well as $0.1 million of remaining cash held by Medley Seed Funding II LLC on April 6, 2020, in full satisfaction of the liability due to DB Med Investors (Note 11). As a result of the transfer of STRF shares to DB Med Investors, the Company no longer consolidates STRF in its consolidated financial statements for periods subsequent to April 6, 2020.
The condensed balance sheet of STRF as of April 6, 2020, the date of deconsolidation, is presented in the table below.
 
As of
 
April 6, 2020
 
 
Assets
(in thousands)
Cash and cash equivalents
$
471

Investments, at fair value
1,016

Other assets
76

    Total assets
$
1,563

Liabilities and Equity
 
  Accounts payable, accrued expenses and other liabilities
$
39

  Equity
1,524

   Total liabilities and equity
$
1,563

Non-Consolidated Variable Interest Entities

F- 9


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




The Company holds interests in certain VIEs that are not consolidated because the Company is not deemed to be the primary beneficiary. The Company's interest in these entities is in the form of insignificant equity interests and fee arrangements. The maximum exposure to loss represents the potential loss of assets by the Company relating to these non-consolidated entities.
As of September 30, 2020, the Company recorded investments, at fair value, attributed to these non-consolidated VIEs of $2.4 million, receivables of $0.6 million included as a component of other assets and a clawback obligation of $7.2 million included as a component of accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets. As of December 31, 2019, the Company recorded investments, at fair value, attributed to non-consolidated VIEs of $3.0 million, receivables of $1.3 million included as a component of other assets and a clawback obligation of $7.2 million included as a component of accounts payable, accrued expenses and other liabilities on the Company’s consolidated balance sheets. As of September 30, 2020, the Company’s maximum exposure to losses from these entities is $3.0 million.
Concentration of Credit and Market Risk
In the normal course of business, the Company's underlying funds encounter significant credit and market risk. Credit risk is the risk of default on investments in debt securities, loans and derivatives that result from a borrower's or derivative counterparty's inability or unwillingness to make required or expected payments. Credit risk is increased in situations where the Company's underlying funds are investing in distressed assets or unsecured or subordinate loans or in securities that are a material part of its respective business. Market risk reflects changes in the value of investments due to changes in interest rates, credit spreads or other market factors. The Company's underlying funds may make investments outside of the United States. These non-U.S. investments are subject to the same risks associated with U.S. investments, as well as additional risks, such as fluctuations in foreign currency exchange rates, unexpected changes in regulatory requirements, heightened risk of political and economic instability, difficulties in managing the investments, potentially adverse tax consequences, and the burden of complying with a wide variety of foreign laws.
Use of Estimates
The preparation of 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management’s estimates are based on historical experience and other factors, including expectations of future events that management believes to be reasonable under the circumstances. These assumptions and estimates also require management to exercise judgment in the process of applying the Company’s accounting policies. Significant estimates and assumptions by management affect the carrying value of investments, deferred tax assets, performance compensation payable and certain accrued liabilities. Actual results could differ from these estimates, and such differences could be material.  
Indemnification
In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has not experienced any prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.
Non-Controlling Interests in Consolidated Subsidiaries
Non-controlling interests in consolidated subsidiaries represent the component of equity in such consolidated entities held by third-parties and certain employees. These interests are adjusted for contributions to and distributions from Medley entities and are allocated income or loss from Medley entities based on their ownership percentages. 
Redeemable Non-Controlling Interests
Redeemable non-controlling interests represents interests of certain third parties that are not mandatorily redeemable but redeemable for cash or other assets at a fixed or determinable price or a fixed or determinable date, at the option of the holder or upon the occurrence of an event that is not solely within the control of the Company. These interests are classified in the mezzanine section on the Company's consolidated balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents include liquid investments in money market funds and demand deposits. The Company had cash balances with financial institutions in excess of Federal Deposit Insurance Corporation insured limits as of September 30, 2020 and December 31, 2019. The Company monitors the credit standing of these financial institutions and has not experienced, and has no expectations of experiencing, any losses with respect to such balances.

F- 10


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Investments
Investments include equity method investments that are not consolidated but over which the Company exerts significant influence. The Company measures the carrying value of its privately-held equity method investments by recording its share of the earnings or losses of its investee in the periods for which they are reported by the investee in the investee's financial statements rather than in the period in which an investee declares a dividend or distribution. For the Company's public non-traded equity method investment, it measures the carrying value of such investment at Net Asset Value ("NAV") per share. Unrealized appreciation (depreciation) resulting from changes in fair value of the equity method investments is reflected as a component of investment income in the consolidated statements of operations along with the income and expense allocations from such investments.
The carrying amounts of equity method investments are reflected in Investments, at fair value on the Company's consolidated balance sheets. As the underlying entities that the Company manages and invests in are, for U.S. GAAP purposes, primarily investment companies which reflect their investments at estimated fair value, the carrying value of the Company’s equity method investments in such entities approximates fair value. The Company evaluates its equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
For presentation in its consolidated statements of cash flows, the Company treats distributions received from certain equity method investments using the cumulative earnings approach. Under the cumulative earnings approach, an investor would compare the distributions received to its cumulative equity-method earnings since inception. Any distributions received up to the amount of cumulative equity earnings would be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return of investment and classified in investing activities.
Investments also include publicly traded common stock. The Company measures the fair value of its publicly traded common stock at the quoted market price on the primary market or exchange on which the underlying shares trade. Any realized gains (losses) from the sale of investments and unrealized appreciation (depreciation) resulting from changes in fair value are recorded in other income (expense), net.
Investments of Consolidated Fund
In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company's consolidated fund at December 31, 2019 has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 5. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. The consolidated fund weighs the use of third-party broker quotations, if any, in determining fair value based on management's understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus unamortized discount, or minus amortized premium, which approximates fair value. Investments for which market quotations are not readily available are valued at fair value as determined by the consolidated fund’s board of trustees based upon input from management and third party valuation firms. Because these investments are illiquid and because there may not be any directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and consistently applied across all loans and through time. As a result of the transfer of STRF shares to DB Med Investors on April 6, 2020, the Company no longer consolidates STRF in its consolidated financial statements.
Revenues 
The Company recognizes revenue in accordance with ASC 606, Revenues from Contracts with Customers. The Company recognizes revenue under the core principle of depicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for such goods or services. To achieve this, the Company applies a five step approach: (1) identify the contract(s) with a customer, (2) identify the performance obligations within the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations and (5) recognize revenue when, or as, each performance obligation is satisfied.
Carried interest are performance-based fees that represent a capital allocation of income to the general partner or investment manager. Such fees are accounted for under ASC 323, Investments - Equity Method and Joint Ventures and, therefore, are not in the scope of ASC 606.
Management Fees
Medley provides investment management services to both public and private investment vehicles. Management fees include base management fees, other management fees, and Part I incentive fees, as described below.

F- 11


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Base management fees are calculated based on either (i) the average or ending gross assets balance for the relevant period, (ii) limited partners’ capital commitments to the funds, (iii) invested capital, (iv) NAV or (v) lower of cost or market value of a fund’s portfolio investments. Depending upon the contracted terms of the investment management agreement, management fees are paid either quarterly in advance or quarterly in arrears, and are recognized as earned over the period the services are provided. 
Certain management agreements provide for Medley to receive other management fee revenue derived from up front origination fees paid by the funds' and/or separately managed accounts' underlying portfolio companies. These fees are recognized when the Company becomes entitled to such fees.
Certain management agreements also provide for Medley to receive Part I incentive fee revenue derived from net investment income (excluding gains and losses) above a hurdle rate. As it relates to MCC, these fees are subject to netting against realized and unrealized losses. Part I incentive fees are paid quarterly and are recognized as earned in the period the services are provided.
Performance Fees
Performance fees are contractual fees which do not represent a capital allocation of income to the general partner or investment manager that are earned based on the performance of certain funds, typically, the Company’s separately managed accounts. Performance fees are earned based on each fund's performance during the period, subject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s investment management agreement.
Other Revenues and Fees
Medley provides administrative services to certain affiliated funds and is reimbursed for direct and allocated expenses incurred in providing such administrative services, as set forth in the respective underlying agreements. These fees are recognized as revenue in the period administrative services are rendered. Medley also acts as the administrative agent on certain deals for which Medley may earn loan administration fees and transaction fees. Medley may also earn consulting fees for providing non-advisory services related to its managed funds. These fees are recognized as revenue over the period the services are performed.
Investment Income (loss) - Carried Interest
Carried interest are performance-based fees that represent a capital allocation of income to the general partner or investment manager. Carried interest are allocated to the Company based on cumulative fund performance to date, subject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s governing documents and are accounted for under the equity method of accounting. Accordingly, these performance fees are reflected as carried interest within investment income on the Company's consolidated statements of operations and balances due for such fees are included as a part of equity method investments within Investments, at fair value on the Company's consolidated balance sheets.
The Company records carried interest based upon an assumed liquidation of that fund's net assets as of the reporting date, regardless of whether such amounts have been realized. For any given period, carried interest on the Company's consolidated statements of operations may include reversals of previously recognized carried interest due to a decrease in the value of a particular fund that results in a decrease of cumulative fees earned to date. Since fund return hurdles are cumulative, previously recognized carried interest also may be reversed in a period of appreciation that is lower than the particular fund's hurdle rate.
Carried interest received in prior periods may be required to be returned by the Company in future periods if the funds’ investment performance declines below certain levels. Each fund is considered separately in this regard and, for a given fund, carried interest can never be negative over the life of a fund. If upon a hypothetical liquidation of a fund’s investments, at their then current fair values, previously recognized and distributed carried interest would be required to be returned, a liability is established for the potential clawback obligation. During the three and nine months ended September 30, 2020, the Company received carried interest distributions of $0.1 million and $0.2 million, respectively. Prior to these distributions, the Company received a carried interest distribution of $0.3 million from one of its managed funds, which had been fully liquidated as of December 31, 2019. In addition to the receipt of these distributions, the Company has also received tax distributions related to the Company’s allocation of net income, which included an allocation of carried interest. Pursuant to the organizational documents of each respective fund, a portion of these tax distributions may be subject to clawback. As of September 30, 2020 and December 31, 2019, the Company had accrued $7.2 million for clawback obligations that would need to be paid if the funds were liquidated at fair value as of the end of the reporting period. The Company’s actual obligation, however, would not become payable or realized until the end of a fund’s life.
During each of the three and nine months ended September 30, 2020 and 2019, the Company recorded reversals of previously recognized carried interest of $0.1 million.

F- 12


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Investment Income (loss) - Other
Other investment income is comprised of unrealized appreciation (depreciation) resulting from changes in fair value of the Company's equity method investments in addition to the income and expense allocations from such investments.
Stock-based Compensation
Stock-based compensation expense relating to equity based awards are measured at fair value as of the grant date, reduced for actual forfeitures in the period they occur, and expensed over the requisite service period on a straight-line basis as a component of compensation and benefits on the Company's consolidated statements of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability approach, which requires the recognition of tax benefits or expenses for temporary differences between the financial reporting and tax basis of assets and liabilities. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company also recognizes a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. The Company’s policy is to recognize interest and penalties on uncertain tax positions and other tax matters as a component of its provision for income taxes. For interim periods, the Company accounts for income taxes based on its estimate of the effective tax rate for the year. Discrete items and changes in its estimate of the annual effective tax rate are recorded in the period in which they occur.
Medley Management Inc. is subject to U.S. federal, state and local corporate income taxes on its allocable portion of the income of Medley LLC at prevailing corporate tax rates. Medley LLC and its subsidiaries are not subject to federal, state and local corporate income taxes since all income, gains and losses are passed through to its members. However, a portion of taxable income from Medley LLC and its subsidiaries are subject to New York City’s unincorporated business tax, which is included in the Company’s provision for income taxes.
The Company analyzes its tax filing positions in all of the U.S. federal, state and local tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established.
Class A Earnings per Share
The Company computes and presents earnings per share using the two-class method. Under the two-class method, the Company allocates earnings between common stock and participating securities. The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. For purposes of calculating earnings per share, the Company reduces its reported net earnings by the amount allocated to participating securities to arrive at the earnings allocated to Class A common stockholders. Earnings are then divided by the weighted average number of Class A common stock outstanding to arrive at basic earnings per share. Diluted earnings per share reflects the potential dilution beyond shares for basic earnings per share that could occur if securities or other contracts to issue common stock were exercised, converted into common stock, or resulted in the issuance of common stock that would have shared in our earnings. Participating securities consist of the Company's unvested restricted stock units that contain non-forfeitable rights to dividend equivalent payments, whether paid or unpaid, in the number of shares outstanding in its basic and diluted calculations.
Recently Issued Accounting Pronouncements Adopted as of January 1, 2020
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty, and adding new disclosure requirements. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this ASU effective January 1, 2020 and the impact was not material.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). This ASU aligns the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement with the guidance on capitalizing costs associated with developing or obtaining internal-use software. It addresses when costs should be capitalized rather than expensed, the term to use when amortizing capitalized costs, and how to evaluate the unamortized portion of these capitalized implementation costs for impairment. This ASU also includes guidance on how to present implementation costs in the financial statements and creates additional disclosure requirements. The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments.

F- 13


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Early adoption is permitted and can be applied either retrospectively or prospectively. The Company adopted this ASU on January 1, 2020 and has applied this new ASU on a prospective basis, and the impact was not material.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
The guidance in this ASU clarifies and amends existing guidance. It is effective for public entities for annual reporting periods beginning after December 15, 2020 and interim periods within those reporting periods, with early adoption permitted. The Company adopted this guidance on January 1, 2020 and the impact was not material.
Recently Issued Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This ASU is effective for the Company on January 1, 2021 and will be adopted prospectively. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.
The Company does not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on its consolidated balance sheets, results of operations or cash flows.
3. REVENUES FROM CONTRACTS WITH CUSTOMERS
The majority of the Company's revenues are derived from investment management and advisory contracts that are accounted for in accordance with ASC 606.
Performance Obligations
Performance obligations are the unit of account under the revenue recognition standard and represent the distinct goods or services that are promised to the customer. The majority of the Company's contracts have a single performance obligation to provide asset management, advisory and other related services to permanent capital vehicles, long-dated private funds and separately managed accounts. The Company also has a separate performance obligation to act as an agent for certain third party lenders and provide loan administration services to certain borrowers. These loan administration services also represent a single performance obligation.
The Company primarily provides investment management services to a fund by managing the fund’s investments and maximizing returns on those investments. The Company’s asset management, advisory and other related services are transferred over time to the customer on a day-to-day basis. The contracts with each fund create a distinct performance obligation for each quarter the Company provides the promised services to the customer, from which the customer can benefit from each individual quarter of service. Furthermore, each quarter of the promised services is considered separately identifiable because there is no integration of the promised services between quarters, each quarter does not modify services provided prior to that quarter, and the services provided are not interdependent or interrelated. Most services provided to these funds are provided continuously over the contract period, so the services in the contract generally represent a single performance obligation comprising a series of distinct service periods. A contract’s transaction price is allocated to the series of distinct services that constitute a single performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
The management fees earned by the Company are largely dependent on fluctuations in the market and, thus, the determination of such fees is highly susceptible to factors outside the Company's influence. Management fees typically have a large number and broad range of possible consideration amounts and historical experience is generally not indicative of future performance of the market. Hence, the Company is applying the exemption provided under the new revenue recognition guidance as the Company is unable to estimate the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied and the variable consideration is allocated entirely to a wholly unsatisfied performance obligation.
Reimbursement of certain expenses incurred on behalf of the Company's funds are reported on a gross basis on the statements of operations if the Company is determined to be acting as the principal in those transactions.

F- 14


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Significant Judgments
The Company's contracts with customers generally include a single performance obligation to provide asset management, advisory and other related services on a quarterly basis. Revenues are recognized as such performance obligation is satisfied and the constraint on the management fees is lifted on a quarterly basis, hence, the Company does not need to exercise significant judgments in regards to management fees. Consideration for management fees is received on a quarterly basis as the performance obligations are satisfied.
With respect to performance fees based on the economic performance of its SMAs, significant judgment is required when determining recognition of revenues. Such judgments include:
whether the fund is near final liquidation
whether the fair value of the remaining assets in the fund is significantly in excess of the threshold at which the Company would earn an incentive fee
the probability of significant fluctuations in the fair value of the remaining assets
whether the SMA’s remaining investments are under contract for sale with contractual purchase prices that would result in no clawback and it is highly likely that the contracts will be consummated
As such, the Company will consider the above factors at each reporting period to determine whether there is an amount of the SMA performance fees which should be recognized as revenue because it is probable that there will not be a significant future revenue reversal, hence, the “constraint” on the performance fees has been lifted.
The Company accounts for performance fees which represent capital allocations to the general partner or investment manager pursuant to accounting rules relating to investments accounted for under the equity method of accounting. As such, these types of performance fees are not within the scope of the new revenue recognition standard and the above significant judgments and constraints do not apply to them. Refer to Note 2, “Summary of Significant Accounting Policies,” and Note 4, “Investments,” for additional information.
Revenue by Category
The following table presents the Company's revenue from contracts with customers disaggregated by type of customer for the three and nine months ended September 30, 2020:
 
 
Permanent
Capital
Vehicles
 
Long-dated
Private Funds
 
SMAs
 
Other
 
Total
 
 
(in thousands)
For the three months ended September 30, 2020
 
 
Management fees
 
$
4,045

 
$
1,097

 
$
1,133

 
$

 
$
6,275

Other revenues and fees
 
1,192

 

 

 
443

 
1,635

Total revenues from contracts with customers
 
$
5,237

 
$
1,097

 
$
1,133

 
$
443

 
$
7,910

 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2020
 
 
Management fees
 
$
12,855

 
$
3,633

 
$
3,319

 
$

 
$
19,807

Other revenues and fees
 
4,426

 

 

 
1,843

 
6,269

Total revenues from contracts with customers
 
$
17,281

 
$
3,633

 
$
3,319

 
$
1,843

 
$
26,076

Management fees in the table above are presented net of expense support payments under an expense support agreement entered into by the Company and MCC which became effective on June 1, 2020 (See Note 13). During the three and nine months ended September 30, 2020 such amounts were $0.4 million and $0.7 million respectively. In determining whether the expenses under the expense support agreement should be recorded on a gross or net basis on its consolidated statements of operations the Company followed the contract modification guidance in ASC 606. As the expense support agreement changes the existing enforceable rights and obligations of the parties to the original contract, the expense support agreement represents an agreed-upon change in the transaction price, and as such, is presented on a net basis within management fees on the Company's condensed consolidated statement of operations.

F- 15


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




The following table presents the Company's revenue from contracts with customers disaggregated by type of customer for the three and nine months ended September 30, 2019:
 
 
Permanent
Capital
Vehicles
 
Long-dated
Private Funds
 
SMAs
 
Other
 
Total
 
 
(in thousands)
For the three months ended September 30, 2019
 
 
Management fees
 
$
6,593

 
$
1,616

 
$
1,398

 
$

 
$
9,607

Other revenues and fees
 
2,075

 

 

 
546

 
2,621

Total revenues from contracts with customers
 
$
8,668

 
$
1,616

 
$
1,398

 
$
546

 
$
12,228

 
 
 
 
 
 
 
 
 
 
 
For the nine months ended September 30, 2019
 
 
 
 
 
 
 
 
 
 
Management fees
 
$
21,144

 
$
5,185

 
$
4,399

 
$

 
$
30,728

Other revenues and fees
 
5,327

 

 

 
2,404

 
7,731

Total revenues from contracts with customers
 
$
26,471

 
$
5,185

 
$
4,399

 
$
2,404

 
$
38,459

Other revenues and fees reflected in the tables above consist of: (i) revenues earned under administration agreements, as described in Note 13, (ii) revenues earned by Medley while serving as loan administrative agent on certain deals, including loan administration fees and transaction fees, (iii) reimbursable origination and deal related expenses, (iv) reimbursable entity formation and organizational expenses and (v) consulting fees for providing non-advisory services related to one of the Company's managed funds.
The Company's asset management, advisory and other related services are transferred over time and the Company recognizes these revenues over the period of time these services are provided.
Contract Balances
For certain customers, the Company has a performance obligation to provide loan administration services. The timing of revenue recognition may differ from the timing of invoicing to such customers or receiving consideration. For the majority of these services cash deposits are received prior to the performance obligation being met. The performance obligation of acting as a loan administrator is satisfied over time; therefore, the Company defers any payments received upfront as deferred revenue and recognizes revenue on a pro-rata basis over time as the loan administrative services are performed.
These contract liabilities are reported as deferred revenue within accounts payable, accrued expenses and other liabilities on the Company's condensed consolidated balance sheets and were $0.2 million as of September 30, 2020 and December 31, 2019. During the three months ended September 30, 2020 and 2019, the Company recognized revenue from amounts included in deferred revenue of $0.1 million and $0.2 million, respectively, and received cash deposits of $0.1 million and $0.2 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company recognized revenue from amounts included in deferred revenue of $0.4 million and $0.5 million, respectively, and received cash deposits of $0.3 million for each of those periods.
The Company did not have any contract assets as of September 30, 2020 or December 31, 2019.
Assets Recognized for the Costs to Obtain or Fulfill a Contract
As part of providing investment management services to a fund, the Company might incur certain placement fees to third parties for obtaining new investors for the fund. Any placement fees incurred to third party placement agents for placing investors into a fund are variable as it is based on a percentage of future fees and cannot be reasonably estimated. The Company determined that placement fees which are paid in cash over time as fees are earned, do not relate to a new contract at the time the payment is made. These costs do not represent a cost to obtain a new contract but rather a cost to fulfill an existing contract. The Company does not recognize any assets for the incremental costs of obtaining or fulfilling a contract with a customer and expenses placement fees as incurred.

F- 16


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




4. INVESTMENTS
Investments consist of the following:
 
As of
 
September 30, 2020
 
December 31, 2019
 
 
 
 
 
(in thousands)
Equity method investments, at fair value
$
9,589

 
$
11,650

Investment held at cost less impairment
48

 
196

Investments of consolidated fund

 
1,441

Total investments, at fair value
$
9,637


$
13,287

Equity Method Investments
Medley measures the carrying value of its public non-traded equity method investment in Sierra Income Corporation (“SIC” or “Sierra”), a related party, at NAV per share. Unrealized appreciation (depreciation) resulting from changes in NAV per share is reflected as a component of other investment (loss) income, net on the Company's condensed consolidated statements of operations. The carrying value of the Company’s privately-held equity method investments is determined based on the amounts invested by the Company plus the equity in earnings or losses of the investee allocated based on the respective underlying agreements, less distributions received.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. There were no impairment losses recorded during the three and nine months ended September 30, 2020 and 2019.
The Company's equity method investment in shares of Sierra was $5.4 million and $6.4 million as of September 30, 2020 and December 31, 2019, respectively. The remaining balance as of September 30, 2020 and December 31, 2019 relates primarily to the Company’s investments in Medley Opportunity Fund II, LP (“MOF II”), Medley Opportunity Fund III LP (“MOF III”), Medley Opportunity Fund Offshore III LP (“MOF III Offshore”) and Aspect-Medley Investment Platform B LP (“Aspect B”).
For performance fees earned which represent a capital allocation to the general partner or investment manager, the Company accounts for them under the equity method of accounting. As of September 30, 2020 and December 31, 2019, the balance due to the Company for such performance fees was $0.8 million and $0.9 million, respectively. Revenues associated with these performance fees are classified as carried interest within investment income (loss) on the Company's condensed consolidated statements of operations.
The entities in which the Company's investments are accounted for under the equity method are considered to be related parties.
Investment Held at Cost Less Impairment
The Company measures its investment in CK Pearl Fund, LP at cost less impairment, adjusted for observable price changes for an identical or similar investment of the same issuer as well as any distributions received during the period. The Company performs a quantitative and qualitative assessment at each reporting date to determine whether the investment is impaired and an impairment loss equal to the difference between the carrying value and fair value is recorded within other income (expenses), net on the Company's condensed consolidated statement of operations if an impairment has been determined. During the nine months ended September 30, 2020, the Company recorded an impairment loss of $0.1 million. There were no impairment losses recorded during the three months ended September 30, 2020 and 2019 nor during the three months ended September 30, 2019.
Investments of consolidated fund
As of December 31, 2019, Medley measured the carrying value of investments held by its consolidated fund, which consisted of $0.2 million of equity investments and $1.3 million of senior secured loans. There were no investments of consolidated fund as of September 30, 2020, as a result of the deconsolidation of STRF on April 6, 2020.

F- 17


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




5. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial investments recorded at fair value in these condensed consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs to the valuation of the investment as of the measurement date. Investments which are valued using NAV as a practical expedient are excluded from this hierarchy:
Level I – Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II – Valuations based on inputs other than quoted prices in active markets included in Level I, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities.
Level III – Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and are based upon management’s assessment of the assumptions that market participants would use in pricing the assets and liabilities. These investments include debt and equity investments in private companies or assets valued using the Market or Income Approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes which include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level III information, assuming no additional corroborating evidence.
There were no financial assets or liabilities at fair value as of September 30, 2020 due to the deconsolidation of STRF and settlement of the amounts due to DB Med Investors in April 2020.
The following tables summarize the fair value hierarchy of the Company's financial assets and liabilities measured at fair value as of December 31, 2019:
 
As of December 31, 2019
 
Level I
 
Level II
 
Level III
 
Total
 
 
 
 
 
 
 
 
Assets
(in thousands)
Investments of consolidated fund
$
110

 
$

 
$
1,331

 
$
1,441

Total Assets
$
110

 
$

 
$
1,331

 
$
1,441

Liabilities
 
 
 
 
 
 
 
Due to DB Med Investors (Note 11)
$

 
$

 
$
1,750

 
$
1,750

 Total Liabilities
$

 
$

 
$
1,750

 
$
1,750

Included in investments of consolidated fund as of December 31, 2019 are Level I assets of $0.1 million in equity investments and Level III assets of $1.3 million, which consists of senior secured loans and equity investments. The significant unobservable inputs used in the fair value measurement of Level III assets of the consolidated fund's investments in senior secured loans include market yields. Significant increases or decreases in market yields in isolation would result in a significantly higher or lower fair value measurement. There were no significant unrealized gains or losses related to the investments of consolidated fund for the three and nine months ended September 30, 2020 and 2019.



F- 18

Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)




The following is a summary of changes in fair value of the Company's financial assets that have been categorized within Level III of the fair value hierarchy:

Level III Financial Assets as of September 30, 2020
 
Balance at
December 31, 2019
 
Deconsolidation of STRF
 
Transfers In or (Out) of Level III
 
Realized and Unrealized Depreciation
 
Sale of Level III Assets
 
Balance at
September 30, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Investments of consolidated fund
$
1,331

 
(940
)
 

 
(295
)
 
(96
)
 
$

The following is a summary of changes in fair value of the Company's financial liabilities that have been categorized within Level III of the fair value hierarchy:

Level III Financial Liabilities as of September 30, 2020
 
Balance at
December 31, 2019
 
Settlement of liability to DB Med Investors, at fair value
 
Payments
 
Realized and Unrealized Depreciation
 
Balance at
September 30, 2020
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Due to DB Med Investors (Note 11)
$
1,750

 
(1,541
)
 

 
(209
)
 
$

A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting all levels of the fair value hierarchy are reported as transfers in or out of Level I, II or III category as of the beginning of the quarter during which the reclassifications occur. There were no transfers between levels in the fair value hierarchy during the three and nine months ended September 30, 2020.
When determining the fair value of publicly traded equity securities, the Company uses the quoted closing market price as of the valuation date on the primary market or exchange on which they trade. Our equity method investments for which fair value is measured at NAV per share, or its equivalent, using the practical expedient, are not categorized in the fair value hierarchy.
Prior to the deconsolidation of STRF on April 6, 2020, the Company's investments of consolidated fund were treated as investments at fair value and any realized and unrealized gains and losses from those investments were recorded through the Company's condensed consolidated statements of operations. The Company's treatment was consistent with that of STRF, which is considered an investment company under ASC 946, Financial Services - Investment Companies, for standalone reporting purposes. The fair value of the Company's liability to DB Med Investors at December 31, 2019 was derived from the net asset value of shares of STRF which was held by the Company. On April 6, 2020, such shares were distributed to DB Med Investors in satisfaction of the Company's liability to them. Changes in unrealized losses related to the Company's due to DB Med Investors liability were all included in earnings.
6. LEASES
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and lease liabilities. Lease liabilities and the corresponding right-of-use assets are recorded based on the present values of lease payments over the expected lease terms. The Company’s expected lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, or specific characteristics unique to the particular lease that would make it reasonably certain that the Company would exercise such option. The Company has concluded that renewal and early termination options are not reasonably certain of being exercised by the Company and thus not included in the calculation of its right-of-use assets and operating lease liabilities. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes the appropriate incremental borrowing rates, which are the rates that would be incurred to borrow on a collateralized basis, over similar terms, amounts equal to the lease payments in a similar economic environment. Variable payments that do not depend on a rate or index are not included in the lease liability and are recognized as incurred. If significant events, changes in circumstances, or other events indicate that the lease term or other inputs have changed, the Company would reassess


F- 19

Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


lease classification, re-measure the lease liability by using revised inputs as of the reassessment date, and adjust the underlying right-of-use asset.
Substantially all of the Company's operating leases are comprised of its office space in New York City and San Francisco which expire at various times through September 2023. The Company does not have any contracts that would be classified as a finance lease or any operating leases that contain variable payments.
The components of lease cost and other information during the three and nine months ended September 30, 2020 and 2019 are as follows:
 
For the Three Months Ended
September 30,
 
For the Nine Months Ended September 30,
 
2020
 
2019
 
2020
 
2019
 
 
 
 
 
 
 
 
Lease cost
(in thousands)
Operating lease costs
$
634

 
$
637

 
$
1,914

 
$
1,895

Variable lease costs

 

 

 

Sublease income
(110
)
 
(113
)
 
(329
)
 
(342
)
Total lease cost
$
524

 
$
524

 
$
1,585

 
$
1,553


Supplemental balance sheet information related to leases as of September 30, 2020 and December 31, 2019 is as follows:
 
As of
 
September 30, 2020
 
December 31, 2019
 
 
 
 
Weighted-average remaining lease term (in years)
2.8

 
3.5

Weighted-average discount rate
8.2
%
 
8.2
%

On June 29, 2020, the Company entered into a letter agreement with its landlord for its New York headquarters, pursuant to which the Company was granted its request for a concession from the landlord to defer rent payments for the months of May, June, July and August 2020 until 2021. The deferred rent payments, which aggregated to $0.8 million, will be paid back in nine equal monthly installments commencing on January 1, 2021.
In April 2020, the FASB staff issued a question and answer document (“FASB Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the Company would have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant or if a lease concession was under the enforceable rights and obligations within the existing lease agreement. The FASB Q&A allows the Company, if certain criteria have been met, to bypass the lease-by-lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company elected to apply such relief and availed itself of the election to avoid performing a lease-by-lease analysis for the lease concessions received as the concessions granted as relief were due to the COVID-19 pandemic and result in the cash flows to the landlord remaining substantially the same or less.
Future payments for operating leases as of September 30, 2020 are as follows (in thousands):
Remaining in 2020 (October 1st through December 31st)
$
728

2021
3,288

2022
2,441

2023
1,823

Total future lease payments
8,280

Less imputed interest
(860
)
Operating lease liabilities, at September 30, 2020
$
7,420



F- 20

Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


7. OTHER ASSETS
Other assets consist of the following:
 
As of
 
September 30, 2020
 
December 31, 2019
 
 
 
 
 
(in thousands)
Fixed assets, net of accumulated depreciation and amortization
of $4,386 and $3,847, respectively
$
2,041

 
$
2,564

Security deposits
1,975

 
1,975

Administrative fees receivable (Note 13)
1,252

 
1,073

Deferred tax assets, net (Note 15)
268

 
185

Due from affiliates (Note 13)
398

 
1,787

Prepaid expenses and income taxes
5,785

 
2,022

Other assets
302

 
677

Total other assets
$
12,021


$
10,283

8. SENIOR UNSECURED DEBT
The carrying value of the Company’s senior unsecured debt consists of the following:
 
As of
 
September 30, 2020
 
December 31, 2019
 
 
 
 
 
(in thousands)
2026 Notes, net of unamortized discount and debt issuance costs of $2,308 and $2,584, respectively
$
51,287

 
$
51,011

2024 Notes, net of unamortized premium and debt issuance costs of $1,329 and $1,629 respectively
67,671

 
67,371

Total senior unsecured debt
$
118,958

 
$
118,382

2026 Notes 
On August 9, 2016 and October 18, 2016, the Company issued debt consisting of $53.6 million in aggregate principal amount of senior unsecured notes due 2026 at a stated coupon rate of 6.875% (the "2026 Notes"). The net proceeds from these offerings were used to pay down a portion of the Company's outstanding indebtedness under its term loan facility with Credit Suisse, which was terminated in February 2017. Interest is payable quarterly. The 2026 Notes are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after August 15, 2019 at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments. The 2026 notes were recorded net of discount and direct issuance costs of $3.8 million which are being amortized over the term of the notes using the effective interest rate method. The 2026 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol “MDLX.” The fair value of the 2026 Notes based on their underlying quoted market price was $14.6 million as of September 30, 2020.
Interest expense on the 2026 Notes, including accretion of note discount and amortization of debt issuance costs, was $1.0 million for each of the three months ended September 30, 2020 and 2019. For each of the nine months ended September 30, 2020 and 2019, such interest expense was $3.0 million.
2024 Notes
On January 18, 2017 and February 22, 2017, the Company issued $69.0 million in aggregate principal amount of senior unsecured notes due 2024 at a stated coupon rate of 7.25% (the "2024 Notes"). The net proceeds from these offerings were used to pay down the remaining portion of the Company's outstanding indebtedness under its Term Loan Facility with the remaining to be used for general corporate purposes. Interest is payable quarterly and interest payments commenced on April 30, 2017. The 2024 Notes are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after January 30, 2020 at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments. The 2024 notes were recorded net of premium and direct issuance costs of $2.8 million which are being amortized over the term of the notes using the effective interest rate method. The 2024 Notes are listed on the New York


F- 21

Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Stock Exchange and trade thereon under the trading symbol “MDLQ.” The fair value of the 2024 Notes based on their underlying quoted market price was $20.5 million as of September 30, 2020.
Interest expense on the 2024 Notes, including amortization of debt premium and debt issuance costs, was $1.4 million for each of the three months ended September 30, 2020 and 2019. For each of the nine months ended September 30, 2020 and 2019, such interest expense was $4.1 million.
9. LOANS PAYABLE
Loans payable consist of the following:
 
As of
 
September 30, 2020
 
December 31, 2019
 
 
 
 
 
(in thousands)
Non-recourse promissory notes
$
10,000

 
$
10,000

Total loans payable
$
10,000


$
10,000

In April 2012, the Company borrowed $10.0 million under two non-recourse promissory notes. Proceeds from the borrowings were used to purchase 1,108,033 shares of common stock of SIC, which were pledged as collateral for the obligations. Interest on the notes is paid monthly and is equal to the dividends received by the Company related to the pledged shares. The Company may prepay the notes in whole or in part at any time without penalty and the lenders may call the notes if certain conditions are met. The proceeds from the notes were recorded net of issuance costs of $3.8 million and were being accreted, using the effective interest method, over the original term of the non-recourse promissory notes. During the three months ended September 30, 2020, there was no interest expense under these notes. During the three months ended September 30, 2019, total interest expense under these notes, including accretion of the notes discount, was $0.2 million. During the nine months ended September 30, 2020 and 2019, interest expense under these notes, including accretion of the notes discount, was $0.2 million and $0.7 million, respectively. The notes had an original maturity date of March 31, 2019. Through various amendments dated February 28, 2019, June 28, 2019, December 8, 2019, March 27, 2020 and June 30, 2020, the maturity date had been extended, with the latest amendment, extending the maturity date to December 31, 2020. As consideration paid for the June 28, 2019 amendment, the interest rate on these notes was increased by 1.0% per annum. As consideration received for the June 30, 2020 amendment, the 1.0% increase in the interest per annum is no longer in effect for periods subsequent to June 30, 2020. The fair value of the outstanding balance of the notes was $10.0 million as of September 30, 2020 and December 31, 2019.
Contractual Maturities of Loans Payable
The $10.0 million of future principal payments will be due on December 31, 2020. The notes can also be settled in full by delivery of 1,108,033 shares of common stock of Sierra, which were pledged as collateral for the obligations.


F- 22

Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


10. DUE TO FORMER MINORITY INTEREST HOLDER
This balance consists of the following:
 
As of
 
September 30, 2020
 
December 31, 2019
 
 
 
 
 
(in thousands)
Due to former minority interest holder, net of unamortized discount of $817 and $1,480, respectively
$
7,233

 
$
8,145

Total due to former minority interest holder
$
7,233

 
$
8,145


In January 2016, the Company executed an amendment to SIC Advisors' operating agreement which provided the Company with the right to redeem membership units owned by the minority interest holder, Strategic Capital Advisory Services, LLC ("SCAS"). The Company’s redemption right was triggered by the termination of the dealer manager agreement between Sierra and SC Distributors LLC ("DMA Termination"), an affiliate of the minority interest holder. As a result of this redemption feature, the Company reclassified the non-controlling interest in SIC Advisors from the equity section of its consolidated balance sheet to redeemable non-controlling interests in the mezzanine section of its consolidated balance sheet based on its fair value as of the amendment date. On July 31, 2018, a DMA Termination event occurred and, as a result, the Company reclassified the redeemable non-controlling interest in SIC Advisors from redeemable non-controlling interests in the mezzanine section of its consolidated balance sheet to due to former minority interest holder, a component of total liabilities on the Company's consolidated balance sheet, based on its fair value as of that date.

In December 2018, Medley LLC entered into a Letter Agreement with SCAS, whereby consideration of $14.0 million was agreed upon for the satisfaction in full of all amounts owed by Medley under the LLC Agreement. The amount due was payable in sixteen equal installments through August 5, 2022. The unamortized discount is being amortized over the term of the payable using the effective interest method.

As a result of the ongoing economic impact of COVID-19, the Company did not pay its installment payment that was due in May 2020 and commenced discussions with SCAS to seek deferral of a portion of the upcoming installment payments until 2021 through 2023. On August 4, 2020, the Company and SCAS entered into an amendment to the Letter Agreement which, among other items, revises the payment terms under the original letter agreement. The payment terms were amended such that the remaining balance due to SCAS would be payable as follows: $700,000 on August 5, 2020, followed by three quarterly installments of $350,000 and quarterly installments thereafter of $1.0 million through February 5, 2023.The Company accounted for this concession as a troubled debt restructuring and as the future undiscounted cash flows from the revised agreement was greater than the carrying value of the amount due at the date of the concession. As a result a new effective interest rate was established based on the carrying value of the original liability and the revised cash flows.

As of September 30, 2020, future payments due to the former minority interest holder, including principal and implied interest were as follows (in thousands):
Remaining in 2020 (October 1st through December 31st)
$
350

2021
2,700

2022
4,000

2023
1,000

Total future payments
$
8,050

 
During the three and nine months ended September 30, 2020, the amortization of the discount was $0.2 million and $0.7 million, respectively, and is included as a component of interest expense on the Company's condensed consolidated statements of operations. During the three and nine months ended September 30, 2019 the amortization of the discount was $0.3 million and $0.8 million, respectively, and is included as a component of interest expense on the Company's condensed consolidated statements of operations.


F- 23


Medley Management Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)


11. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consist of the following:
 
As of
 
September 30, 2020
 
December 31, 2019