MEDLEY MANAGEMENT INC. The following discussion and analysis should be read in conjunction with our audited consolidated financial statements and related notes as ofDecember 31, 2020 and 2019 and for the years endedDecember 31, 2020 , 2019 and 2018 included in this Form 10-K. Overview We are an alternative asset management firm offering yield solutions to retail and institutional investors. We focus on credit-related investment strategies, primarily originating senior secured loans to private middle market companies in theU.S. that have revenues between$50 million and$1 billion . We generally hold these loans to maturity. Over the past 19 years, we have provided capital to over 450 companies across 35 industries inNorth America .
We manage one permanent capital vehicle, which is a BDC, as well as long-dated private funds and SMAs, focusing on senior secured credit.
• Permanent capital vehicle: SIC has a total AUM of
31, 2020.
• Long-dated private funds and SMAs: MOF II, MOF III, MOF III Offshore, MCOF,
Aspect, Aspect B, SIC JV and SMAs, have a total AUM of
December 31, 2020 . As ofDecember 31, 2020 , we had$2.9 billion of AUM,$0.7 billion in a permanent capital vehicle and$2.1 billion in long-dated private funds and SMAs. Our AUM as ofDecember 31, 2020 declined by 31% year-over-year which was driven primarily by: (i) the adoption by MCC of an internalized management structure, (ii) repayment of debt, (iii) distributions and (iv) changes in fund values. OnNovember 18, 2020 , the board of directors of MCC approved the adoption of an internalized management structure for MCC effectiveJanuary 1, 2021 . As a result of the implementation of MCC's new management structure, the current Investment Management and Administration Agreements betweenMCC Advisors LLC and MCC expired in accordance with their respective terms onDecember 31, 2020 . When referring to our aggregate AUM and fee earning AUM as ofDecember 31, 2020 , such amounts exclude the AUM and fee earning AUM of MCC as ofDecember 31, 2020 as we no longer manage such assets effectiveJanuary 1, 2021 and will no longer earn fees on such assets. Our compounded annual AUM growth rate fromDecember 31, 2010 throughDecember 31, 2019 was 11% and our compounded annual fee earning AUM growth rate was 4%, both of which have been driven in large part by the growth in our permanent capital vehicle. As ofDecember 31, 2020 , we had$1.3 billion of fee earning AUM which consisted of$0.7 billion in a permanent capital vehicle and$0.6 billion in long-dated private funds and SMAs. Typically, the investment periods of our institutional commitments range from 18 to 24 months and we expect our fee earning AUM to increase as capital commitments included in AUM are invested. In general, our institutional investors do not have the right to withdraw capital commitments and, to date, we have not experienced any withdrawals of capital commitments. For a description of the risk factor associated with capital commitments, see "Risk Factors - 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" included in this Annual Report on Form 10-K. Credit structuring and active monitoring of the loan portfolios we manage are important success factors in our business, which can be adversely affected by difficult market and political conditions. We strive to adhere to a disciplined investment process that employs these principles with the goal of delivering strong risk-adjusted investment returns while protecting investor capital. We believe that our ability to structure and lead deals enables us to achieve these goals. In addition, the loans we manage generally have a contractual maturity of between three and seven years and are typically floating rate, which we believe positions our business well for rising interest rates. The significant majority of our revenue is derived from management fees, which include base management fees earned on all of our investment products as well as Part I incentive fees earned from our permanent capital vehicle and certain of our long-dated private funds. Our base management fees are generally calculated based upon fee earning assets and paid quarterly in cash. Our Part I incentive fees are typically calculated based upon net investment income, subject to a hurdle rate, and are paid quarterly in cash. We also may earn carried interest from our long-dated funds and contractual performance fees from our SMAs. Typically, these fees are 15.0% to 20.0% of the total return above a hurdle rate. Carried interest represent fees that are a capital allocation to the general partner or investment manager, are accrued quarterly and paid after the return of all invested capital and an amount sufficient to achieve the hurdle rate of return. We also may receive incentive fees related to realized capital gains in our permanent capital vehicle and certain of our long-dated private funds that we refer to as Part II incentive fees. Part II incentive fees are payable annually and are calculated at the end of each applicable year by subtracting the sum of cumulative realized capital losses and unrealized capital depreciation from cumulative aggregate realized capital gains. If the amount calculated is positive, then the Part II incentive fee for such year is equal to 20% of such amount, less the aggregate amount of Part II incentive fees paid in all prior years. If such amount is negative, then no Part II incentive fee will be payable for such year. As our investment strategy is focused on generating yield from senior secured credit, historically we have not generated Part II incentive fees. For the year endedDecember 31, 2020 , 80% of our revenues were generated from management fees and carried interest derived primarily from net interest income on senior secured loans. Our primary expenses are compensation to our employees and general, administrative and other expenses. Compensation includes salaries, discretionary bonuses, stock-based compensation, performance based compensation and benefits paid and payable to our employees. General and administrative expenses include costs primarily related to professional services, office rent and related expenses, depreciation and amortization, travel and related expenses, information technology, communication and information services, placement fees and third-party marketing expenses and other general operating items. 39
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Reorganization and Initial Public Offering
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 ofMedley 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 ofMedley LLC . OnJanuary 19, 2021 , pursuant to the terms of the Exchange Agreement,Medley Management Inc. issued to the pre-IPO members an aggregate of 2,343,686 shares of Class A Common Stock in exchange for an equivalent number of LLC Units, representing approximately 98% of the vested LLC Units. Our StructureMedley Management Inc. is a holding company and its sole material asset is a controlling equity interest inMedley LLC .Medley Management Inc. operates and controls all of the business and affairs and consolidates the financial results ofMedley LLC and its subsidiaries. We and our pre-IPO owners have also entered into an exchange agreement under which they (or certain permitted transferees) have the right (subject to the terms of the exchange agreement), to exchange their LLC Units for shares of our Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.Medley Group LLC , an entity wholly-owned by our pre-IPO owners, holds all 10 issued and outstanding shares of our Class B common stock. For so long as our pre-IPO owners 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 byMedley Management Inc. ), which we refer to as the "Substantial Ownership Requirement," the Class B common stock entitlesMedley Group LLC , without regard to the number of shares of Class B common stock held by it, to a number of votes that is equal to 10 times the aggregate number of LLC Units held by all non-managing members ofMedley 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 LLC Units held by such holder. For purposes of calculating the Substantial Ownership Requirement, shares of Class A common stock deliverable to our pre-IPO owners and then-current Medley personnel pursuant to outstanding equity awards will be deemed then outstanding and shares of Class A common stock and LLC Units held by any estate, trust, partnership or limited liability company or other similar entity of which any pre-IPO owner or then-current Medley personnel, or any immediate family member thereof, is a trustee, partner, member or similar party will be considered held by such pre-IPO owner or other then-current Medley personnel. From and after the time that the Substantial Ownership Requirement is no longer satisfied, the Class B common stock will entitleMedley Group LLC , without regard to the number of shares of Class B common stock held by it, to a number of votes that is equal to the aggregate number of LLC Units held by all non-managing members ofMedley 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 the number of LLC Units held by such holder. At the completion of our IPO, our pre-IPO owners were comprised of all of the non-managing members ofMedley LLC . However,Medley LLC may in the future admit additional non-managing members that would not constitute pre-IPO owners. If at any time the ratio at which LLC Units are exchangeable for shares of our Class A common stock changes from one-for-one as set forth in the Exchange Agreement, the number of votes to which Class B common stockholders are entitled will be adjusted accordingly. Holders of shares of our Class B common stock will vote together with holders of our Class A common stock as a single class on all matters on which stockholders are entitled to vote generally, except as otherwise required by law. 40
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Other thanMedley Management Inc. , holders of LLC Units, including our pre-IPO owners, were, subject to limited exceptions, prohibited from transferring any LLC Units held by them upon consummation of our IPO, or any shares of Class A common stock received upon exchange of such LLC Units, until the third anniversary of our IPO without our consent. Thereafter and prior to the fourth and fifth anniversaries of our IPO, such holders were not able to transfer more than 33 1/3% and 66 2/3%, respectively, of the number of LLC Units held by them upon consummation of our IPO, together with the number of any shares of Class A common stock received by them upon exchange therefor, without our consent. While this agreement could have been amended or waived by us, our pre-IPO owners did not seek any waivers of these restrictions. OnJanuary 19, 2021 , the pre-IPO members ofMedley LLC exchanged an aggregate of approximately 98% of their vested LLC Units for shares of Class A Common Stock (collectively, the "Unit Exchange"). In total, MDLY issued to the pre-IPO members an aggregate of 2,343,686 shares of Class A Common Stock in exchange for an equivalent number of vested LLC Units held by the pre-IPO members. OnJanuary 15, 2021 , all of the 293,163 restricted LLC units held by the pre-IPO members were cancelled and substituted with restricted stock units covering Class A Common Stock of MDLY on substantially equivalent terms as the restricted LLC units so cancelled (including vesting schedule). The remaining 49,999 LLC Units, excluding the LLC Units held byMedley Management Inc. , are held by Freedom 2021 LLC, an entity controlled by one of the pre-IPO owners. As a result of the Unit Exchange, MDLY's total membership interestMedley LLC increased to approximately 98%. The Unit Exchange increased the number of outstanding shares of Class A Common Stock although the number of as-converted fully-diluted shares of the Company remained the same. The Unit Exchange did not result in a change in control of the Company, including for purposes of the Investment Advisers Act of 1940, as amended.
The diagram below depicts our organizational structure (excluding those
operating subsidiaries with no material operations or assets) as of
[[Image Removed: mdlyorg321.jpg]]
(1) Our pre-IPO owners control 66.9% of the voting power of Medley Management
Inc. through Class A Common Stock held by entities controlled by the pre-IPO
owners. The Class B common stock provides
votes that is equal to 10 times the aggregate number of LLC Units held
Freedom 2021, LLC, an entity controlled by one of the pre-IPO owners of
Requirement is no longer satisfied, the Class B common stock will provide
of LLC Units held by Freedom 2021, LLC that does not itself hold shares of
Class B common stock. (2) If Freedom 2021 LLC exchanged all of its LLC Units for shares of Class A
common stock, it would hold 1.6% of the outstanding shares of Class A common
stock, entitling it to an equivalent percentage of economic interests and
voting power in
power or economic interests in
Inc. would hold 100% of outstanding LLC Units and 100% of the voting power in
LLC.
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(4)
(5) Certain employees, former employees and former members of
approximately 40.3% of the limited liability company interests in MOF II GP
LLC, the entity that serves as general partner of MOF II, entitling the
holders to share the carried interest earned from MOF II.
(6)
(7)
(8) Certain employees of
liability company interests in
holders to share the carried earned from
(9) Certain employees of
liability company interests in
holders to share the carried earned from
(10) Certain employees of
liability company interests in Medley Real D Investors LLC , entitling the
holders to share the carried earned from Medley Real D (Annuity) LLC .
Termination of Agreement and Plan of Merger
OnJuly 29, 2019 , we entered into the Amended and Restated Agreement and Plan of Merger, dated as ofJuly 29, 2019 (the "Amended MDLY Merger Agreement"), by and among the Company, Sierra Income Corporation ("Sierra" of "SIC"), andSierra Management, Inc. , a wholly owned subsidiary of the Company ("Merger Sub"), pursuant to which we 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, onJuly 29, 2019 ,Medley Capital Corporation ("MCC") and Sierra entered into the Amended and Restated Agreement and Plan of Merger, dated as ofJuly 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"). OnMay 1, 2020 , we 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 has not been consummated on or beforeMarch 31, 2020 (the "Outside Date"). As a result, the Amended MDLY Merger Agreement had been terminated effective as ofMay 1, 2020 . Sierra terminated the Amended MDLY Merger Agreement effective as ofMay 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, onMay 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 byMarch 31, 2020 . Sierra elected to do so onMay 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 primarily consist of professional fees. Such expenses amounted to$4.7 million ,$4.6 million and$3.8 million for the years endingDecember 31, 2020 , 2019 and 2018, respectively. OnSeptember 17, 2019 the staff of the Securities andExchange Commission's Division of Enforcement (the "Staff") informed the Company that it was conducting an informal inquiry and requested the production and preservation of certain documents and records. The Company fully cooperated with the Staff's informal inquiry and began voluntarily providing the Staff with any requested documents. By letter datedDecember 18, 2019 , the Staff advised the Company that a formal order of private investigation (the "Order") had been issued and that the informal inquiry was now a formal investigation. The Order indicated that the investigation relates to Section 17(a) of the Securities Act of 1933, Section 10(b) of the Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 thereunder, and Sections 206(1), 206(2), and 206(4) of the Investment Advisers Act of 1940, Rule 206(4)-8, Sections 13(a) and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 14a-9 thereunder. MDLY continues to cooperate fully with the investigation. The Company cannot predict the outcome of, or the timeframe for, the conclusion of this investigation. An adverse outcome could have a material effect on the Company's business, financial condition, or results of operations.
Trends Affecting Our Business
Our results of operations, including the fair value of our AUM, are affected by a variety of factors, including conditions in the global financial markets as well as economic and political environments, particularly in theU.S.
During the year ended
In addition to these macroeconomic trends and market factors, our future performance is dependent on our ability to attract new capital. We believe the following factors will influence our future performance:
The outcome of the Medley LLC Chapter 11 Case and the Regulatory Matter. Our
ability to operate our business is dependent on the outcome of the
Chapter 11 Case, including whether the
Medley LLC Plan of Reorganization. We are cooperating with an
• investigation as discussed in Note 12 to our consolidated financial statements
included in this Form 10-K. We cannot predict the outcome of, or the timeframe
for, the conclusion of this investigation. An adverse outcome could have a
material effect on our business, financial condition, or results of
operations.
• The extent to which investors favor directly originated private credit
investments. Our ability to attract additional capital is dependent on
investors' views of directly originated private credit investments relative to
traditional assets. We believe fundraising efforts will continue to be
impacted by certain fundamental asset management trends that include: (i) the
importance of directly originated private credit investment strategies for
institutional investors; (ii) demand for directly originated private credit
investments from retail investors; (iii) recognition by the consultant
channel, which serves endowment and pension fund investors, that directly
originated private credit is an important component of asset allocation; (iv)
increasing demand from insurance companies seeking alternatives to investing
in the liquid credit markets; and (v) deleveraging of the global banking
system, bank consolidation and increased bank regulatory requirements.
• Our ability to generate strong, stable returns and retain investor capital
throughout market cycles. The capital we are able to attract and retain drives
the growth of our AUM, fee earning AUM and management fees. We believe we are
well positioned to invest through market cycles given our AUM is in either a
permanent capital vehicle or long-dated private funds and SMAs.
• Our ability to source investments with attractive risk-adjusted returns. Our
ability to grow our revenue is dependent on our continued ability to source
attractive investments and deploy the capital that we have raised. We believe
that the current economic environment, while uncertain, will ultimately
provide attractive investment opportunities. Our ability to identify
attractive investments and execute on those investments is dependent on anumber of factors, including the general macroeconomic environment, valuation,
size and the liquidity available in our investment vehicles. A significant
decrease in the quality or quantity of investment opportunities in the
directly originated private credit market, a substantial increase in corporate
default rates, an increase in competition from new entrants providing capital
to the private debt market and a decrease in recovery rates of directly
originated private credit could adversely affect our ability to source
investments with attractive risk-adjusted returns.
• The attractiveness of our product offering to investors. We expect defined
contribution plans, retail investors, public institutional investors, pension
funds, endowments, sovereign wealth funds and insurance companies to maintain
or increase exposure to directly originated private credit investment products
to seek differentiated returns and current yield. Our permanent capital
vehicle and long-dated private funds and SMAs may benefit from this demand by
offering institutional and retail investors the ability to invest in our
private credit investment strategy. We believe that the breadth, diversity and
number of investment vehicles we offer allow us to maximize our reach with
investors.
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Table of Contents • The strength of our investment process, operating platform and client
servicing capabilities. Following the 2008 financial crisis, investors in
alternative investments, including those managed by us, have heightened their
focus on matters such as manager due diligence, reporting transparency and
compliance infrastructure, and we expect this to continue during and post the
COVID-19 pandemic. Since inception, we have invested in our investment
monitoring systems, compliance and enterprise risk management systems to
proactively address investor expectations and the evolving regulatorylandscape. We believe these investments in operating infrastructure will
continue to support our growth in AUM.
Components of Our Results of Operations
Revenues
Management Fees. Management fees include both base management fees as well as Part I incentive fees.
• Base Management Fees. Base management fees are generally based on a defined
percentage of (i) average or total gross assets, including assets acquired
with leverage, (ii) total commitments, (iii) net invested capital, (iv) NAV or
(v) lower of cost or market value of a fund's portfolio investments. These
fees are calculated quarterly and are paid in cash in advance or in arrears.
Base management fees are recognized as revenue in the period advisory services
are rendered, subject to our assessment of collectability.
In addition, we also receive non asset-based management fees that may include
special fees such as origination fees, transaction fees and similar fees paid to
us in connection with portfolio investments of our funds. These fees are
specific to particular transactions and the contractual terms of the portfolio
investments, and are recognized when earned.
• Part I Incentive Fees. We also include Part I incentive fees that we receive
from our permanent capital vehicle and certain of our long-dated private funds
in management fees. Part I incentive fees are paid quarterly, in cash, and are
driven primarily by net interest income on senior secured loans. We are
primarily an asset manager of yield-oriented products and our incentive fees
are primarily derived from spread income rather than trading or capital gains.
In addition, we also carefully manage interest rate risk. We are generally
positioned to benefit from a raising rate environment, which should benefit
fees paid to us from our vehicles and funds.
• Part II Incentive Fees. For our permanent capital vehicle and certain of our
long-dated private funds, Part II incentive fees generally represent 20.0% of
each fund's cumulative realized capital gains (net of realized capital losses
and unrealized capital depreciation). We have not received these fees
historically, and do not expect such fees to be material in the future given
our focus on senior secured lending.
Performance Fees. Performance fees are contractual fees which do not represent a
capital allocation to the general partner or investment manager that are earned
based on the performance of certain funds, typically our separately managed
accounts. Performance fees are earned based upon fund 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. We
recognize these contractual based performance fees as revenue when it is
probable that a significant reversal of such fees will not occur in the future.
The timing and amount of performance fees generated by our funds is uncertain.
If we were to have a realization event in a particular quarter or year, it may
have a significant impact on our results for that particular quarter or year
that may not be replicated in subsequent periods. Refer to "Risk Factors - Risks
Related to Our Business and Industry" included in this Annual Report on Form
10-K.
Other Revenues and Fees. We provide administrative services to certain of our
vehicles that are reported as other revenues and fees. Such fees are recognized
as revenue in the period that administrative services are rendered. These fees
are generally based on expense reimbursements for the portion of overhead and
other expenses incurred by certain professionals directly attributable to each
respective fund. We also act as the administrative agent on certain deals for
which we may earn loan administration fees and transaction fees. We may also
earn consulting fees for providing non-advisory services related to our managed
funds. Additionally, this line item includes reimbursable origination and deal
expenses as well as reimbursable entity formation and organizational expenses.
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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 us 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 our 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 our consolidated balance sheets. We record 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 our 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 us 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 year endedDecember 31, 2020 , the Company received a carried interest distribution of$0.6 million from one of its managed funds. In addition to the receipt of this distribution, the Company received a carried interest distribution of$0.3 million from one of its managed funds during 2019, which has been fully liquidated as ofDecember 31, 2020 . Prior to the receipt of these distributions, the Company had 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 ofDecember 31, 2020 and 2019, we have 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. Our actual obligation, however, would not become payable or realized until the end of a fund's life.
Other Investment income. Other investment income is comprised of unrealized appreciation (depreciation) resulting from changes in fair value of our equity method investments in addition to the income/expense allocations from such investments.
In certain cases, the entities that receive management and incentive fees from our funds are owned byMedley LLC together with other persons. See "Critical Accounting Policies" and Note 2, "Summary of Significant Accounting Policies," to our consolidated financial statements included in this Form 10-K for additional information regarding the manner in which management fees, performance fees, carried interest, investment income and other fees are recognized. Expenses Compensation and Benefits. Compensation and benefits consists primarily of salaries, discretionary bonuses and benefits paid and payable to our employees, performance fee compensation and stock-based compensation associated with the grants of equity-based awards to our employees. Compensation expense relating to equity based awards are measured at fair value as of the grant date, reduced for actual forfeitures when they occur, and expensed over the vesting period on a straight-line basis. Bonuses are accrued over the service period to which they relate. Guaranteed payments made to our senior professionals who are members ofMedley LLC are recognized as compensation expense. The guaranteed payments to our Co-Chief Executive Officers are performance based and periodically set subject to maximums based on our total assets under management. For each of the Co-Chief Executive Officers such maximums aggregated to$1.5 million for the year endedDecember 31, 2020 and$2.5 million for each of the years endingDecember 31, 2019 and 2018. During the year endedDecember 31, 2020 , the Company's Co-Chief Executive Officers received guaranteed payments in the aggregate of$0.8 million . Bonuses to the Company's Co-Chief Executive Officers aggregated to$0.2 million for the year endedDecember 31, 2020 . During the years endedDecember 31, 2019 and 2018, neither of the Company's Co-Chief Executive Officers received any guaranteed payments or bonuses. General, Administrative and Other Expenses. General and administrative expenses include costs primarily related to professional services, office rent, depreciation and amortization, general insurance, recruiting, travel and related expenses, information technology, communication and information services and other general operating items. Other Income (Expense)
Dividend Income. Dividend income consists of dividends associated with our
investment in SIC and, prior to
Interest Expense. Interest expense consists primarily of interest expense relating to debt incurred by us.
Other (Income) Expenses, Net. Other income (expenses), net consists primarily of
expenses associated with our revenue share payable and, prior to
Provision for (Benefit from) Income Taxes.Medley Management Inc. is subject toU.S. federal, state and local corporate income taxes on its allocable portion of taxable income fromMedley LLC at prevailing corporate tax rates.Medley LLC and its subsidiaries were not subject toU.S. federal, state and local corporate income taxes since all of its income or losses was passed through to its members. However,Medley LLC and its subsidiaries were subject toNew York City's unincorporated business tax on its taxable income allocated toNew York City . Our effective income tax rate is dependent on many factors, including the impact of nondeductible items, the need for or changes in the valuation allowance on deferred tax assets, and a rate benefit attributable to the fact that a portion of our earnings are not subject to corporate level taxes. OnFebruary 3, 2021 ,Medley LLC filed with theU.S. Internal Revenue Service Form 8832 electing to classifyMedley LLC as a corporation forU.S. federal income tax purposes, effective as ofJanuary 24, 2021 . 44
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Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. To the extent it is more likely than not that the deferred tax assets will not be recognized, a valuation allowance is provided to offset their benefit. We recognize the benefit of an income tax position only if it is more likely than not that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit is recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50% percent likelihood of being realized upon ultimate settlement. Interest expense and penalties related to income tax matters are recognized as a component of the provision for income taxes.
Net Income (Loss) Attributable to Redeemable Non-Controlling Interests and Non-Controlling Interests in Consolidated Subsidiaries. Net income (loss) attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries represents the ownership interests that third parties hold in certain consolidated subsidiaries.
Net Income (Loss) Attributable to Non-Controlling Interests inMedley LLC . Net income (loss) attributable to non-controlling interests inMedley LLC represents the ownership interests that non-managing members' hold inMedley LLC . Our private funds are closed-end funds, and accordingly do not permit investors to redeem their interests other than in limited circumstances that are beyond our control, such as instances in which retaining the limited partnership interest could cause the limited partner to violate a law, regulation or rule. In addition, SMAs for a single investor may allow such investor to terminate the investment management agreement at the discretion of the investor pursuant to the terms of the applicable documents. We manage assets for SIC, which is a BDC. The capital managed by SIC is permanently committed to these funds and cannot be redeemed by investors.
Managing Business Performance
Non-GAAP Financial Information
In addition to analyzing our results on a GAAP basis, management also makes operating decisions and assesses business performance based on the financial and operating metrics and data that are presented without the consolidation of any fund(s). Core Net Income, Core EBITDA, Core Net Income Per Share and Core Net Income Margin are non-GAAP financial measures that are used by management to assess the performance of our business. There are limitations associated with the use of non-GAAP financial measures as compared to the use of the most directly comparableU.S. GAAP financial measure and these measures supplement and should be considered in addition to and not in lieu of the results of operations discussed further under "Results of Operations,'' which are prepared in accordance withU.S. GAAP. Furthermore, such measures may be inconsistent with measures presented by other companies. For a reconciliation of these measures to the most comparable measure in accordance withU.S. GAAP, see "Reconciliation of Certain Non-GAAP Performance Measures to ConsolidatedU.S. GAAP Financial Measures.'' Core Net Income. Core Net Income is an income measure that is used by management to assess the performance of our business through the removal of non-core items, as well as non-recurring expenses associated with our IPO. It is calculated by adjusting net income (loss) attributable toMedley Management Inc. and net income (loss) attributable to non-controlling interests inMedley LLC to exclude reimbursable expenses associated with the launch of funds, amortization of stock-based compensation expense associated with grants of restricted stock units at the time of our IPO, expenses associated with strategic initiatives and other non-core items and the income tax impact of these adjustments. Core Earnings Before Interest, Income Taxes, Depreciation and Amortization (Core EBITDA). Core EBITDA is an income measure also used by management to assess the performance of our business. Core EBITDA is calculated as Core Net Income before interest expense, income taxes, depreciation and amortization.
Pro-Forma Weighted Average Shares Outstanding. The calculation of Pro-Forma Weighted Average Shares Outstanding in the table below assumes the conversion by the pre-IPO holders of up to 2,686,848 vested and unvested LLC Units for 2,686,848 shares of Class A common stock at the beginning of each period presented.
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Core Net Income Per Share. Core Net Income Per Share is Core Net Income adjusted for corporate income taxes assuming that all of our pre-tax earnings are subject to federal, state and local corporate income taxes, divided by Pro-Forma Weighted Average Shares Outstanding (as defined above). In determining corporate income taxes we used an annual effective corporate tax rate of 44% for the years endedDecember 31, 2020 and 2019 and 33.0% for the year endedDecember 31, 2018 . Please refer to the calculation of Core Net Income Per Share in "Reconciliation of Certain Non-GAAP Performance Measures to ConsolidatedU.S. GAAP Financial Measures."
Core Net Income Margin. Core Net Income Margin equals Core Net Income Per Share divided by total revenue per share.
Key Performance Indicators
When we review our performance we focus on the indicators described below:
For the Years Ended December 31,
2020 2019 2018
(dollars in thousands,except AUM, share and per share
amounts)
Consolidated Financial Data: Net (loss) income attributable toMedley Management Inc. and non-controlling interests in Medley LLC$ (18,454 ) $ (13,074 ) $ (10,443 ) Net (loss) income per Class A common stock$ (4.26 ) $ (6.00 ) $ (6.50 ) Net Income Margin (1) (55.7 )% (26.8 )% (18.5 )% Weighted Average Shares - Basic and Diluted 643,351 587,821 557,963 Non-GAAP Data: Core Net (Loss) Income$ (12,111 ) $ (6,652 ) $ 4,058 Core EBITDA$ (2,053 ) $ 10,945 $ 17,420 Core Net (Loss) Income Per Share$ (2.12 ) $ (0.25 ) $ 1.23 Core Net Income Margin (22.6 )% (1.7 )% 7.0 % Pro-Forma Weighted Average Shares Outstanding 3,506,147 3,360,349 3,169,521 Other Data (at period end, in millions): AUM$ 2,859 $ 4,122 $ 4,712 Fee Earning AUM$ 1,325 $ 2,138 $ 2,785
(1) Net Income Margin equals Net income (loss) attributable to Medley Management
Inc. and non-controlling interests in
AUM AUM refers to the assets of our funds. We view AUM as a metric to measure our investment and fundraising performance as it reflects assets generally at fair value plus available uncalled capital. For our funds, our AUM equals the sum of the following: • Gross asset values or 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).
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The below table provides the roll forward of AUM fromDecember 31, 2017 toDecember 31, 2020 % of AUM Long-dated Permanent Long-dated Permanent Private Capital Private Funds Capital Funds and Vehicles and SMAs Total Vehicles SMAs (Dollars in millions) Ending balance, December 31, 2017$ 2,337 $ 2,861$ 5,198 45 % 55 % Commitments (1) (210 ) 116 (94 ) Distributions (3) (107 ) (144 ) (251 ) Change in fund value (4) (103 ) (38 ) (141 ) Ending balance, December 31, 2018$ 1,917 $ 2,795$ 4,712 41 % 59 % Commitments (1) (48 ) 6 (42 ) Capital reduction (2) (135 ) - (135 ) Distributions (3) (67 ) (173 ) (240 ) Change in fund value (4) (119 ) (54 ) (173 ) Ending balance, December 31, 2019$ 1,548 $ 2,574$ 4,122 38 % 62 % Commitments (1) (153 ) (12 ) (165 ) Capital reduction (2) (540 ) (288 ) (828 ) Distributions (3) (24 ) (101 ) (125 ) Change in fund value (4) (117 ) (28 )
(145 )
Ending balance,
25 % 75 %
(1) With respect to permanent capital vehicles, represents decreases during the
period for debt repayments offset, in part, by equity and debt offerings.
With respect to long-dated private funds and SMAs, represents new
commitments as well as any increases in available undrawn borrowings.
(2) Represents the permanent reduction in equity or leverage during the period.
(3) With respect to permanent capital vehicles, represents distributions of
income. With respect to long-dated private funds and SMAs, represents return
of capital, given our funds' stage in their respective life cycle and the
prioritization of capital distributions.
(4) Includes interest income, realized and unrealized gains (losses), fees
and/or expenses.
AUM decreased by $1.3 billion to $2.9 billion as of December 31, 2020 compared
to December 31, 2019 . Our permanent capital vehicles decreased AUM by $834.0
million as of December 31, 2020 and our long-dated private funds and SMAs
decreased AUM by $429.0 million as of December 31, 2020 in each case as compared
with December 31, 2019 .
AUM decreased by $590.0 million to $4.1 billion as of December 31, 2019 compared
to December 31, 2018 . Our permanent capital vehicles decreased AUM by $369.0
million as of December 31, 2019 and our long-dated private funds and SMAs
decreased AUM by $221.0 million as of December 31, 2019 in each case as compared
with December 31, 2018 .
AUM was $4.7 billion as of December 31, 2018 compared to $5.2 billion of AUM as
of December 31, 2017 . Our permanent capital vehicles decreased by $420.0 million
as of December 31, 2018 , primarily due to MCC voluntarily satisfying and
terminating its commitments under its revolving credit facility with ING Capital
LLC in accordance with its terms, along with distributions and changes in fund
values. Our long-dated private funds and SMAs decreased AUM by $66.0 million .
Fee Earning AUM
Fee earning AUM refers to assets under management on which we directly earn base
management fees. We view fee earning AUM as a metric to measure changes in the
assets from which we earn management fees. Our fee earning AUM is the sum of all
the individual fee earning assets of our funds that contribute directly to our
management fees and generally equals the sum of:
• for our permanent capital vehicles, the average or total gross asset value,
including assets acquired with the proceeds of leverage (see "Fee earning AUM
based on gross asset value" in the "Components of Fee Earning AUM" table below
for the amount of this component of fee earning AUM as of each period);
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• for certain long-dated private funds within their investment period, the
amount of limited partner capital commitments (see "Fee earning AUM based on
capital commitments" in the "Components of Fee Earning AUM" table below for
the amount of this component of fee earning AUM as of each period); and
• for the aforementioned funds beyond their investment period and certain
managed accounts within their investment period, the amount of limited partner
invested capital, the NAV of the fund or lower of cost or market value of a
fund's portfolio investments (see "Fee earning AUM based on invested capital
or NAV" in the "Components of Fee Earning AUM" table below for the amount of
this component of fee earning AUM as of each period).
Our calculations of fee earning AUM and AUM may differ from the calculations of
other asset managers and, as a result, this measure may not be comparable to
similar measures presented by others. In addition, our calculations of fee
earning AUM and AUM may not be based on any definition of fee earning AUM or AUM
that is set forth in the agreements governing the investment funds that we
advise.
Components of Fee Earning AUM
As of December 31,
2020 2019
(in millions)
Fee earning AUM based on gross asset value $ 678 $ 1,361
Fee earning AUM based on invested capital, NAV or
capital commitments 647 777
Total fee earning AUM $ 1,325 $ 2,138
As of December 31, 2020 , fee earning AUM based on gross asset value decreased by
$683.0 million , compared to December 31, 2019 . The decrease was primarily due to
capital reductions resulting from debt repayments, distributions and changes in
fund value.
As of December 31, 2020 , fee earning AUM based on invested capital, NAV or
capital commitments decreased by $130.0 million compared to December 31, 2019 .
The decrease was primarily due to the return of portfolio investment capital to
the respective fund.
The table below presents the roll forward of fee earning AUM from December 31,
2017 to December 31, 2020 .
% of Fee Earning AUM
Long-dated
Permanent Long-dated Permanent Private
Capital Private Funds Capital Funds and
Vehicles and SMAs Total Vehicles SMAs
(Dollars in millions)
Ending balance, December 31, 2017 $ 2,090 $ 1,068 $ 3,158 66 % 34 %
Commitments (1) (137 ) 237 100
Distributions (3) (107 ) (159 ) (266 )
Change in fund value (4) (103 ) (104 ) (207 )
Ending balance, December 31, 2018 $ 1,743 $ 1,042 $ 2,785 63 % 37 %
Commitments (1) (66 ) 113 47
Capital reduction(2) (135 ) - (135 )
Distributions (3) (67 ) (293 ) (360 )
Change in fund value (4) (114 ) (85 ) (199 )
Ending balance, December 31, 2019 $ 1,361 $ 777 $ 2,138 64 % 36 %
Commitments (1) (126 ) 92 (34 )
Capital reduction(2) (412 ) - (412 )
Distributions (3) (24 ) (157 ) (181 )
Change in fund value (4) (121 ) (65 ) (186 )
Ending balance, December 31, 2020 $ 678 $ 647 $ 1,325 51 % 49 %
(1) With respect to permanent capital vehicles, represents increases or
temporary reductions during the period through equity and debt offerings, as
well as any increases in capital commitments. With respect to long-dated
private funds and SMAs, represents new commitments or gross inflows,
respectively.
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(2) Represents the permanent reduction in equity or leverage during the period.
(3) Represents distributions of income, return of capital and return of
portfolio investment capital to the fund.
(4) Includes interest income, realized and unrealized gains (losses), fees
and/or expenses.
Total fee earning AUM decreased by $813.0 million , or 38%, to $1.3 billion as of
December 31, 2020 compared to December 31, 2019 , due primarily to distributions,
debt repayments representing capital reductions and changes in fund value.
Total fee earning AUM decreased by $647.0 million , or 23%, to $2.1 billion as of
December 31, 2019 compared to December 31, 2018 , due primarily to distributions,
debt repayments representing capital reductions and changes in fund value.
Total fee earning AUM decreased by $373.0 million , or 12%, to $2.8 billion as of
December 31, 2018 compared to December 31, 2017 , primarily due to changes in
fund value and distributions, partially offset by capital deployment by our
private funds and SMAs.
Returns
The following section sets forth historical performance for our active funds.
Sierra Income Corporation (SIC)
We launched SIC, our first public non-traded permanent capital vehicle, inApril 2012 . SIC primarily focuses on direct lending to middle market borrowers inthe United States . Since inception, we have provided capital for a total of 474 investments and have invested a total of$2.6 billion . As ofDecember 31, 2020 , fee earning AUM was$678 million . The performance for SIC as ofDecember 31, 2020 is summarized below: Annualized Net Total Return(1) 1.4 % Annualized Realized Losses onInvested Capital 1.6 % Average Recovery(3) 57.1 % 49
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MOF II is a long-dated private investment fund that we launched inDecember 2010 . MOF II lends to middle market private borrowers, with a focus on providing senior secured loans. Since inception, we have provided capital for a total of 87 investments and have invested a total of$979 million . As ofDecember 31, 2020 , fee earning AUM was$64 million . MOF II is currently fully invested and actively managing its assets. The performance for MOF II as ofDecember 31, 2020 is summarized below:
Gross Portfolio Internal Rate of Return(4): 5.0 % Net Investor Internal Rate of Return(5):
1.2 %
Annualized Realized Losses on
40.8 %
MOF III is a long-dated private investment fund that we launched inDecember 2014 . MOF III lends to middle market private borrowers in theU.S. , with a focus on providing senior secured loans. Since inception, we have provided capital for a total of 55 investments and have invested a total of$228 million . As ofDecember 31, 2020 , fee earning AUM was$51 million . The performance for MOF III as ofDecember 31, 2020 is summarized below:
Gross Portfolio Internal Rate of Return(4): 8.2 % Net Investor Internal Rate of Return(5):
4.5 %
Annualized Realized Losses on
41.1 %
Separately Managed Accounts (SMAs)
In the case of our separately managed accounts, the investor, rather than us, may control the assets or investment vehicle that holds or has custody of the related investments. Certain subsidiaries ofMedley LLC serve as the investment adviser for our SMAs. Since inception, we have provided capital for a total of 253 investments and have invested a total of$1.4 billion . As ofDecember 31, 2020 , fee earning AUM in our SMAs was$428 million . The aggregate performance of our SMAs as ofDecember 31, 2020 is summarized below:
Gross Portfolio Internal Rate of Return(4): 6.6 % Net Investor Internal Rate of Return(6):
5.2 %
Annualized Realized Losses on
34.0 %
Other Long-Dated Private Funds
We launchedAspect-Medley Investment Platform A LP ("Aspect") inNovember 2016 andAspect-Medley Investment Platform B LP ("Aspect-B") inMay 2018 to meet the current demand for equity capital solutions in the traditional corporate debt-backed collateralized loan obligation ("CLO") market. Its investment objective is to generate current income, and also to generate capital appreciation through investing in CLO equity, as well as, equity and junior debt tranches trading in the secondary market. We launchedMedley Credit Opportunity Fund ("MCOF") inJuly 2016 to meet the current demand for equity capital solutions in the traditional corporate debt-backed collateralized loan obligation ("CLO") market. Its investment objective is to generate current income, and also to generate capital appreciation through investing in CLO equity, as well as, equity and junior debt tranches trading in the secondary market. We launchedMedley Opportunity Fund Offshore III LP ("MOF III Offshore") inMay 2017 . MOF III Offshore invests in senior secured loans made to middle market private borrowers in the US. 50
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The performance of Aspect, Aspect-B, MCOF and MOF III Offshore as of
(1) Annualized Net Total Return for SIC represents the annualized return
assuming an investment at SIC's inception, reinvestments of all
distributions at prices obtained under SIC's dividend reinvestment plan and
no sales charge.
(2) Average Recovery includes only those realized investments in which we
experience a loss of principal on a cumulative cash flow basis and is
calculated by dividing the total actual cash inflows for each respective
investment, including all interest, principal and fee note repayments,
dividends and transactions fees, if applicable, by the total actual cash
outflows for each respective investment.
(3) For MOF II, MOF III, and SMAs, the Gross Internal Rate of Return represents
the cumulative investment performance from inception of each respective fund
through
realized and unrealized investments and excludes the impact of base
management fees, incentive fees and other fund related expenses. For
realized investments, the investment returns were calculated based on the
actual cash outflows and inflows for each respective investment and include
all interest, principal and fee note repayments, dividends and transactions
fees, if applicable. For unrealized investments, the investment returns were
calculated based on the actual cash outflows and inflows for each respective
investment and include all interest, principal and fee note repayments,
dividends and transactions fees, if applicable. The investment return
assumes that the remaining unrealized portion of the investment is realized
at the investment's most recent fair value, as calculated in accordance with
GAAP. There can be no assurance that the investments will be realized at
these fair values and actual results may differ significantly.
(4) Net Internal Rate of Return for MOF II and MOF III was calculated net of all
management fees and carried interest allocation since inception and was
computed based on the actual dates of capital contributions and the ending
aggregate partners' capital at the end of the period.
(5) Net Internal Rate of Return for our SMAs was calculated using the Gross
Internal Rate of Return, as described in note 4, and includes the actual
management fees, incentive fees and general fund related expenses.
Results of Operations
The following table and discussion sets forth information regarding our
consolidated results of operations for the years ended December 31, 2020 , 2019
and 2018. The consolidated financial statements of Medley have been prepared on
substantially the same basis for all historical periods presented.
For the Years Ended December 31,
2020 2019 2018
(Amounts in thousands, except AUM data)
Revenues
Management fees (includes Part I incentive
fees of $0 , $176 and $0 for the years ending
in 2020, 2019 and 2018, respectively) $ 26,135 $ 39,473 $ 47,085
Other revenues and fees 7,867 9,703 10,503
Investment income:
Carried interest 337 819 142
Other investment loss, net (1,087 ) (1,154 ) (1,221 )
Total Revenues 33,252 48,841 56,509
Expenses
Compensation and benefits 21,520 28,925 31,666
General, administrative and other expenses 16,437 17,186 19,366
Total Expenses 37,957 46,111 51,032
Other Income (Expense)
Dividend income 159 1,119 4,311
Interest expense (10,487 ) (11,497 ) (10,806 )
Other expenses, net (5,151 ) (4,412 ) (20,250 )
Total expenses, net (15,479 ) (14,790 ) (26,745 )
Loss before income taxes (20,184 ) (12,060 ) (21,268 )
(Benefit from) provision for income taxes (1,956 ) 4,710 258
Net Loss (18,228 ) (16,770 ) (21,526 )
Net income (loss) attributable to redeemable
non-controlling interests and
non-controlling interests in consolidated
subsidiaries 226 (3,696 ) (11,083 )
Net loss attributable to non-controlling
interests in Medley LLC (15,790 ) (9,695 ) (8,011 )
Net Loss Attributable to Medley Management
Inc. $ (2,664 ) $
(3,379 )
Other data (at period end, in millions): AUM$ 2,859 $ 4,122 $ 4,712 Fee earning AUM$ 1,325 $ 2,138 $ 2,785 51
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Year Ended
Revenues Management Fees. Total management fees decreased by$13.4 million , or 34%, to$26.1 million during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 .
• Our management fees from permanent capital vehicles decreased by
million, or 38%, during the year ended
the same period in 2019. The decrease was due primarily to lower base
management fees from both SIC and MCC as a result of a decrease in fee
earning assets under management driven by a reduction in leverage andchanges in fund values, which was mainly driven by a decline in portfolio
valuations. The decline in management fees was also due in part to $0.7
million of expenses recorded under an Expense Support Agreement we entered
into with MCC on June 12, 2020 , as these expenses are reported as a
reduction to management fees for the year ended December 31, 2020 .
• Our management fees from long-dated private funds and SMAs decreased by
million, or 25%, during the year ended
The decrease was due primarily to lower base management fees as a result of a
decrease in fee earning assets under management driven by investment
realizations, distributions and changes in fund value.
Other Revenues and Fees. Other revenues and fees decreased by $1.8 million , or
19%, to $7.9 million during the year ended December 30, 2020 as compared to the
same period in 2019. The decrease was due primarily to lower administration fees
for services provided to our permanent capital vehicles as well a decline in
loan closing fees.
Investment Income (Loss). Investment loss, net increased by approximately
Expenses
Compensation and Benefits. Compensation and benefits expenses decreased by$7.4 million , or 26%, to$21.5 million for the year endedDecember 31, 2020 as compared to the same period in 2019. The decrease was due primarily to a decrease in average employee headcount, stock compensation and a reduction in discretionary bonuses, offset in part, by an increase in severance expense. General, Administrative and Other Expenses. General, administrative and other expenses decreased by$0.7 million , or 4%, to$16.4 million during the year endedDecember 31, 2020 compared to the same period in 2019. The decrease was due primarily to lower travel, office expense and expenses associated with our previously consolidated fund in 2019 of$0.4 million . This decrease was offset in part by an increase in professional fees, primarily driven by costs associated with our terminated merger with Sierra, costs associated with our debt restructuring and regulatory matter. Other Income (Expense)
Dividend Income. Dividend income decreased by
Interest Expense. Interest expense decreased by$1.0 million , or 9%, to$10.5 million during the year endedDecember 31, 2020 compared to the same period in 2019. The decrease was due primarily to SIC temporary suspending its dividend effectiveApril 1, 2020 throughSeptember 30, 2020 , resulting in lower interest being due on our non-recourse promissory notes. Interest on the promissory notes is paid monthly and is equal, in part, to the dividends received by us related to the pledged shares of SIC. Other Income (Expenses), net. Other expenses, net increased by$0.7 million to$5.1 million during the year endedDecember 31, 2020 compared to the same period in 2019. This increase was due primarily to the revaluation of our revenue share payable during the year endedDecember 31, 2020 , offset in part by a$4.1 million unrealized loss on MCC shares recorded during the year endedDecember 31, 2019 . During the year endedDecember 31, 2020 , we did not hold any shares of MCC, and as a result there were no unrealized gains or losses recorded in that period. Provision for Income Taxes Our effective income tax rate was 9.7% and (39.1%) for the years endedDecember 31, 2020 and 2019, respectively. Our tax rate is affected by recurring items, such as permanent differences and income allocated to certain redeemable non-controlling interests, which are not subject toU.S. federal, state and local corporate income taxes. Our effective tax rate is also impacted by discrete items that may occur in any given period, but are not consistent from period to period. During the year endedDecember 31, 2020 , our effective tax rate was impacted by a favorable current income tax benefit of$2.3 million primarily due to provisions of the CARES Act, allowing for the carryback of net operating losses which are currently being projected for 2020. Also impacting the effective tax rate is a full valuation allowance on our projected annual net deferred tax assets as well as losses allocated to noncontrolling interests which are not subject to subject to federal, state and city corporate income taxes. During the year endedDecember 31, 2019 , our effective tax rate was impacted primarily by losses allocated to non-controlling interests which are not subject to subject to federal, state and city corporate income taxes and the establishment of a full valuation allowance on the Company's finite lived deferred tax assets, as well as, discrete items associated with the vesting of restricted LLC Units and payment of dividend equivalent payments on restricted stock units.
Redeemable Non-Controlling Interests and Non-Controlling Interests in Consolidated Subsidiaries
Net income attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries increased by$3.9 million to$0.2 million for the year endedDecember 31, 2020 as compared to the same period 2019. The increase was due primarily to the allocation of unrealized losses on shares of MCC to one of our redeemable non-controlling interests, based on its preferred ownership interests held in one of our consolidated subsidiaries during the year endedDecember 31, 2019 , whose interests were redeemed inApril 2020 .
Year Ended
Revenues Management Fees. Total management fees decreased by$7.6 million , or 16%, to$39.5 million during the year endedDecember 31, 2019 as compared to the year endedDecember 31, 2018 .
• Our management fees from permanent capital vehicles decreased by
or 16%, during the year ended
was due primarily to lower base management fees from both SIC and MCC as a
result of a decrease in fee earning assets under management driven by a
reduction in leverage and changes in fund values, which was mainly driven by a
decline in portfolio valuations.
• Our management fees from long-dated private funds and SMAs decreased by
million, or 16%, during the year ended
The decrease was due primarily to lower base management fees from MOF II and
MOF III as a result of a decrease in fee earning assets under management
driven by investment realizations and changes in fund value.
Other Revenues and Fees. Other revenues and fees decreased by $0.8 million , or
8%, to $9.7 million during the year ended December 31, 2019 as compared to 2018.
The decrease was due primarily to lower reimbursable expenses and transaction
fees from closed deals, offset by a $0.3 million increase in consulting fees for
providing non-advisory services to one of our private long-dated funds.
Investment Income. Investment income increased by approximately $0.7 million to
a net investment loss of $0.3 million during the year ended December 31, 2019
compared to a net investment loss of $1.1 million during the year ended December
31, 2018 . The increase was due primarily to an increase in carried interest
earned during 2019 as compared to 2018.
Expenses
Compensation and Benefits. Compensation and benefits expenses decreased by $2.7
million , or 9%, to $28.9 million for the year ended December 31, 2019 as
compared to 2018. The decrease was due primarily to a 9% decrease in average
employee headcount in 2019 as compared to 2018.
General, Administrative and Other Expenses. General, administrative and other
expenses decreased by $2.2 million , or 11%, to $17.2 million during the year
ended December 31, 2019 compared to the same period in 2018. The decrease was
due primarily to a $1.0 million decrease in expenses associated with our
consolidated fund, STRF, and a $0.7 million decrease in professional fees. The
reduction in expenses associated with STRF is primarily attributed to the
amortization of its deferred offering costs in 2018 as well as reductions in
fund accounting and administration expenses. The reduction in professional fees
is primarily driven by the timing and nature of services being provided in
connection with our pending merger with Sierra.
Other Income (Expense)
Dividend Income. Dividend income decreased by
Interest Expense. Interest expense increased by$0.7 million , or 6%, to$11.5 million during the year endedDecember 31, 2019 compared to 2018. The increase was due primarily to an interest expense associated with our former minority interest holder liability, which was entered into onDecember 31, 2018 . Other Income (Expenses), net. Other expenses decreased by$15.8 million to$4.4 million during the year endedDecember 31, 2019 compared to the same period in 2018. The decrease was attributed primarily to a decline in unrealized losses on our investment in shares of MCC. During the year endedDecember 31, 2019 we recorded unrealized losses of$4.1 million compared to$19.9 million in 2018. All of the$4.1 million in unrealized losses during the year endedDecember 31, 2019 and$16.3 million of the$19.9 million in unrealized losses during 2018 were allocated to redeemable non-controlling interests in consolidated subsidiaries which did not have any impact on the net income (loss) attributed toMedley Management Inc. and non-controlling interests inMedley LLC . Provision for Income Taxes Our effective income tax rate was 39.1% and (1.2)% for the year endedDecember 31, 2019 and 2018, respectively. Our tax rate is affected by recurring items, such as permanent differences and income allocated to certain redeemable non-controlling interests, which is not subject toU.S. federal, state and local corporate income taxes. Our effective tax rate is also impacted by discrete items that may occur in any given period, but are not consistent from period to period. 52
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The variance in our effective tax rate from 2018 is due primarily to the establishment of a full valuation allowance against our deferred tax assets as ofDecember 31, 2019 . Due to the uncertain nature of the ultimate realization of its deferred tax assets, we established a valuation allowance, against the benefits of its deferred tax assets and will recognize these benefits only as reassessment demonstrates they are realizable. Ultimate realization is dependent upon several factors, among which is future earnings and reversing temporary differences. While the need for this valuation allowance is subject to periodic review, if the allowance is reduced, the tax benefits of the net deferred tax assets will be recorded in future operations as a reduction of our income tax expense.
Redeemable Non-Controlling Interests and Non-Controlling Interests in Consolidated Subsidiaries
Net loss attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries decreased by$7.4 million to$3.7 million for the year endedDecember 31, 2019 as compared to 2018. The decrease was due primarily to the allocation of unrealized losses and dividend income on shares of MCC to one of our redeemable non-controlling interests, based on its preferred ownership interests held in one of our consolidated subsidiaries.
Reconciliation of Certain Non-GAAP Performance Measures to Consolidated
In addition to analyzing our results on a GAAP basis, management also makes operating decisions and assesses business performance based on the financial and operating metrics and data that are presented in the table below. Management believes that these measures provide analysts, investors and management with helpful information regarding our underlying operating performance and our business, as they remove the impact of items management believes are not reflective of underlying operating performance. These non-GAAP measures are also used by management for planning purposes, including the preparation of internal budgets; and for evaluating the effectiveness of operational strategies. Additionally, we believe these non-GAAP measures provide another tool for investors to use in comparing our results with other companies in our industry, many of whom use similar non-GAAP measures. There are limitations associated with the use of non-GAAP financial measures as compared to the use of the most directly comparableU.S. GAAP financial measure and these measures supplement and should be considered in addition to and not in lieu of the results of operations discussed below. Furthermore, such measures may be inconsistent with measures presented by other companies. Net income (loss) attributable toMedley Management Inc. and non-controlling interests inMedley LLC is theU.S. GAAP financial measure most comparable to Core Net Income and Core EBITDA. 53
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The following table is a reconciliation of net income (loss) attributable to
For the Years Ended December 31,
2020 2019 2018
(in thousands, except share and per share amounts)
Net loss income attributable to Medley
Management Inc. $ (2,664 ) $ (3,379 ) $ (2,432 )
Net loss income attributable to
non-controlling interests in Medley LLC (15,790 ) (9,695 ) (8,011 )
Net loss attributable to Medley Management
Inc. and non-controlling interests in Medley
LLC $ (18,454 ) $ (13,074 ) $ (10,443 )
Reimbursable fund startup expenses 1 289 1,483
IPO date award stock-based compensation - 777 1,446
Expenses associated with strategic
initiatives 4,928 4,556 4,833
Other non-core items:
Unrealized (gains) losses on shares of MCC - (70 ) 3,543
Severance expense 2,103 1,558 2,730
Other (1) 120 - 1,967
Income tax expense on adjustments (809 ) (688 ) (1,501 )
Core Net Income (Loss) $ (12,111 ) $ (6,652 ) $ 4,058
Interest expense 10,487 11,497 10,806
Income taxes (1,147 ) 5,398 1,760
Depreciation and amortization 718 702 796
Core EBITDA $ (2,053 ) $
10,945
Core Net (Loss) Income Per Share $ (2.12 ) $
(0.25 )
Pro-Forma Weighted Average Shares Outstanding (2) 3,506,147 3,360,349 3,169,521 (1) For the year endedDecember 31, 2020 , other items consist primarily of
impairment loss on one of our investments. For the year ended
2018, other items consist primarily of expenses related to the
consolidation of our business activities to our New York office.
(2) The calculation of Pro-Forma Weighted Average Shares Outstanding assumes
the conversion by the pre-IPO holders of up to 2,686,848 vested and
unvested LLC Units for 2,686,848 shares of Class A common stock at the
beginning of each period presented, as well as the vesting of the weighted
average number of restricted stock units granted to employees and directors
during each of the periods presented. Refer to the chart below for the
weighted average shares used to calculate Core Net Income Per Share for
each of the periods presented in the table above.
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The calculation of Core Net Income Per Share is presented in the table below:
For the Years Ended December 31,
2020 2019 2018
(in thousands, except share and per share amounts)
Numerator
Core Net Income (Loss) $ (12,111 ) $ (6,652 ) $ 4,058
Add: Income taxes (1,147 ) 5,398 1,760
Pre-Tax Core Net Income (Loss) $ (13,258 ) $ (1,254 ) $ 5,818
Denominator
Class A common stock 643,351 587,821 557,963
Conversion of LLC Units and restricted LLC
Units to Class A common stock 2,659,678 2,562,337 2,406,086
Restricted stock units 203,118 210,191 205,472
Pro-Forma Weighted Average Shares
Outstanding 3,506,147 3,360,349 3,169,521
Pre-Tax Core Net Income (Loss) Per Share $ (3.78 ) $ (0.37 ) $ 1.84
Less: corporate income taxes per share (1) 1.66 0.12 (0.61 )
Core Net Income (Loss) Per Share $ (2.12 ) $
(0.25 )
(1) Assumes that all of our pre-tax earnings are subject to federal, state and
local corporate income taxes. In determining corporate income taxes, we used
a combined effective corporate tax rate of 44.0% for the year ending 2020
and a combined effective corporate tax rate of 33.0% for the years ended
December 31, 2019 and 2018. Net Income Margin is theU.S. GAAP financial measure most comparable to Core Net Income Margin. Net Income margin is equal to Net income attributable toMedley Management Inc. and non-controlling interests inMedley LLC divided by total revenue. The following table is a reconciliation of Net Income Margin to Core Net Income Margin. For the Years Ended December 31, 2020 2019 2018 Net (Loss) Income Margin (55.7 )% (26.8 )% (18.5 )% Reimbursable fund startup expenses (1) - % 0.6 % 2.6 % IPO date award stock-based compensation (1) - % 1.6 % 2.6 % Expenses associated with strategic initiatives (1) 14.8 % 9.3 % 8.6 % Other non-core items: (1) Unrealized (gains) losses on shares of MCC - % (0.1 )% 6.3 % Severance expense 6.3 % 3.2 % 4.8 % Other 0.4 % - % 3.5 % Provision for income taxes (1) (5.9 )% 9.6 % 0.5 % Corporate income taxes (2) 17.6 % 0.9 % (3.4 )% Core Net Income Margin (22.6 )% (1.7 )% 7.0 %
(1) Adjustments to Net income attributable to
non-controlling interests in
presented as a percentage of total revenue.
(2) Assumes that all our pre-tax earnings, including adjustments above, are
subject to federal, state and local corporate income taxes. In determining
corporate income taxes, we used a combined effective corporate tax rate of
33.0% for the years ending 2020 and 2019, and a combined effective corporate
tax rate of 33.0% for the year ended December 31, 2018 .
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Liquidity and Capital Resources
Our primary cash flow activities involve generating cash flow from operations, which largely includes management fees; and interest payments and repayments on our outstanding debt. As ofDecember 31, 2020 , we had$3.9 million in cash and cash equivalents. Our material source of cash from our operations is management fees, which are collected quarterly. Market conditions resulting from the continuing COVID-19 pandemic may impact our liquidity, as management fees may be impacted by declines or write downs in valuations, a slowdown or decline in deployment, or our ability to fund raise. On the Petition Date,Medley LLC commenced a voluntary case under chapter 11 of title 11 of the United States Code in theUnited States Bankruptcy Court for the District of Delaware . This Chapter 11 case is captioned In re:Medley LLC , Case No. 21-10526 (KBO).Medley LLC is the only entity that has filed for Chapter 11 protection,Medley Management Inc. and the other affiliated adviser entities are not filing any bankruptcy petitions.Medley LLC will continue to operate its business as "debtor-in-possession" under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of theBankruptcy Court . To ensure its ability to continue operating in the ordinary course of business,Medley LLC has filed with theBankruptcy Court motions seeking a variety of "first day" relief, including authority to continue utilizing and maintaining its existing cash management system. In connection with the Medley LLC Chapter 11 Case,Medley LLC filed with the Bankruptcy court a proposed Medley LLC Plan of Reorganization and a proposed Disclosure Statement related thereto (the "Disclosure Statement").Medley LLC intends to seek theBankruptcy Court's approval of the Disclosure Statement and confirmation of the Plan. Refer to Note 20, Subsequent Events, to our consolidated financial statements for additional information. Our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to the approval by theBankruptcy Court , implement a plan of reorganization, emerge from the chapter 11 proceedings and generate sufficient liquidity following the reorganization to meet our obligations. Although management believes that our reorganization through the Chapter 11 proceedings will appropriately position us upon emergence, the commencement of these proceedings constituted an event of default that accelerates the obligations under the Company's senior unsecured debt. Any efforts to enforce payment obligations under the senior unsecured debt are automatically stayed as a result of the filing of the Medley LLC Chapter 11 Case and the holders' rights of enforcement with respect to the senior unsecured debt are subject to the applicable provisions of the Bankruptcy Code. We primarily use cash flows from operations to pay compensation and benefits, general, administrative and other expenses, federal, state and local corporate income taxes. Debt Instruments Senior Unsecured Debt OnAugust 9, 2016 ,Medley LLC completed a registered public offering of$25.0 million of an aggregate principal amount of 6.875% senior notes due 2026 (the "2026 Notes"). OnOctober 18, 2016 ,Medley LLC completed a registered public offering of an additional$28.6 million in aggregate principal amount of the 2026 Notes. The 2026 Notes mature onAugust 15, 2026 . OnJanuary 18, 2017 ,Medley LLC completed a registered public offering of$34.5 million in aggregate principal amount of 7.25% senior notes due 2024 (the "2024 Notes"). OnFebruary 22, 2017 ,Medley LLC completed a registered public offering of an additional$34.5 million in aggregate principal amount of 2024 Notes. The 2024 Notes mature onJanuary 30, 2024 .
As of
OnFebruary 1, 2021 ,Medley LLC did not pay the approximately$1.3 million quarterly interest payment due on such date in respect ofMedley LLC's 2024 Notes. The indentures governing the 2024 Notes affordedMedley LLC the benefit of a 30-day grace period (throughMarch 3, 2021 ) which must elapse before a missed interest payment may be treated as an event of default under the terms of the 2024 Notes. OnFebruary 16, 2021 ,Medley LLC did not pay the approximately$0.9 million quarterly interest payment due on such date in respect ofMedley LLC's 2026 Notes. The indentures governing the 2026 Notes affordedMedley LLC the benefit of a 30-day grace period (throughMarch 18, 2021 ) which must elapse before a missed interest payment may be treated as an event of default under the terms of the 2026 Notes. The commencement of Medley LLC's Chapter 11 Case constitutes an event of default that accelerates the obligations under the above-referenced indentures governing the 2024 Notes and the 2026 Notes. Any efforts to enforce payment obligations under the 2024 Notes and the 2026 Notes are automatically stayed as a result of the filing of the Medley LLC Chapter 11 Case and the holders' rights of enforcement with respect to the senior unsecured debt are subject to the applicable provisions of the Bankruptcy Code.
See Note 8, "Senior Unsecured Debt" and Note 20, Subsequent Events, to our consolidated financial statements included in this Form 10-K for additional information on the 2026 and the 2024 Notes.
Non-Recourse Promissory Notes InApril 2012 , we borrowed$5.0 million under a non-recourse promissory note with a foundation, and$5.0 million under a non-recourse promissory note with a trust. These notes are scheduled to mature onJune 30, 2021 .
See Note 9 "Loans Payable" to our consolidated financial statements included in this Form 10-K for additional information regarding the promissory notes.
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Cash Flows
The significant captions and amounts from our consolidated statements of cash
flows are summarized below. Negative amounts represent a net outflow, or use of
cash.
For the Years Ended December 31,
2020 2019 2018
(in thousands)
Statements of cash flows data
Net cash (used in) provided by operating
activities $ (3,177 ) $ 2,145 $ 16,217
Net cash (used in) provided by investing
activities (460 ) 93 (1,594 )
Net cash (used in) provided by financing
activities (3,059 )
(8,899 ) (33,731 )
Net decrease in cash and cash equivalents
Operating Activities Our net cash outflow from operating activities was$3.2 million during the year endedDecember 31, 2020 . During the year endedDecember 31, 2020 , net cash used in operating activities was attributed to a net loss of$18.2 million , non-cash adjustments of$10.8 million and a net increase in operating assets and liabilities of$4.3 million . Investing Activities Our investing activities generally reflect cash used to acquire fixed assets, purchase investments, and make capital contributions to our equity method investments. Cash provided by our investing activities generally reflect return of capital distributions received from our investment held at cost less impairment. During the year endedDecember 31, 2020 , cash used in investing activities was attributed to a decrease in cash a result of the deconsolidation of STRF whose cash balance as of the date of deconsolidation was$0.4 million . Financing Activities Our financing activities generally reflect cash used to make distributions to non-controlling interests and redeemable non-controlling interests, make principal payments on our debt and make payments of tax withholdings related to net share settlement of restricted stock units. During the year endedDecember 31, 2020 , cash used in financing activities consisted of (i) distributions to non-controlling interests and redeemable non-controlling interests of$0.8 million , (ii) payments to a former minority interest holder of$1.9 million and (iii) payments of tax withholdings related to net share settlement of restricted stock units of$0.3 million .
Sources and Uses of Liquidity
As a result of the commencement of Medley LLC's Chapter 11 Case, the payment ofMedley LLC's pre-petition liabilities is subject to compromise or other treatment pursuant to a plan of reorganization. Such liabilities include the Company's senior unsecured debt and amounts due to former minority interest holder. The determination of how these liabilities will ultimately be settled or treated cannot be made until theBankruptcy Court confirms a Chapter 11 plan of reorganization and such plan becomes effective. Our sources of liquidity are (i) cash on hand, (ii) net working capital, (iii) cash flows from operations, and (iv) realizations on our investments. Over the next twelve months, we expect that our cash and liquidity needs will continue to be met by cash generated by our ongoing operations. Although there can be no assurances thatMedley LLC will obtain theBankruptcy Court's approval of the Disclosure Statement and/or confirmation of the Medley LLC Plan of Reorganization, or that if the plan is approved, that the reorganization ofMedley LLC will be successfully implemented as contemplated by theMedley LLC Plan of Reorganization. As a result, substantial doubt about our ability to continue as a going concern exists in light of Medley LLC's Chapter 11 Case. Our ability to continue as a going concern is contingent upon, among other things, our ability to, subject to the approval by theBankruptcy Court , implement a plan of reorganization, emerge from the chapter 11 proceedings and generate sufficient liquidity following the reorganization to meet our obligations. Critical Accounting Policies We prepare our consolidated financial statements in accordance withU.S. GAAP. In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. See Note 2, "Summary of Significant Accounting Policies," to our consolidated financial statements included in this Form 10-K for a summary of our significant accounting policies. 57
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Principles of Consolidation
In accordance with ASC 810, Consolidation, we consolidate those entities where
we have a direct and indirect controlling financial interest based on either a
variable interest model or voting interest model. As such, we consolidate
entities that we conclude are VIEs, for which we are deemed to be the primary
beneficiary and entities in which we hold a majority voting interest or have
majority ownership and control over the operational, financial and investing
decisions of that entity.
For legal entities evaluated for consolidation, we 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 fees and performance fees
paid to us when acting as a decision maker or service provider to the entity
being evaluated. Fees received by us that are customary and commensurate with
the level of services provided, and we don't hold other economic interests in
the entity that would absorb more than an insignificant amount of the expected
losses or returns of the entity, would not be considered a variable interest. We
factor in all economic interests including proportionate interests through
related parties, to determine if fees are considered a variable interest.
An entity in which we hold 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 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 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. We are
generally deemed to have a controlling financial interest if we have 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. We determine
whether we are the primary beneficiary of a VIE at the time we become initially
involved with the VIE and we reconsider 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 judgments.
Each entity is assessed for consolidation on a case-by-case basis.
For those entities evaluated under the voting interest model, we consolidate the entity if we have a controlling financial interest. We have a controlling financial interest in a voting interest entity ("VOE") if we own a majority voting interest in the entity.
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, our separately managed accounts. Performance fees are earned based on the fund 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. We account for performance fees in accordance with ASC 606, Revenue from Contracts with Customers, and we will only recognize performance fees when it is probable that a significant reversal of such fees will not occur in the future. Carried Interest Carried interest are performance-based fees that represent a capital allocation of income to the general partner or investment manager. Carried interest is allocated to us 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. We account for carried interest under, ASC 323,Investments-Equity Method and Joint Ventures . Under this standard, we record carried interest in a consistent manner as we historically had which is 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 our 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. 58
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Carried interest received in prior periods may be required to be returned by us 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. Our actual obligation, however, would not become payable or realized until the end of a fund's life. Income Taxes We account 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. We also recognize 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. Our policy is to recognize interest and penalties on uncertain tax positions and other tax matters as a component of income tax expense. For interim periods, we account for income taxes based on our estimate of the effective tax rate for the year. Discrete items and changes in our estimate of the annual effective tax rate are recorded in the period they occur.Medley Management Inc. , is subject toU.S. federal, state and local corporate income taxes on its allocable portion of taxable income fromMedley LLC at prevailing corporate tax rates, which are reflected in our consolidated financial statements included in this Form 10-K.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,Medley LLC and its subsidiaries are subject toNew York City's unincorporated business tax, which is included in our provision for income taxes. We analyze our tax filing positions in all of theU.S. federal, state and local tax jurisdictions where we are required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, we determine that uncertainties in tax positions exist, a liability is established. Stock-based Compensation We account for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation. Under the fair value recognition provision of this guidance, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period and reduced for actual forfeitures in the period they occur. Stock-based compensation is included as a component of compensation and benefits in our consolidated statements of operations.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements and their impact on us can be found in Note 2, "Summary of Significant Accounting Policies," to our consolidated financial statements included in this Form 10-K.
Off-Balance Sheet Arrangements
In the normal course of business, we may engage in off-balance sheet arrangements, including transactions in guarantees, commitments, indemnifications and potential contingent repayment obligations.
See Note 12, "Commitments and Contingencies," to our consolidated financial statements included in this Form 10-K for a discussion of our commitments and contingencies.
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Table of Contents Contractual Obligations
The following table sets forth information relating to our contractual
obligations as of
Less than 1 More than 5
year 1 - 3 years 4 - 5 years years Total
(in thousands)
Medley Obligations
Operating lease obligations (1) $ 3,288 $ 4,265 $ - $ - $ 7,553
Loans payable (2) 10,000 - - - 10,000
Senior unsecured debt (3) - - 69,000 53,595 122,595
Payable to former minority
interest holder of SIC Advisors
LLC (Note 10) 2,700 5,000 - - 7,700
Revenue share payable 746 1,049 563 4,336 6,694
Capital commitments to funds
(4) 256 - - - 256
Total $ 16,990 $ 10,314 $ 69,563 $ 57,931 $ 154,798 (1) We lease office space in
lease agreements. The amounts in this table represent the minimum lease
payments required over the term of the lease, and include operating leases
for office equipment.
(2) We have included all loans described in Note 9, "Loans Payable," to our
consolidated financial statements included in this Form 10-K.
(3) We have included all our obligations described in Note 8, "Senior Unsecured
Debt," to our consolidated financial statements included in this Form 10-K.
In addition to the principal amounts above, the Company is required to make
quarterly interest payments of
(4) Represents equity commitments by us to certain long-dated private funds
managed by us. These amounts are generally due on demand and are therefore
presented in the less than one year category.
Indemnifications
In the normal course of business, we enter into contracts that contain
indemnities for our affiliates, persons acting on our behalf or such affiliates
and third parties. The terms of the indemnities vary from contract to contract
and the maximum exposure under these arrangements, if any, cannot be determined
and has neither been recorded in our consolidated financial statements. As of
December 31, 2020 , we have not had prior claims or losses pursuant to these
contracts and expect the risk of loss to be remote.
Contingent Obligations
The partnership documents governing our funds generally include a clawback
provision that, if triggered, may give rise to a contingent obligation that may
require the general partner to return amounts to the fund for distribution to
investors. Therefore, carried interest, generally, is subject to reversal in the
event that the funds incur future losses. These losses are limited to the extent
of the cumulative carried interest recognized in income to date, net of a
portion of taxes paid. Due in part to our investment performance and the fact
that our carried interest is generally determined on a liquidation basis, as of
December 31, 2020 , we accrued $7.2 million for clawback obligations that would
need to be paid had the funds been liquidated as of that date. There can be no
assurance that we will not incur additional clawback obligations in the future.
If all of the existing investments were valued at $0 , the amount of cumulative
carried interest that has been recognized would be reversed. We believe that the
possibility of all of the existing investments becoming worthless is remote. At
December 31, 2020 , had we assumed all existing investments were valued at $0 ,
the net amount of carried interest subject to additional reversal would have
been approximately $0.7 million .
Carried interest is also affected by changes in the fair values of the
underlying investments in the funds that we advise. Valuations, on an unrealized
basis, can be significantly affected by a variety of external factors including,
but not limited to, bond yields and industry trading multiples. Under the
governing agreements of certain of our funds, we may have to fund additional
amounts on account of clawback obligations beyond what we received in
performance fee compensation on account of distributions of performance fee
payments made to current or former professionals from such funds if they do not
fund their respective shares of such clawback obligations. We will generally
retain the right to pursue any remedies that we have under such governing
agreements against those carried interest recipients who fail to fund their
obligations.
Additionally, at the end of the life of the funds, there could be a payment due
to a fund by us if we have recognized more carried interest than was ultimately
earned. The general partner obligation amount, if any, will depend on final
realized values of investments at the end of the life of the fund.
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