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

FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 20172020
or 
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from            to            

 Commission File Number: 001-37857001-36638

Medley LLC
(Exact name of registrant as specified in its charter)

Delaware27-2437343
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
280 Park Avenue, 6th Floor East
New York, New York 10017
(Address of principal executive offices)(Zip Code)
 
(212) 759-0777
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
(Title of each class)Trading Symbol(Name of each exchange on which registered)
6.875% Notes due 2026MDLXNew York Stock Exchange
7.25% Notes due 2024MDLQNew York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes   ☒     No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   ☒     No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐Accelerated filer☐
Non-accelerated filer☐  (Do not check if a smaller reporting company)☒Smaller reporting company☒
  Emerging growth company☒☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☒☐ 

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

As of November 9, 2017, 29,329,55810, 2020, 3,063,441 units of membership interest ofMembership interests in Medley LLC were outstanding. There is no trading market for Medley LLC's unitsunit of membership interests.interest.





TABLE OF CONTENTS 
 

  
 Page
Part I.
FINANCIAL INFORMATION
 
   
Item 1.
Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016
F- 1
   
 Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019
F- 1
Condensed Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 20172020 and 20162019
F- 2
   
 
Condensed Consolidated Statements of Comprehensive IncomeChanges in Members' Deficit (unaudited) for the Three and Nine Months Ended September 30, 20172020 and 2016
2019
F- 3
   
 
Condensed Consolidated Statement of Changes in Equity (unaudited) for the Nine Months Ended September 30, 2017
F- 4
Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 20172020 and 2016
2019
F- 5
   
 
Notes to the Condensed Consolidated Financial Statements (unaudited)
F- 6
   
Item 2.
Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations
129
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
2324
   
Item 4.
Controls and Procedures
2527
   
Part II.
OTHER INFORMATION
 
   
Item 1.
Legal Proceedings
2628
   
Item 1A.Risk Factors
Risk Factors
2629
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
2629
   
Item 3.
Defaults Upon Senior Securities
2629
   
Item 4.
Mine Safety Disclosures
2629
   
Item 5.
Other Information
2629
   
Item 6.
Exhibits, Financial Statement Schedules
2730
   
 
Signatures
2832



FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Form 10-Q”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. In some cases, you can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “may,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under Part I, Item 1A. “Risk Factors,”Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the "Annual Report on Form 10-K")2019, available on the SEC'sSEC’s website at www.sec.gov,, which include, but are not limited to, the following:
difficult market and political conditions may adversely affect our business in many ways, including by reducing the value or hampering the performance of the investments made by our funds, each of which could materially and adversely affect our business, results of operations and financial condition;
our business may be adversely affected by the ongoing COVID-19 pandemic;
we derive a substantial portion of our revenues from funds managed pursuant to advisory agreements that may be terminated or fund partnership agreements that permit fund investors to remove us as the general partner;
we may not be able to maintain our current fee structure as a result of industry pressure from fund investors to reduce fees, which could have an adverse effect on our profit margins and results of operations;
a change of control of us could result in termination of our investment advisory agreements;
the historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results;funds;
if we are unable to consummate or successfully integrate development opportunities, acquisitions or joint ventures, we may not be able to implement our growth strategy successfully;
we depend on third-party distribution sources to market our investment strategies;
an investment strategy focused primarily on privately held companies presents certain challenges, including the lack of available information about these companies;
our funds’ investments in investee companies may be risky, and our funds could lose all or part of their investments;
prepayments of debt investments by our investee companies could adversely impact our results of operations;
our funds’ investee companies may incur debt that ranks equally with, or senior to, our funds’ investments in such companies;
subordinated liens on collateral securing loans that our funds make to their investee companies may be subject to control by senior creditors with first priority liens and, if there is a default, the value of the collateral may not be sufficient to repay in full both the first priority creditors and our funds;
there may be circumstances where our funds’ debt investments could be subordinated to claims of other creditors or our funds could be subject to lender liability claims;
our funds may not have the resources or ability to make additional investments in our investee companies;
economic recessions or downturns could impair our investee companies and harm our operating results;
a covenant breach by our investee companies may harm our operating results;
the investment management business is competitive;
our funds operate in a competitive market for lending that has recently intensified, and competition may limit our funds’ ability to originate or acquire desirable loans and investments and could also affect the yields of these assets and have a material adverse effect on our business, results of operations and financial condition;
dependence on leverage by certain of our funds and by our funds’ investee companies subjects us to volatility and contractions in the debt financing markets and could adversely affect our ability to achieve attractive rates of return on those investments;

i




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

ii



servicing our indebtedness will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are not within our control;

ii




despite our current level of indebtedness, we may be able to incur substantially more debt and enter into other transactions, which could further exacerbate the risks to our financial condition;
operational risks may disrupt our business, result in losses or limit our growth;
our ability to realize anticipated cost savings and efficiencies from consolidating our business activities to our New York office;
the impact of the termination of the Amended MDLY Merger Agreement and the Amended MCC Merger Agreement on our business and financial results; and
our tax treatment depends on our statusrisks and uncertainties relating to the possibility that MCC may explore strategic alternatives, including, but are not limited to: the timing, benefits and outcome of any exploration of strategic alternatives by MCC; potential disruptions in MCC’s business as a partnership for U.S. federalresult of its exploration of any strategic alternatives; and state income tax purposes. If the Internal Revenue Service (“IRS”) wererisk that any exploration of strategic alternatives may have an adverse effect on MCC’s existing business arrangements or relationships, including its relationship with the Company and its ability to treat us asretain or hire key personnel. There is no assurance that any exploration of strategic alternatives will result in a corporation for U.S. federal income tax purposes, which would subject us to entity-level taxation,transaction or if we were subjected to a material amount of additional entity-level taxation by individual states, then our cash available for payments on the notes and our other debt obligations could be substantially reducedstrategic change or outcome.

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Form 10-Q, the risk factors and other cautionary statements in our annual reportAnnual Report on Form 10-K for the year ended December 31, 20162019 and other reports we file with the Securities and Exchange Commission. Forward-looking statements speak as of the date on which they are made, and we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Medley LLC was formed on October 27, 2010 and is the operating company of Medley Management Inc., a public company traded under the symbol “MDLY.”"MDLY." Medley Management Inc. is the sole managing member of Medley LLC. Medley Management Inc. was incorporated on June 13, 2014 and commenced operations on September 29, 2014 upon completion of its initial public offering (“IPO”) of its Class A common stock. Medley Management Inc.'s sole material operating asset is its investment in Medley LLC. Medley Management Inc. is controlled by the pre-IPO owners.owners of Medley LLC.

Unless the context suggests otherwise, references herein to the “Company,” “Medley,”“Medley”, “we,” “us” and “our” refer to Medley LLC, and its consolidated subsidiaries.
The “pre-IPO owners” refers to the senior professionals who were the owners of Medley LLC immediately prior to the Offering Transactions. The “Offering Transactions” refer to Medley Management Inc.’s purchase upon the consummation of its IPO of 6,000,000 newly issued limited liability company units (the “LLC Units”) from Medley LLC, which correspondingly diluted the ownership interests of the pre-IPO owners in Medley LLC and resulted in Medley Management Inc.’s holding a number of LLC Units in Medley LLC equal to the number of shares of Class A common stock it issued in its IPO.
Unless the context suggests otherwise, references herein to:
“Aspect” refers to Aspect-Medley Investment Platform A LP;
“Aspect B” refers to Aspect-Medley Investment Platform B LP;
“AUM” refers to the assets of our funds, which represents the sum of the NAV of such funds, the drawn and undrawn debt (at the fund level, including amounts subject to restrictions) and uncalled committed capital (including commitments to funds that have yet to commence their investment periods);
“base management fees” refers to fees we earn for advisory services provided to our funds, which are generally based on a defined percentage of fee earning AUM or, in certain cases, a percentage of originated assets in the case of certain of our SMAs;
“BDC” refers to business development company;
“Consolidated Funds” refers to, with respect to periods after December 31, 2013 and before January 1, 2015, MOF II, with respect to periods prior to January 1, 2014, MOF I LP, MOF II and MOF III, subsequent to its formation; and, with respect to periods after May 31, 2017 and prior to April 6, 2020, Sierra Total Return Fund;
“fee earning AUM” refers to the assets under management on which we directly earn base management fees;
“hurdle rates” refers to the rates above which we earn performance fees, as defined in the long-dated private funds’ and SMAs’ applicable investment management or partnership agreements;

iii




“investee company” refers to a company to which one of our funds lends money or in which one of our funds otherwise makes an investment;
“long-dated private funds” refers to MOF II, MOF III, MOF III Offshore, MCOF, Aspect, Aspect B and any other private funds we may manage in the future;
“management fees” refers to base management fees, other management fees and Part I incentive fees;
“MCOF” refers to Medley Credit Opportunity Fund LP;
“MDLY” refers to Medley Management Inc.;
“Medley LLC” refers to Medley LLC and its consolidated subsidiaries;
“MOF II” refers to Medley Opportunity Fund II LP;

iii



“MOF III” refers to Medley Opportunity Fund III LP;
"MOF III Offshore" refers to Medley Opportunity Fund Offshore III LP;
“our funds” refers to the funds, alternative asset companies and other entities and accounts that are managed or co-managed by us and our affiliates;
“our investors” refers to the investors in our permanent capital vehicles, our private funds and our SMAs;
“Part I incentive fees” refers to fees that we receive from our permanent capital vehicles, and insince 2017, MCOF and Aspect, which are paid in cash quarterly and are driven primarily by net interest income on senior secured loans subject to hurdle rates. As it relates to Medley Capital Corporation (NYSE: MCC) (TASE:MCC) (“MCC”), these fees are subject to netting against realized and unrealized losses;
“Part II incentive fees” refers to fees related to realized capital gains in our permanent capital vehicles;
“performance fees” refers to incentive allocations in our long-dated private funds and incentive fees from our SMAs, which are typically 15% to 20% of the total return after a hurdle rate, accrued quarterly, but paid after the return of all invested capital and in an amount sufficient to achieve the hurdle rate;
“permanent capital” refers to capital of funds that do not have redemption provisions or a requirement to return capital to investors upon exiting the investments made with such capital, except as required by applicable law, which funds currently consist of MCC, Sierra Total Return Fund ("STRF") and Sierra Income Corporation (“SIC” or "Sierra"). Such funds may be required, or elect, to return all or a portion of capital gains and investment income. In certain circumstances, the investment adviser of such a fund may be removed; and
“SMA” refers to a separately managed account.account; and


"standalone" refers to our financial results without the consolidation of any fund(s).


iv




PART I.
Item 1. Financial Statements (Unaudited)
Medley LLC
Condensed Consolidated Balance Sheets (unaudited)
(Unaudited)
(AmountsDollars in thousands)

 As of

September 30, 2020
December 31, 2019
Assets 

 
Cash and cash equivalents$5,823
 $10,377
Investments, at fair value9,637
 13,287
Management fees receivable5,799
 8,104
Right-of-use assets under operating leases5,206
 6,564
Other assets10,073
 9,727
Total Assets$36,538

$48,059
 


 
Liabilities, Redeemable Non-controlling Interests and Members' Deficit 

 
Liabilities   
Senior unsecured debt, net$118,958
 $118,382
Loans payable10,000
 10,000
Due to former minority interest holder, net7,233
 8,145
Operating lease liabilities7,420
 8,267
Accounts payable, accrued expenses and other liabilities25,942
 21,886
Total Liabilities169,553

166,680




 
Commitments and Contingencies (Note 12)








 
Redeemable Non-controlling Interests—

(748)
 


 
Members' Deficit 

 
Members' Capital(132,538) (117,482)
Non-controlling interests in consolidated subsidiaries(477) (391)
Total deficit(133,015)
(117,873)
Total Liabilities, Redeemable Non-controlling Interests and Members' Deficit$36,538

$48,059

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

Medley LLC
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands)


 As of

September 30, 2017
December 31, 2016
Assets 

 
Cash and cash equivalents$39,688
 $49,566
Cash and cash equivalents of consolidated fund346
 —
Restricted cash equivalents—
 4,897
Investments, at fair value62,866
 31,904
Management fees receivable13,415
 12,630
Performance fees receivable3,119
 4,961
Other assets14,561
 17,004
Total Assets$133,995

$120,962
 




Liabilities, Redeemable Non-controlling Interests and Equity 

 
Liabilities   
Senior unsecured debt$116,698
 $49,793
Loans payable9,066
 52,178
Accounts payable, accrued expenses and other liabilities20,564
 37,178
Total Liabilities146,328

139,149






Commitments and Contingencies (Note 9)










Redeemable Non-controlling Interests53,936

30,805
 




Equity 

 
Accumulated other comprehensive income (loss)(5,325) 166
Non-controlling interests in consolidated subsidiaries(1,708) (1,717)
Member's deficit(59,236) (47,441)
Total deficit(66,269)
(48,992)
Total Liabilities, Redeemable Non-controlling Interests and Equity$133,995

$120,962

For the Three Months Ended
September 30,
For the Nine Months Ended September 30,
 2020
2019
2020
2019
Revenues 

 

 

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

$9,607
 $19,807
 $30,728
Other revenues and fees1,635

2,621
 6,269
 7,731
Investment income (loss):       
Carried interest(3) (142) 83
 651
Other investment income (loss), net419
 (550) (1,384) (922)
Total Revenues8,326

11,536

24,775

38,188
        
Expenses 

 

 
  
Compensation and benefits4,040
 7,090
 17,119
 22,069
General, administrative and other expenses3,599
 5,403
 11,682
 12,763
Total Expenses7,639
 12,493
 28,801
 34,832
        
Other Income (Expenses) 

 

 
  
Dividend income—
 182
 137
 942
Interest expense(2,535) (2,874) (7,950) (8,646)
Other (expenses) income, net(167) 1,768
 (5,592) (641)
Total expenses, net(2,702) (924) (13,405) (8,345)
Loss before income taxes(2,015) (1,881)
(17,431) (4,989)
Benefit from income taxes(51) (28)
(392) (71)
Net Loss(1,964)
(1,853)
(17,039)
(4,918)
Net income attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries1

1,619
 60
 140
Net Loss Attributable to Medley LLC$(1,965) $(3,472)
$(17,099)
$(5,058)


Medley LLC
Condensed Consolidated Statements of Operations (unaudited)Changes in Members' Deficit
(Unaudited)
(AmountsDollars in thousands)




For the Three Months Ended September 30, 2020:
 

Accumulated
Deficit
 Non-
controlling
Interests in
Consolidated
Subsidiaries		 
Total
Deficit
   
Balance at June 30, 2020$(131,758) $(364) $(132,122)
Net (loss) income(1,965) 1
 (1,964)
Contributions1,185
 —
 1,185
Distributions—
 (114) (114)
Balance at September 30, 2020$(132,538) $(477) $(133,015)



For the Nine Months Ended September 30, 2020:

For the Three Months Ended
September 30,
For the Nine Months Ended September 30,
 2017
2016
2017
2016
Revenues 

 

 

 
Management fees (includes Part I incentive fees of $1,393, $2,372, $1,937 and $11,947, respectively)$14,838

$15,262
 $41,934
 $50,220
Performance fees(202)
1,446
 (1,846) 1,706
Other revenues and fees2,016

2,172
 7,004
 5,851
Total Revenues16,652

18,880

47,092

57,777
        
Expenses 

 

 
  
Compensation and benefits6,382
 6,964
 17,881
 21,396
Performance fee compensation(14) (212) (845) (238)
General, administrative and other expenses3,510
 8,801
 8,932
 25,679
Total Expenses9,878
 15,553
 25,968
 46,837
        
Other Income (Expense) 

 

 
  
Dividend income1,428
 312
 2,896
 755
Interest expense(2,718) (2,403) (9,131) (6,593)
Other income (expense), net(282) 55
 1,299
 (1,559)
Total Other Expense, Net(1,572) (2,036) (4,936) (7,397)
Income before income taxes5,202
 1,291

16,188
 3,543
Provision for income taxes263
 160

530
 221
Net Income4,939

1,131

15,658

3,322
Net income attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries1,917

438
 4,709
 1,106
Net Income Attributable to Medley LLC$3,022
 $693

$10,949

$2,216
 

Accumulated
Deficit
 Non-
controlling
Interests in
Consolidated
Subsidiaries		 
Total
Deficit
   
Balance at December 31, 2019$(117,482) $(391) $(117,873)
Net (loss) income(17,099) 64
 (17,035)
Contributions2,821
 —
 2,821
Distributions(401) (150) (551)
Fair value adjustment to redeemable non-controlling interests (Note 16)(752) —
 (752)
Reclassification of cumulative dividends on forfeited restricted stock units to compensation and benefits expense375
 —
 375
Balance at September 30, 2020$(132,538) $(477) $(133,015)












Medley LLC
Condensed Consolidated Statements of Comprehensive Income (unaudited)Changes in Members' Deficit
(Unaudited)
(AmountsDollars in thousands)



For the Three Months Ended
September 30,
For the Nine Months Ended September 30,
 2017
2016
2017
2016
Net Income$4,939
 $1,131
 $15,658
 $3,322
Other Comprehensive Income: 

 

 

 
Change in fair value of available-for-sale securities (net of taxes of $0.1 million and $0.2 million for the three and nine months ended September 30, 2017, respectively)(3,175) 268
 (5,517) 268
Total Comprehensive Income1,764

1,399

10,141

3,590
Comprehensive income attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries1,917
 469
 4,680
 1,137
Comprehensive Income Attributable to Medley LLC$(153)
$930

$5,461

$2,453


Medley LLC
Condensed Consolidated Statement of Changes in Equity (unaudited)
(Amounts in thousands)


For the Three Months Ended September 30, 2019:
 
Accumulated
Other
Comprehensive
Income (Loss)
 Non-
controlling
Interests in
Consolidated
Subsidiaries		 Members' Deficit 
Total
Deficit
    
Balance at December 31, 2016$166
 $(1,717) $(47,441) $(48,992)
Cumulative effect of accounting change due to the adoption of ASU 2016-09—
 —
 32
 32
Net income—
 10
 10,949
 10,959
Change in fair value of available-for-sale securities, net of taxes(5,491) —
 —
 (5,491)
Stock-based compensation—
 —
 2,027
 2,027
Reclass of cumulative dividends on forfeited RSUs—
 —
 517
 517
Repurchases of LLC Units—
 —
 (3,589) (3,589)
Distributions—
 (1) (21,731) (21,732)
Balance at September 30, 2017$(5,325) $(1,708) $(59,236) $(66,269)
 

Accumulated
Deficit
 Non-
controlling
Interests in
Consolidated
Subsidiaries		 
Total
Deficit
   
Balance at June 30, 2019$(109,016) $(416) $(109,432)
Net loss(3,472) (93) (3,565)
Contributions1,495
 —
 1,495
Reclass of cumulative dividends on forfeited restricted stock units to compensation and benefits expense37
 —
 37
Balance at September 30, 2019$(110,956) $(509) $(111,465)


For the Nine Months Ended September 30, 2019:
 

Accumulated
Deficit
 Non-
controlling
Interests in
Consolidated
Subsidiaries		 
Total
Deficit
   
Balance at December 31, 2018$(109,981) $(747) $(110,728)
Net (loss) income(5,058) 461
 (4,597)
Contributions4,716
 —
 4,716
Reclass of cumulative dividends on forfeited restricted stock units to compensation and benefits expense336
 —
 336
Distributions(969) (223) (1,192)
Balance at September 30, 2019$(110,956) $(509) $(111,465)

Medley LLC
Condensed Consolidated Statements of Cash Flows (unaudited)
(Unaudited)
(AmountsDollars in thousands)



 For the Nine Months Ended September 30,
 2017 2016
Cash flows from operating activities 
  
Net income$15,658
 $3,322
Adjustments to reconcile net income to net cash provided by
operating activities:
 
  
Stock-based compensation2,027
 2,735
Amortization of debt issuance costs1,393
 555
Accretion of debt discount934
 633
Provision for (benefit from) deferred taxes(25) (547)
Depreciation and amortization689
 678
Net change in unrealized depreciation (appreciation) on investments252
 (8)
(Income) loss from equity method investments(155) 264
Reclassification of cumulative dividends paid on forfeited restricted stock units to compensation expense517
 —
Other non-cash amounts(9) 27
Changes in operating assets and liabilities: 
  
Management fees receivable(785) 3,559
Performance fees receivable1,842
 (1,727)
Distributions of income received from equity method investments296
 —
Other assets2,874
 (320)
Accounts payable, accrued expenses and other liabilities(16,856) (394)
Cash and cash equivalents of consolidated fund(346) —
Investments of consolidated fund(1,850) —
Other assets of consolidated fund(943) —
Other liabilities of consolidated fund270
 —
Net cash provided by operating activities5,783

8,777
Cash flows from investing activities 
  
Purchases of fixed assets(39) (1,924)
Distributions received from equity method investment42
 1,152
Purchases of investments(34,980) (8,846)
Net cash used in investing activities(34,977)
(9,618)
Cash flows from financing activities 
  
Repayments of loans payable(44,800) (23,812)
Proceeds from issuance of senior unsecured debt69,108
 24,212
Capital contributions from redeemable non-controlling interests23,000
 12,002
Distributions to members and redeemable non-controlling interests(26,270) (23,575)
Debt issuance costs(2,783) (842)
Repurchases of LLC Units(3,589) (1,198)
Capital contributions to equity method investments(247) (207)
Net cash provided by (used in) financing activities14,419

(13,420)
Net decrease in cash, cash equivalents and restricted cash equivalents(14,775) (14,261)
Cash, cash equivalents and restricted cash equivalents, beginning of period54,463
 71,300
Cash, cash equivalents and restricted cash equivalents, end of period$39,688

$57,039
    
Supplemental disclosure of non-cash investing and financing activities   
Deferred tax asset impact on cumulative effect of accounting change
 due to the adoption of ASU 2016-09 (Note 2)
$32
 $—
Reclassification of redeemable non-controlling interest (Note 14)—
 12,155
Fixed assets—
 2,293
Issuance of non-controlling interest, at fair value—
 192
 Nine Months Ended September 30,
 2020 2019
Cash flows from operating activities 
  
Net loss$(17,039) $(4,918)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
 
  
Stock-based compensation2,946
 5,227
Amortization of debt issuance costs519
 580
Accretion of debt discount720
 994
Benefit from deferred taxes—
 (36)
Depreciation and amortization539
 528
Net unrealized depreciation on investments1,288
 1,368
Losses (income) from equity method investments330
 (257)
Reclassification of cumulative dividends paid on forfeited restricted stock units to compensation and benefits expense375
 336
Non-cash lease costs1,823
 1,823
Other non-cash amounts330
 —
Changes in operating assets and liabilities: 
  
Management fees receivable2,305
 1,748
Income distributions received from equity method investments772
 648
Purchase of investments—
 (706)
Sale of investments95
 822
Other assets(872) (234)
Operating lease liabilities(1,313) (2,042)
Accounts payable, accrued expenses and other liabilities5,339
 (4,457)
Net cash (used in) provided by operating activities(1,843)
1,424
Cash flows from investing activities 
  
Purchases of fixed assets(16) (37)
Distributions received from investment held at cost less impairment27
 222
Decrease in cash resulting from the deconsolidation of STRF(471) —
Capital contributions to equity method investments—
 (3)
Net cash (used in) provided by investing activities(460)
182
Cash flows from financing activities 
  
Payments to former minority interest holder(1,575) (3,500)
Distributions to members, non-controlling interests and redeemable
non-controlling interests
(551) (3,554)
Payments of tax withholdings related to net share settlement of restricted stock units(125) (511)
Net cash used in financing activities(2,251)
(7,565)
Net decrease in cash and cash equivalents(4,554) (5,959)
Cash and cash equivalents, beginning of period10,377
 16,970
Cash and cash equivalents, end of period$5,823

$11,011
    
Supplemental disclosure of non-cash operating and financing activities:   
Recognition of right-of-use assets under operating leases upon adoption of new leasing standard$—
 $8,233
Recognition of operating lease liabilities arising from obtaining right-of-use assets under operating leases upon adoption of new leasing standard—
 10,229
Accretion of operating lease liabilities recorded against right-of-use assets—
 586
Fair value adjustment to redeemable non-controlling interest in STRF Advisors LLC (Note 17)752
 —
 

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
(Unaudited)






1. ORGANIZATION AND BASIS OF PRESENTATION
Medley LLC is an alternative asset management firm offering yield solutions to retail and institutional investors. The Company's national direct origination franchise provides capital to the middle market in the U.S.United States of America. Medley LLC, provides investment management services to permanent capital vehicles, long-dated private funds and separately managed accounts and serves as the general partner to the private funds, which are generally organized as pass-through entities. Medley LLC and its consolidated subsidiaries (collectively “Medley” or the “Company”) is headquartered in New York City and has an office in San Francisco.City.
The Company’sMedley's business is currently comprised of only one reportable segment, the investment management segment, and substantially all of the Company operations are conducted through this segment. The investment management segment provides investment management services to permanent capital vehicles, long-dated private funds and separately managed accounts. The Company conducts its investment management business in the U.S., where substantially all its revenues are generated.
Medley LLC was formed on October 27, 2010 and is the operating company of Medley Management Inc., a public company traded under the symbol “MDLY.” Medley Management Inc. is the sole managing member of Medley LLC. Medley Management Inc. was incorporated on June 13, 2014 and commenced operations on September 29, 2014 upon completion of its initial public offering (“IPO”) of its Class A common stock. Medley Management Inc.'s sole material operating asset is its investment in Medley LLC.
Registered Public Offering of Medley LLC Notes
On August 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") at a public offering price of 100% of the principal amount. On October 18, 2016, Medley LLC completed a public offering of an additional $28.6 million in aggregate principal amount of the 2026 Notes at a public offering price of $24.45 for each $25.00 principal amount of notes. The notes mature on August 15, 2026 and interest is payable quarterly. The notes will be redeemable in whole or in part at Medley's option on or after August 15, 2019 at a redemption price of 100% of the aggregate principal amount plus accrued and unpaid interest payments. The Company used the net proceeds from the offering to repay a portion of the outstanding indebtedness under the Company's Term Loan Facility.its term loan facility with Credit Suisse, which was terminated in February 2017. The 2026 Notes are listed on the New York Stock Exchange and trades thereon under the trading symbol “MDLX.”
On January 18, 2017, Medley LLC completed a registered public offering of $34.5 million of an aggregate principal amount of 7.25% senior notes due 2024 (the “2024 Notes”) at a public offering price of 100% of the principal amount. On February 22, 2017, Medley LLC completed a public offering of an additional $34.5 million in aggregate principal amount of the 2024 Notes at a public offering price of $25.25 for each $25.00 principal amount of notes. The 2024 Notes mature on January 30, 2024 and interest is payable quarterly commencing on April 30, 2017. The notes will be redeemable in whole or in part at Medley's option on or after January 30, 2020 at a redemption price of 100% of the aggregate principal amount plus accrued and unpaid interest payment. The Company used the net proceeds from the offering to repay the remaining outstanding indebtedness under the Term Loan Facilityits term loan facility with Credit Suisse, which was terminated in February 2017, and for general corporate purposes. The 2024 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol “MDLQ.”
 Medley LLC Reorganization
In connection with the IPO of Medley Management Inc.“MDLY”, Medley LLC amended and restated its limited liability agreement to modify its capital structure by reclassifying the 23,333,3332,333,333 interests, as adjusted for the reverse split mentioned below, held by the pre-IPO members into a single new class of units (“LLC Units”). The pre-IPO members also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right, subject to the terms of an exchange agreement, to exchange their LLC Units for shares of Medley Management Inc.’s Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. In addition, pursuant to the amended and restated limited liability agreement, Medley Management Inc. became the sole managing member of Medley LLC.
The pre-IPO ownersReverse Split of LLC Units
On October 30, 2020, MDLY effected a reverse stock split at a ratio of 1-for-10 of all classes of its common stock. As a result of the reverse stock split, each ten shares of MDLY's outstanding common stock were combined into one share of the respective class of common stock without any change to the par value per share. In accordance with the organization agreement entered into by MDLY and Medley LLC in connection with the IPO of MDLY, the Company's LLC Units were also adjusted at a ratio of 1-for-10 simultaneously with the reverse stock split of MDLY common stock.
As a result of this reverse stock split, all references in these consolidated financial statements and notes thereto to MDLY common share amounts and the Company's LLC Units reflect the effect of the reverse stock split.
Termination of Agreement and Plan of Merger
On July 29, 2019, MDLY entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among MDLY, Sierra Income Corporation (“Sierra”), and Sierra Management,

F- 6

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




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

On May 1, 2020, MDLY received a written notice of termination from transferring any LLC Units held by them or any shares of Class A common stock received upon exchange of such LLC Units, until September 29, 2017, which was the third anniversarySierra in accordance with Sections 9.1 and 10.2 of the dateAmended MDLY Merger Agreement. Section 9.1(c) of the Amended MDLY Merger Agreement permits both MDLY and Sierra to terminate the Amended MDLY Merger Agreement if the MDLY Merger had not been consummated on or before March 31, 2020 (the “Outside Date”).

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

In addition, on May 1, 2020, MCC received a notice of termination from Sierra of the IPO, withoutAmended MCC Merger Agreement. Under the Company’s consent. ThereafterAmended MCC Merger Agreement, either party may have, subject to certain conditions, terminated the Amended MCC Merger Agreement if the MCC Merger was not consummated by March 31, 2020. Sierra elected to do so on May 1, 2020. Representatives of Sierra informed MCC that in determining to terminate the Amended MCC Merger Agreement, Sierra considered a number of factors, including, among other factors, changes in the relative valuation of MCC and priorSierra, 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 fourthMDLY Merger are included in general, administrative and fifth anniversariesother expenses and consist primarily of professional fees. Such expenses amounted to $1.0 million and $2.1 million for the three months ended September 30, 2020 and 2019, respectively, and $3.5 million for each of the closing of the IPO, such holders may not transfer more than 33 1/3%nine months ended September 30, 2020 and 66 2/3%, respectively, of the number of LLC Units held by them, together with the number of any shares of Class A common stock received by them upon exchange therefor, without the Company’s consent.2019.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles (“GAAP”) and includeincludes the accounts of Medley LLC and its consolidated subsidiaries (collectively, “Medley” or the “Company”). Additionally, the accompanying condensed consolidated

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


financial statements of the Companysubsidiaries. Intercompany balances and related financial informationtransactions have been prepared pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain disclosures accompanying annual financial statements preparedeliminated in accordance with U.S. GAAP may be omitted. In the opinion of management, the unaudited condensed consolidated financial results included herein contain all adjustments, consisting solely of normal recurring accruals, considered necessary for the fair presentation of financial statements for the interim periods included herein. Therefore, this Form 10-Q should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016. The current period's results of operations will not necessarily be indicative of results that ultimately may be achieved for the full year ending December 31, 2017.consolidation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
In accordance with Accounting Standards Codification (“ASC”) 810, Consolidation, the Company consolidates those entities where it has a direct and indirect controlling financial interest based on either a variable interest model or voting interest model. As such, the Company consolidates entities that the Company concludes are variable interest entities (“VIEs”), for which the Company is deemed to be the primary beneficiary and entities in which it holds a majority voting interest or has majority ownership and control over the operational, financial and investing decisions of that entity.
For legal entities evaluated for consolidation, the Company must determine whether the interests that it holds and fees paid to it qualify as a variable interest in an entity. This includes an evaluation of the management feesfee and performance feesfee paid to the Company when acting as a decision maker or service provider to the entity being evaluated. If fees received by the Company are customary and commensurate with the level of services provided, and the Company does not hold other economic interests in the entity that would absorb more than an insignificant amount of the expected losses or returns of the entity, the interest that the Company holds would not be considered a variable interest. The Company factors in all economic interests including proportionate interests through related parties, to determine if fees are considered a variable interest.
An entity in which the Company holds a variable interest is a VIE if any one of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support, (b) the holders of the equity investment at risk have the right to direct the activities of the entity that most significantly

F- 7

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




impact the legal entity’s economic performance, or (c) the voting rights of some investors are disproportionate to their obligation to absorb losses or rights to receive returns from a legal entity. For limited partnerships and other similar entities, non-controlling investors must have substantive rights to either dissolve the fund or remove the general partner (“kick-out rights”) in order to not qualify as a VIE.
For those entities that qualify as a VIE, the primary beneficiary is generally defined as the party who has a controlling financial interest in the VIE. The Company is generally deemed to have a controlling financial interest if it has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. The Company determines whether it is the primary beneficiary of a VIE at the time it becomes initially involved with the VIE and reconsiders that conclusion continuously. The primary beneficiary evaluation is generally performed qualitatively on the basis of all facts and circumstances. However, quantitative information may also be considered in the analysis, as appropriate. These assessments require judgment. Each entity is assessed for consolidation on a case-by-case basis. 
For those entities evaluated under the voting interest model, the Company consolidates the entity if it has a controlling financial interest. The Company has a controlling financial interest in a voting interest entity (“VOE”) if it owns a majority voting interest in the entity.
Consolidated Variable Interest Entities
As of September 30, 2017 and December 31, 2016,2020, Medley LLC had four majority owned subsidiaries, SIC AdvisorsMedley Caddo Investors Holdings 1 LLC, Medley Seed Funding IAvantor Investors LLC, Medley Seed Funding IICloverleaf Investors LLC and STRF AdvisorsMedley Real D Investors LLC, which are consolidated VIEs. Each of these entities werewas organized as a limited liability company and was legally formed to either manage a designated fund or to strategically invest capital as well as isolate business risk. As of September 30, 2017,2020, total assets and total liabilities, after eliminating entries, of these VIEs reflected in the condensed consolidated balance sheets were $68.0$0.9 million and $13.1less than $0.1 million, respectively. As of December 31, 2016,2019, Medley LLC had seven subsidiaries, Medley Seed Funding I LLC, Medley Seed Funding II LLC, STRF Advisors LLC, Medley Caddo Investors Holdings 1 LLC, Medley Avantor Investors LLC, Medley Cloverleaf Investors LLC and Medley Real D Investors LLC. As of December 31, 2019, total assets and total liabilities, after eliminating entries, of these VIEs reflected in the condensed consolidated balance sheets were $51.7$1.2 million and $22.8less than $0.1 million, respectively. Except to the extent of the assets of these VIEs that are consolidated, the holders of the consolidated VIEs’ liabilities generally do not have recourse to the Company.

Medley LLC
Notes to CondensedSeed Investments and Deconsolidation of Consolidated Financial Statements (unaudited)


Seed InvestmentsFund
The Company accounts for seed investments through the application of the voting interest model under ASC 810-10-25-1 through 25-14 and consolidates a seed investment when the investment advisor holds a controlling interest, which is, in general, 50% or more of the equity in such investment. For seed investments in which the Company does not hold a controlling interest, the Company accounts for such seed investment under the equity method of accounting, at its ownership percentage of such seed investment’s net asset value.
The Company seed funded $2.1 million to Sierra Total Return Fund ("STRF"), which commenced investment operations in June 2017. AsSince inception through April 6, 2020, the date of September 30, 2017,deconsolidation of STRF, the Company owned 100% of the equity of STRF and, as such, consolidated STRF in its condensed consolidated financial statements.

F- 8

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




The condensed balance sheet of STRF as of September 30, 2017December 31, 2019 is presented in the table below (in thousands).below.
As of
December 31, 2019
As of
September 30, 2017
 
Assets (in thousands)
Cash and cash equivalents$346
$682
Investments, at fair value1,850
1,441
Other assets1,651
29
Total assets$3,847
$2,152
Liabilities and Equity  
Accrued expenses and other liabilities$1,750
Accounts payable, accrued expenses and other liabilities$342
Equity2,097
1,810
Total liabilities and equity$3,847
$2,152
TheAs of December 31, 2019, the Company's condensed consolidated balance sheet reflects the elimination of $0.7$0.2 million of other assets $1.5 million of accrued expenses and other liabilities and $2.1$1.8 million of equity as a result of the consolidation of STRF. During the three and nine months ended September 30, 2017, the2020 and 2019 this fund did not generate any significant income or losses from operations.
In connection with the exercise of DB Med Investors put option right in October 2019, as further discussed in Notes 11 and 16 to these condensed consolidated financial statements, STRF filed an application with the Securities and Exchange Commission ("SEC") on December 26, 2019, and an amendment on February 24, 2020, requesting an order under section 8(f) of the Investment Company Act of 1940 (the "Act") declaring that it has ceased to be an investment company. On March 25, 2020, the SEC ordered, under the Act, that STRF's application registration under the Act shall forthwith cease to be in effect. All shares of STRF held by the Company were transferred to DB Med Investors as well as $0.1 million of remaining cash held by Medley Seed Funding II LLC on April 6, 2020, in full satisfaction of the liability due to DB Med Investors (Note 11). As a result of the transfer of STRF shares to DB Med Investors, the Company no longer consolidates STRF in its consolidated financial statements for periods subsequent to April 6, 2020.
The condensed balance sheet of STRF, as of April 6, 2020, is presented in the table below.
 As of
 April 6, 2020
  
Assets(in thousands)
Cash and cash equivalents$471
Investments, at fair value1,016
Other assets76
    Total assets$1,563
Liabilities and Equity 
  Accounts payable, accrued expenses and other liabilities$39
  Equity1,524
   Total liabilities and equity$1,563
Non-Consolidated Variable Interest Entities
The Company holds interests in certain VIEs that are not consolidated because the Company is not deemed to be the primary beneficiary. The Company's interest in these entities is in the form of insignificant equity interests and fee arrangements. The maximum exposure to loss represents the potential loss of assets by the Company relating to these non-consolidated entities.
As of September 30, 2017,2020, the Company recorded investments, at fair value, attributed to these non-consolidated VIEs of $5.2$2.4 million, receivables of $2.5$0.6 million included as a component of other assets and a clawback obligation of $7.2 million included as a component of accounts payable, accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets. The clawback obligation assumes a hypothetical liquidation of a fund’s investments, at their then current fair values and a portion of tax distributions relating to performance fees which would need to be returned. As of December 31, 2016,2019, the Company recorded investments, at fair value, attributed to non-consolidated VIEs of $5.1$3.0 million, receivables of $1.9$1.3 million included as a component of other assets and a clawback obligation of $7.1$7.2 million included as a component of accounts payable, accrued expenses and other liabilities on the Company’s condensed consolidated balance sheets. As of September 30, 2017,2020, the Company’s maximum exposure to losses from these entities is $7.7$3.0 million.

F- 9

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Concentration of Credit and Market Risk
In the normal course of business, the Company's underlying funds encounter significant credit and market risk. Credit risk is the risk of default on investments in debt securities, loans and derivatives that result from a borrower's or derivative counterparty's inability or unwillingness to make required or expected payments. Credit risk is increased in situations where the Company's underlying funds are investing in distressed assets or unsecured or subordinate loans or in securities that are a material part of its respective business. Market risk reflects changes in the value of investments due to changes in interest rates, credit spreads or other market factors. The Company's underlying funds may make investments outside of the United States. These non-U.S. investments are subject to the same risks associated with U.S. investments, as well as additional risks, such as fluctuations in foreign currency exchange rates, unexpected changes in regulatory requirements, heightened risk of political and economic instability, difficulties in managing the investments, potentially adverse tax consequences, and the burden of complying with a wide variety of foreign laws.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Management’s estimates are based on historical experience and other factors, including expectations of future events that management believes to be reasonable under the circumstances. These assumptions and estimates also require management to exercise judgment in the process of applying the Company’s accounting policies. Significant estimates and assumptions by management affect the carrying value of investments, deferred tax assets, performance compensation payable and certain accrued liabilities. Actual results could differ from these estimates, and such differences could be material.  

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


Indemnification
In the normal course of business, the Company enters into contractual agreements that provide general indemnifications against losses, costs, claims and liabilities arising from the performance of individual obligations under such agreements. The Company has not experienced any prior claims or payments pursuant to such agreements. The Company’s individual maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on management’s experience, the Company expects the risk of loss to be remote.
Non-Controlling Interests in Consolidated Subsidiaries
Non-controlling interests in consolidated subsidiaries represent the component of equity in such consolidated entities held by third-parties.third-parties and certain employees. These interests are adjusted for contributions to and distributions from Medley entities and are allocated income or loss from Medley entities based on their ownership percentages. 
Redeemable Non-Controlling Interests
Redeemable non-controlling interests represents interests of certain third parties that are not mandatorily redeemable but redeemable for cash or other assets at a fixed or determinable price or a fixed or determinable date, at the option of the holder or upon the occurrence of an event that is not solely within the control of the issuer.Company. These interests are classified in the mezzanine section ofon the Company's condensed consolidated balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents include liquid investments in money market funds and demand deposits. The Company had cash balances with financial institutions in excess of Federal Deposit Insurance Corporation insured limits as of September 30, 2020 and December 31, 2019. The Company monitors the credit standing of these financial institutions and has not experienced, and has no expectations of experiencing, any losses with respect to such balances.
Investments
Investments include equity method investments that are not consolidated but over which the Company exerts significant influence. The Company measures the carrying value of its public non-traded equity method investment at NAV per share. The Company measures the carrying value of its privately-held equity method investments by recording its share of the underlying incomeearnings or losslosses of these entities.
its investee in the periods for which they are reported by the investee in the investee's financial statements rather than in the period in which an investee declares a dividend or distribution. For the Company's public non-traded equity method investment, it measures the carrying value of such investment at Net Asset Value ("NAV") per share. Unrealized appreciation (depreciation) resulting from changes in fair value of the equity method investments is reflected as a component of otherinvestment income (expense), net in the condensed consolidated statements of operations. The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate thatoperations along with the carrying amounts ofincome and expense allocations from such investments may not be recoverable.investments.
The carrying amounts of equity method investments are reflected in investments inInvestments, at fair value on the Company's consolidated statements of financial condition.balance sheets. As the underlying entities that the Company manages and invests in are, for U.S. GAAP purposes, primarily

F- 10

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




investment companies which reflect their investments at estimated fair value, the carrying value of the Company’s equity method investments in such entities approximates fair value. The Company evaluates its equity-method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable.
For presentation in its consolidated statements of cash flows, the Company treats distributions received from certain equity method investments using the cumulative earnings approach. Under the cumulative earnings approach, an investor would compare the distributions received to its cumulative equity-method earnings since inception. Any distributions received up to the amount of cumulative equity earnings would be considered a return on investment and classified in operating activities. Any excess distributions would be considered a return of investment and classified in investing activities.
Investments also include available-for-sale securities which consist of an investment in publicly traded common stock. The Company measures the carryingfair value of its publicly traded investment in available-for-sale securitiescommon stock at the quoted market price on the primary market or exchange on which theythe underlying shares trade. UnrealizedAny realized gains (losses) from the sale of investments and unrealized appreciation (depreciation) resulting from changes in fair value of available-for-sale securities isare recorded in accumulated other comprehensive income, redeemable non-controlling interests and non-controlling interests in Medley LLC. Realized gains (losses) and declines in value determined to be other than temporary, if any, are reported in other income (expenses)(expense), net.
Investments of Consolidated Fund
In accordance with ASC 820, Fair Value Measurements and Disclosures, the Company's consolidated fund at December 31, 2019 has categorized its investments carried at fair value, based on the priority of the valuation technique, into a three-level fair value hierarchy as discussed in Note 5. Fair value is a market-based measure considered from the perspective of the market participant who holds the financial instrument rather than an entity specific measure. Investments for which market quotations are readily available are valued at such market quotations, which are generally obtained from an independent pricing service or multiple broker-dealers or market makers. The Company evaluates its investmentconsolidated fund weighs the use of third-party broker quotations, if any, in available-for-sale securitiesdetermining fair value based on management's understanding of the level of actual transactions used by the broker to develop the quote and whether the quote was an indicative price or binding offer. However, debt investments with remaining maturities within 60 days that are not credit impaired are valued at cost plus unamortized discount, or minus amortized premium, which approximates fair value. Investments for impairment whenever events or changes in circumstances indicate thatwhich market quotations are not readily available are valued at fair value as determined by the carrying amountsconsolidated fund’s board of such investmenttrustees based upon input from management and third party valuation firms. Because these investments are illiquid and because there may not be recoverable.
Debt Issuance Costs
Debt issuance costs represent direct costs incurred in obtaining financingany directly comparable companies whose financial instruments have observable market values, these loans are valued using a fundamental valuation methodology, consistent with traditional asset pricing standards, that is objective and are amortized over the termconsistently applied across all loans and through time. As a result of the underlying debt usingtransfer of STRF shares to DB Med Investors on April 6, 2020, the effective interest method. Debt issuance costs, andCompany no longer consolidates STRF in its consolidated financial statements.
Revenues
The Company recognizes revenue in accordance with ASC 606, Revenues from Contracts with Customers. The Company recognizes revenue under the related amortization expense, are adjusted when any prepaymentscore principle of principal are madedepicting the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for such goods or services. To achieve this, the Company applies a five step approach: (1) identify the contract(s) with a customer, (2) identify the performance obligations within the contract, (3) determine the transaction price, (4) allocate the transaction price to the related outstanding debt. Amortizationseparate performance obligations and (5) recognize revenue when, or as, each performance obligation is satisfied.
Carried interest are performance-based fees that represent a capital allocation of debt issuance costs is included as a component of interest expenseincome to the general partner or investment manager. Such fees are accounted for under ASC 323, Investments - Equity Method and Joint Ventures and, therefore, are not in the Company's consolidated statementscope of operations.
 RevenuesASC 606.
Management Fees
Medley provides investment management services to both public and private investment vehicles. Management fees include base management fees, other management fees, and Part I incentive fees, as described below.
Base management fees are calculated based on either (i) the average or ending gross assets balance for the relevant period, (ii) limited partners’ capital commitments to the funds, (iii) invested capital, (iv) NAV or (v) lower of cost or market value of a

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


fund’s portfolio investments. Depending upon the contracted terms of the investment management agreement, management fees are paid either quarterly in advance or quarterly in arrears, and are recognized as earned over the period the services are provided. 
Certain management agreements provide for Medley to receive other management fee revenue derived from up front origination fees paid by the funds' and/or separately managed accounts' underlying portfolio companies. These fees are recognized when Medleythe Company becomes entitled to such fees.
Certain management agreements also provide for Medley to receive Part I incentive fee revenue derived from net interestinvestment income (excluding gains and losses) above a hurdle rate. As it relates to Medley Capital Corporation (“MCC”),MCC, these fees are subject to netting against realized and unrealized losses. Part I incentive fees are paid quarterly and are recognized as earned overin the period the services are provided.

F- 11

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




Performance Fees
Performance fees consist principally of the allocation of profits from certain funds and separately managed accounts, toare contractual fees which Medley provides management services. Medley is generally entitled to ando not represent a capital allocation of income as ato the general partner or investment manager that are earned based on the performance fee after returningof certain funds, typically, the invested capital plus a specified preferredCompany’s separately managed accounts. Performance fees are earned based on each fund's performance during the period, subject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s investment management agreement.
Other Revenues and Fees
Medley provides administrative services to certain affiliated funds and is reimbursed for direct and allocated expenses incurred in providing such administrative services, as set forth in the respective underlying agreements. These fees are recognized as revenue in the period administrative services are rendered. Medley also acts as the administrative agent on certain deals for which Medley may earn loan administration fees and transaction fees. Medley may also earn consulting fees for providing non-advisory services related to its managed funds. These fees are recognized as revenue over the period the services are performed.
Investment Income (loss) - Carried Interest
Carried interest are performance-based fees that represent a capital allocation of income to the general partner or investment manager. Carried interest are allocated to the Company based on cumulative fund performance to date, subject to the achievement of minimum return levels in accordance with the respective terms set out in each respective agreement. Medley recognizes revenues attributable tofund’s governing documents and are accounted for under the equity method of accounting. Accordingly, these performance fees are reflected as carried interest within investment income on the Company's consolidated statements of operations and balances due for such fees are included as a part of equity method investments within Investments, at fair value on the Company's consolidated balance sheets.
The Company records carried interest based upon the amountan assumed liquidation of that would be due pursuant to the respective agreement at each period end as if the funds were terminatedfund's net assets as of that date. Accordingly, the amount recognized inreporting date, regardless of whether such amounts have been realized. For any given period, carried interest on the Company's condensed consolidated financial statements reflects Medley’s share of the gains and losses of the associated funds’ underlying investments measured at their current fair values. Performance fee revenueoperations may include reversals of previously recognized performance feescarried interest due to a decrease in the investment performancevalue of a particular fund that results in a decrease of cumulative performance fees earned to date. Since fund return hurdles are cumulative, previously recognized performance feescarried interest also may be reversed in a period of appreciation that is lower than the particular fund’sfund's hurdle rate. For the three months ended September 30, 2017 the company recorded reversals of $0.4 million of previously recognized performance fees. For the three months ended September 30, 2016, there were no reversals of previously recognized performance fees. For the nine months ended September 30, 2017 and 2016 the Company recorded reversals of $2.7 million and $0.4 million, respectively, of previously recognized performance fees. As of September 30, 2017, the Company recognized cumulative performance fees of $5.2 million.
Performance feesCarried interest received in prior periods may be required to be returned by Medleythe Company in future periods if the funds’ investment performance declines below certain levels. Each fund is considered separately in this regard and, for a given fund, performance feescarried 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 performance feescarried interest would be required to be returned, a liability is established for the potential clawback obligation. As ofobligation. During the three and nine months ended September 30, 2017,2020, the Company received carried interest distributions of $0.1 million and $0.2 million, respectively. Prior to these distributions, the Company received a carried interest distribution of $0.3 million from one of its managed funds, which had notbeen fully liquidated as of December 31, 2019. In addition to the receipt of these distributions, the Company has also received any performance fee distributions, except for tax distributions related to the Company’s allocation of net income, which included an allocation of performance fees.carried interest. Pursuant to the organizational documents of each respective fund, a portion of these tax distributions may be subject to clawback. As of September 30, 2017,2020 and December 31, 2019, the Company had accrued $7.2 million for clawback obligations that would need to be paid if the funds were liquidated at fair value as of the end of the reporting period. The Company’s actual obligation, however, would not become payable or realized until the end of a fund’s life.
During each of the three and nine months ended September 30, 2020 and 2019, the the Company recorded reversals of previously recognized carried interest of $0.1 million.
Investment Income (loss) - Other
Other Revenuesinvestment income is comprised of unrealized appreciation (depreciation) resulting from changes in fair value of the Company's equity method investments in addition to the income and Feesexpense allocations from such investments.
Medley provides administrative services to certain affiliated funds and is reimbursed for direct and allocated expenses incurred in providing such administrative services, as set forth in the respective underlying agreements. These fees are recognized as revenue in the period administrative services are rendered.
Performance FeeStock-based Compensation
Medley has issued profit interests in certain subsidiaries to select employees. These profit-sharing arrangements are accounted for under ASC 710, Compensation — General, which requiresStock-based compensation expense relating to beequity based awards are measured at fair value atas of the grant date, reduced for actual forfeitures in the period they occur, and expensed over the vestingrequisite service period which is usuallyon a straight-line basis as a component of compensation and benefits on the period over which the service is provided. The fair value of the profit interests are re-measured at each balance sheet date and adjusted for changes in estimates of cash flows and vesting percentages. The impact of such changes is recorded in the condensedCompany's consolidated statements of operations as an increase or decreaseoperations.

F- 12

Medley LLC
Notes to performance fee compensation. Condensed Consolidated Financial Statements
(Unaudited)




Income Taxes
The Company is treated as a partnership for income tax purposes and is therefore not subject to U.S. federal, state and local income taxes. The Company is subject to New York City's unincorporated business tax attributable to the Company's taxable income apportioned to New York City.
The Company accounts for income taxes using the asset and liability approach, which requires the recognition of tax benefits or expenses for temporary differences between the financial reporting and tax basis of assets and liabilities. A valuation allowance

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


is established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company also recognizes a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. The Company’s policy is to recognize interest and penalties on uncertain tax positions and other tax matters as a component of its provision for income tax expense.taxes. For interim periods, the Company accounts for income taxes based on its estimate of the effective tax rate for the year. Discrete items and changes in its estimate of the annual effective tax rate are recorded in the period in which they occur.
As the Company is treated as a partnership for income tax purposes, it is not subject to U.S. federal, state and local income taxes since all income, gains and losses are passed through to its members. However, a portion of taxable income from Medley LLC and its subsidiaries are subject to New York City's unincorporated business tax, which is included in the Company's provision for income taxes.
Recently Issued Accounting Pronouncements Adopted as of January 1, 20172020
In March 2016,August 2018, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting,2018-13, which simplifiesFair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty, and improves several aspectsadding new disclosure requirements. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. The Company adopted this ASU effective January 1, 2020 and the impact was not material.
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (a consensus of the FASB Emerging Issues Task Force). This ASU aligns the accounting for share-based payment transactions, includingcosts incurred to implement a cloud computing arrangement that is a service arrangement with the income tax consequences, classificationguidance on capitalizing costs associated with developing or obtaining internal-use software. It addresses when costs should be capitalized rather than expensed, the term to use when amortizing capitalized costs, and how to evaluate the unamortized portion of awards asthese capitalized implementation costs for impairment. This ASU also includes guidance on how to present implementation costs in the financial statements and creates additional disclosure requirements. The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. Early adoption is permitted and can be applied either equityretrospectively or liabilities and classification on the statement of cash flows.prospectively. The Company adopted this ASU 2016-09 effectiveon January 1, 2017.
Under the2020 and has applied this new guidance, all excess tax benefits and tax deficiencies related to employee stock compensation will be recognized within income tax expense. Under prior guidance, excess tax benefits were recognized in additional paid-in capital and tax deficiencies were recognized in the provision for income taxes only to the extent they exceeded the pool of excess tax benefits. In addition, under the new guidance, excess tax benefits are classified as cash flows from operating activities, and cash withheld by the Company for employees' withholding taxes will be classified as cash flows from financing activities on the Company's consolidated statements of cash flows. In connection with the adoption of ASU 2016-09, the Company elected to account for forfeitures as they occur, instead of utilizing an estimated forfeiture rate assumption. The change in accounting for forfeitures was applied on a modified retrospectiveprospective basis, by means of a cumulative-effect adjustment to equity. As ofand the impact was not material.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
The guidance in this ASU clarifies and amends existing guidance. It is effective for public entities for annual reporting periods beginning after December 15, 2020 and interim periods within those reporting periods, with early adoption permitted. The Company adopted this guidance on January 1, 2017, deferred tax asset2020 and the impact was recorded in the amount of less than $0.1 million to reflect the change in accounting principle.not material.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers(Topic 606), which provides that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services. To achieve this core principle, an entity should apply the following steps: (1) identify the contracts with a customer, (2) identify the performance obligations in the contracts, (3) determine the transaction prices, (4) allocate the transaction prices to the performance obligations in the contracts, and (5) recognize revenue when, or as, the entity satisfies a performance obligation. The guidance also requires advanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In MarchJune 2016, the FASB issued ASU 2016-08,2016-13, Revenue from ContractsFinancial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments in this ASU require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarified the implementation guidance on principal versus agent considerations. In April 2016, the FASB issuedcredit deterioration. The amendments in this ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarified the implementation guidance regarding performance obligations and licensing arrangements. The new standard will becomeare effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This ASU is effective for the Company on January 1, 2018.
Upon2021 and will be adopted prospectively. The Company does not expect the adoption of this new guidance, the Company's current policy of recognizing performance fees with its separately managed accounts is expected to change. The Company expects that it will not be able to recognize such performance fees until such time that it is probable that a significant reversal in the amount of cumulative performance fees will not occur. The Company is continuing to assess the potential additional impacts of ASU 2014-09 on its financial statements for those arrangements within the scope of ASU 2014-09, including its accounting for expense reimbursements and performance fees earned under other types of contracts whereby the Company is the general partner and has an equity interest in the underlying fund. The Company has not yet selected a transition method.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which requires that all equity investments (except those accounted for under the equity method of accounting) be measured at fair value with changes in fair value recognized in net income. This guidance eliminates the available-for-sale classification for equity securities with readily determinable fair values. However, companies may elect to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer. This new guidance will become effective for the Company on January 1, 2018. Under this new guidance, changes in the fair value of available-for-sale securities will no longer be classified in the Company's condensed consolidated statements of comprehensive income but rather as a component of other income in its condensed consolidated statements of operations.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This guidance requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases, along with additional qualitative and quantitative disclosures. This new guidance will become effective for the Company on January 1, 2019, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements. However, the

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


adoption of this guidance is expected to result in a significant increase in total assets and total liabilities, but is not expected to have a significantmaterial impact on the consolidated statements of operations.
In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting. This guidance clarifies when changes to share-based payment awards must be accounted for as modifications. The guidance requires an entity to apply modification accounting guidance if the value, vesting conditions or classification of the award changes but will provide relief to entities that make non-substantive changes to their share-based payment awards. This new guidance will become effective for the Company on January 1, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements, but is not expected to have a significant impact on the Company's consolidated financial statements.
The Company does not believe any other recently issued, but not yet effective, revisions to authoritative guidance will have a material effect on its consolidated balance sheets, results of operations or cash flows.

F- 13

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




3. INVESTMENTSREVENUES FROM CONTRACTS WITH CUSTOMERS
The componentsmajority of the Company's revenues are derived from investment management and advisory contracts that are accounted for in accordance with ASC 606.
Performance Obligations
Performance obligations are the unit of account under the revenue recognition standard and represent the distinct goods or services that are promised to the customer. The majority of the Company's contracts have a single performance obligation to provide asset management, advisory and other related services to permanent capital vehicles, long-dated private funds and separately managed accounts. The Company also has a separate performance obligation to act as an agent for certain third party lenders and provide loan administration services to certain borrowers. These loan administration services also represent a single performance obligation.
The Company primarily provides investment management services to a fund by managing the fund’s investments and maximizing returns on those investments. The Company’s asset management, advisory and other related services are transferred over time to the customer on a day-to-day basis. The contracts with each fund create a distinct performance obligation for each quarter the Company provides the promised services to the customer, from which the customer can benefit from each individual quarter of service. Furthermore, each quarter of the promised services is considered separately identifiable because there is no integration of the promised services between quarters, each quarter does not modify services provided prior to that quarter, and the services provided are not interdependent or interrelated. Most services provided to these funds are provided continuously over the contract period, so the services in the contract generally represent a single performance obligation comprising a series of distinct service periods. A contract’s transaction price is allocated to the series of distinct services that constitute a single performance obligation and recognized as revenue when, or as, the performance obligation is satisfied.
The management fees earned by the Company are largely dependent on fluctuations in the market and, thus, the determination of such fees is highly susceptible to factors outside the Company's influence. Management fees typically have a large number and broad range of possible consideration amounts and historical experience is generally not indicative of future performance of the market. Hence, the Company is applying the exemption provided under the new revenue recognition guidance as the Company is unable to estimate the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied and the variable consideration is allocated entirely to a wholly unsatisfied performance obligation.
Reimbursement of certain expenses incurred on behalf of the Company's funds are reported on a gross basis on the statements of operations if the Company is determined to be acting as the principal in those transactions.
Significant Judgments
The Company's contracts with customers generally include a single performance obligation to provide asset management, advisory and other related services on a quarterly basis. Revenues are recognized as such performance obligation is satisfied and the constraint on the management fees is lifted on a quarterly basis, hence, the Company does not need to exercise significant judgments in regards to management fees. Consideration for management fees is received on a quarterly basis as the performance obligations are satisfied.
With respect to performance fees based on the economic performance of its SMAs, significant judgment is required when determining recognition of revenues. Such judgments include:
whether the fund is near final liquidation
whether the fair value of the remaining assets in the fund is significantly in excess of the threshold at which the Company would earn an incentive fee
the probability of significant fluctuations in the fair value of the remaining assets
whether the SMA’s remaining investments are under contract for sale with contractual purchase prices that would result in no clawback and it is highly likely that the contracts will be consummated
As such, the Company will consider the above factors at each reporting period to determine whether there is an amount of the SMA performance fees which should be recognized as follows:revenue because it is probable that there will not be a significant future revenue reversal, hence, the “constraint” on the performance fees has been lifted.
The Company accounts for performance fees which represent capital allocations to the general partner or investment manager pursuant to accounting rules relating to investments accounted for under the equity method of accounting. As such, these types of performance fees are not within the scope of the new revenue recognition standard and the above significant judgments and

F- 14

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




constraints do not apply to them. Refer to Note 2, “Summary of Significant Accounting Policies,” and Note 4, “Investments,” for additional information.
Revenue by Category
The following table presents the Company's revenue from contracts with customers disaggregated by type of customer for the three and nine months ended September 30, 2020:
 As of
 September 30, 2017 December 31, 2016
 (Amounts in thousands)
Equity method investments, at fair value$14,707
 $14,895
Investment in shares of MCC46,309
 17,009
Investments of consolidated fund1,850
 —
Total investments, at fair value$62,866

$31,904
  Permanent
Capital
Vehicles		 Long-dated
Private Funds		 SMAs Other Total
  (in thousands)
For the three months ended September 30, 2020  
Management fees $4,045
 $1,097
 $1,133
 $—
 $6,275
Other revenues and fees 1,192
 —
 —
 443
 1,635
Total revenues from contracts with customers $5,237
 $1,097
 $1,133
 $443
 $7,910
           
For the nine months ended September 30, 2020  
Management fees $12,855
 $3,633
 $3,319
 $—
 $19,807
Other revenues and fees 4,426
 —
 —
 1,843
 6,269
Total revenues from contracts with customers $17,281
 $3,633
 $3,319
 $1,843
 $26,076
Management fees in the table above are presented net of expense support payments under an expense support agreement entered into by the Company and MCC which became effective on June 1, 2020 (See Note 13). During the three and nine months ended September 30, 2020 such amounts were $0.4 million and $0.7 million respectively. In determining whether the expenses under the expense support agreement should be recorded on a gross or net basis on its consolidated statements of operations the Company followed the contract modification guidance in ASC 606. As the expense support agreement changes the existing enforceable rights and obligations of the parties to the original contract, the expense support agreement represents an agreed-upon change in the transaction price, and as such, is presented on a net basis within management fees on the Company's condensed consolidated statement of operations.
The following table presents the Company's revenue from contracts with customers disaggregated by type of customer for the three and nine months ended September 30, 2019:
  Permanent
Capital
Vehicles		 Long-dated
Private Funds		 SMAs Other Total
  (in thousands)
For the three months ended September 30, 2019  
Management fees $6,593
 $1,616
 $1,398
 $—
 $9,607
Other revenues and fees 2,075
 —
 —
 546
 2,621
Total revenues from contracts with customers $8,668
 $1,616
 $1,398
 $546
 $12,228
           
For the nine months ended September 30, 2019          
Management fees $21,144
 $5,185
 $4,399
 $—
 $30,728
Other revenues and fees 5,327
 —
 —
 2,404
 7,731
Total revenues from contracts with customers $26,471
 $5,185
 $4,399
 $2,404
 $38,459
Other revenues and fees reflected in the tables above consist of: (i) revenues earned under administration agreements, as described in Note 13, (ii) revenues earned by Medley while serving as loan administrative agent on certain deals, including loan administration fees and transaction fees, (iii) reimbursable origination and deal related expenses, (iv) reimbursable entity formation and organizational expenses and (v) consulting fees for providing non-advisory services related to one of the Company's managed funds.

F- 15

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




The Company's asset management, advisory and other related services are transferred over time and the Company recognizes these revenues over the period of time these services are provided.
Contract Balances
For certain customers, the Company has a performance obligation to provide loan administration services. The timing of revenue recognition may differ from the timing of invoicing to such customers or receiving consideration. For the majority of these services cash deposits are received prior to the performance obligation being met. The performance obligation of acting as a loan administrator is satisfied over time; therefore, the Company defers any payments received upfront as deferred revenue and recognizes revenue on a pro-rata basis over time as the loan administrative services are performed.
These contract liabilities are reported as deferred revenue within accounts payable, accrued expenses and other liabilities on the Company's condensed consolidated balance sheets and were $0.2 million as of September 30, 2020 and December 31, 2019. During the three months ended September 30, 2020 and 2019, the Company recognized revenue from amounts included in deferred revenue of $0.1 million and $0.2 million, respectively, and received cash deposits of $0.1 million and $0.2 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company recognized revenue from amounts included in deferred revenue of $0.4 million and $0.5 million, respectively, and received cash deposits of $0.3 million for each of those periods.
The Company did not have any contract assets as of September 30, 2020 or December 31, 2019.
Assets Recognized for the Costs to Obtain or Fulfill a Contract
As part of providing investment management services to a fund, the Company might incur certain placement fees to third parties for obtaining new investors for the fund. Any placement fees incurred to third party placement agents for placing investors into a fund are variable as it is based on a percentage of future fees and cannot be reasonably estimated. The Company determined that placement fees which are paid in cash over time as fees are earned, do not relate to a new contract at the time the payment is made. These costs do not represent a cost to obtain a new contract but rather a cost to fulfill an existing contract. The Company does not recognize any assets for the incremental costs of obtaining or fulfilling a contract with a customer and expenses placement fees as incurred.
4. INVESTMENTS
Investments consist of the following:
 As of
 September 30, 2020 December 31, 2019
    
 (in thousands)
Equity method investments, at fair value$9,589
 $11,650
Investment held at cost less impairment48
 196
Investments of consolidated fund—
 1,441
Total investments, at fair value$9,637

$13,287
Equity Method Investments
Medley measures the carrying value of its public non-traded equity method investmentsinvestment in Sierra Income Corporation (“SIC” or “Sierra”), a related party, at NAV per share. Unrealized appreciation (depreciation) resulting from changes in NAV per share is reflected as a component of other investment (loss) income, (expense) innet on the Company's condensed consolidated statements of operations. The carrying value of the Company’s privately-held equity method investments is determined based on the amounts invested by the Company plus the equity in earnings or losses of the investee allocated based on the respective underlying agreements, less distributions received.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. There were no impairment losses recorded during the three and nine months ended September 30, 2017. During the nine months ended September 30, 2016, the Company recorded a $0.5 million loss on its investment in CK Pearl Fund which is included as a component of other income (expense), net on the condensed consolidated statement of operations. There were no losses recorded during the three months ended September 30, 2016.2020 and 2019.
As of September 30, 2017 and December 31, 2016, the Company’s carrying value of its equity method investments was $14.7 million and $14.9 million, respectively. The Company's equity method investment in shares of Sierra Income Corporation (“SIC”), a related party, were $8.8was $5.4 million and $9.0$6.4 million as of September 30, 20172020 and December 31, 2016,2019, respectively. The remaining balance as of September 30, 20172020 and December 31, 20162019 relates primarily to the Company’s investments in Medley Opportunity Fund II, LP ("(“MOF II"II”), Medley Opportunity Fund III LP (“MOF III”), Medley Opportunity Fund Offshore III LP (“MOF III Offshore”) and CK Pearl Fund, LP.Aspect-Medley Investment Platform B LP (“Aspect B”).

F- 16

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




For performance fees earned which represent a capital allocation to the general partner or investment manager, the Company accounts for them under the equity method of accounting. As of September 30, 2020 and December 31, 2019, the balance due to the Company for such performance fees was $0.8 million and $0.9 million, respectively. Revenues associated with these performance fees are classified as carried interest within investment income (loss) on the Company's condensed consolidated statements of operations.
The entities in which the Company's investments are accounted for under the equity method are considered to be related parties.
Investment in shares of MCCHeld at Cost Less Impairment
As of September 30, 2017 and December 31, 2016, the Company’s carrying value ofThe Company measures its investment in sharesCK Pearl Fund, LP at cost less impairment, adjusted for observable price changes for an identical or similar investment of MCC, a related party, was $46.3 million and $17.0 million, respectively, and consisted of 7,756,938 and 2,264,892 shares, respectively.the same issuer as well as any distributions received during the period. The Company measuresperforms a quantitative and qualitative assessment at each reporting date to determine whether the investment is impaired and an impairment loss equal to the difference between the carrying value of its investment in MCC atand fair value based on the quoted market price on the exchange on which its shares trade. As of September 30, 2017, cumulative unrealized losses in accumulatedis recorded within other comprehensive income (loss)(expenses), net on the Company's condensed consolidated balance sheets was $5.3 million. Asstatement of operations if an impairment has been determined. During the nine months ended September 30, 2017, there2020, the Company recorded an impairment loss of $0.1 million. There were no cumulative unrealized gains orimpairment losses included inrecorded during the balance of redeemable non-controlling interests.

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


three months ended September 30, 2020 and 2019 nor during the three months ended September 30, 2019.
Investments of consolidated fund
As of December 31, 2019, Medley measuresmeasured the carrying value of its investments held by its consolidated fund, at fair value. Aswhich consisted of September 30, 2017,$0.2 million of equity investments and $1.3 million of senior secured loans. There were no investments of consolidated fund consistedas of equity investmentsSeptember 30, 2020, as a result of $0.4 million, debt investmentsthe deconsolidation of $0.1 million and $1.4 million of investments in senior secured loans. See Note 4 "Fair Value Measurements" for more information.STRF on April 6, 2020.
4.5. FAIR VALUE MEASUREMENTS
The Company follows the guidance set forth in ASC 820 for measuring the fair value of investments in available-for-sale securities. Fair value is the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The Company’s fair value analysis includes an analysis of the value of any unfunded loan commitments. Financial instrumentsinvestments recorded at fair value in thethese condensed consolidated financial statements are categorized for disclosure purposes based upon the level of judgment associated with the inputs to the valuation of the investment as of the measurement date. Investments which are valued using NAV as a practical expedient are excluded from this hierarchy:
The three levels are defined as follows: 
Level I – Valuations based on quoted prices in active markets for identical assets or liabilities at the measurement date.
Level II – Valuations based on inputs other than quoted prices in active markets included in Level I, which are either directly or indirectly observable at the measurement date. This category includes quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in non-active markets including actionable bids from third parties for privately held assets or liabilities, and observable inputs other than quoted prices such as yield curves and forward currency rates that are entered directly into valuation models to determine the value of derivatives or other assets or liabilities.
Level III – Valuations based on inputs that are unobservable and where there is little, if any, market activity at the measurement date. The inputs for the determination of fair value may require significant management judgment or estimation and isare based upon management’s assessment of the assumptions that market participants would use in pricing the assets and liabilities. These investments include debt and equity investments in private companies or assets valued using the marketMarket or income approachIncome Approach and may involve pricing models whose inputs require significant judgment or estimation because of the absence of any meaningful current market data for identical or similar investments. The inputs in these valuations may include, but are not limited to, capitalization and discount rates, beta and EBITDA multiples. The information may also include pricing information or broker quotes thatwhich include a disclaimer that the broker would not be held to such a price in an actual transaction. The non-binding nature of consensus pricing and/or quotes accompanied by disclaimer would result in classification as Level III information, assuming no additional corroborating evidence.
There were no financial assets or liabilities at fair value as of September 30, 2020 due to the deconsolidation of STRF and settlement of the amounts due to DB Med Investors in April 2020.

F- 17

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)




The following table summarizestables summarize the fair value hierarchy of the Company's financial assets and liabilities measured at fair value as of September 30, 2017 (in thousands):December 31, 2019:
As of December 31, 2019
As of September 30, 2017Level I Level II Level III Total
Level I Level II Level III Total       
Assets       (in thousands)
Investments of consolidated fund$485
 $50
 $1,315
 $1,850
$110
 $—
 $1,331
 $1,441
Investment in shares of MCC46,309
 —
 —
 46,309
Total Assets$46,794
 $50
 $1,315
 $48,159
$110
 $—
 $1,331
 $1,441
Liabilities       
Due to DB Med Investors (Note 11)$—
 $—
 $1,750
 $1,750
Total Liabilities$—
 $—
 $1,750
 $1,750
The Company’s investment in shares of MCC are classified as available-for-sale securities. Included in investments of consolidated fund as of September 30, 2017December 31, 2019 are Level I assets of $0.5$0.1 million in equity investments Level II assets of $0.1 million, which consists of a debt investment, and Level III assets of $1.3 million, which consists of senior secured loans.loans and equity investments. The significant unobservable inputs used in the fair value measurement of Level III assets of the consolidated fund's investments in senior secured loans include market yields. Significant increases or decreases in market yields in isolation would result in a significantly higher or lower fair value measurement. There were no other financial instruments classified as Level II or Level III as of September 30, 2017 and December 31, 2016. There were no significant unrealized gains or losses related to the investments of consolidated fund for the three and nine months ended September 30, 2017.

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)

2020 and 2019.

The following is a summary of changes in fair value of the Company's financial assets that have been categorized within Level III of the fair value hierarchy at September 30, 2017 (in thousands):hierarchy:
 Level III Financial Assets as of September 30, 2017
 
Balance at
December 31, 2016
 Purchases Transfers In or (Out) of Level III 
Balance at
September 30,
2017
Investments of consolidated fund$—
 $1,315
 $—
 $1,315

Level III Financial Assets as of September 30, 2020
 Balance at
December 31, 2019		 Deconsolidation of STRF Transfers In or (Out) of Level III Realized and Unrealized Depreciation Sale of Level III Assets 
Balance at
September 30, 2020
            
 (in thousands)
Investments of consolidated fund$1,331
 (940) —
 (295) (96) $—
The following is a summary of changes in fair value of the Company's financial liabilities that have been categorized within Level III of the fair value hierarchy:

Level III Financial Liabilities as of September 30, 2020
 Balance at
December 31, 2019		 Settlement of liability to DB Med Investors, at fair value Payments Realized and Unrealized Depreciation 
Balance at
September 30, 2020
          
 (in thousands)
Due to DB Med Investors (Note 11)$1,750
 (1,541) —
 (209) $—
A review of the fair value hierarchy classifications is conducted on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting all levels of the fair value hierarchy are reported as transfers in or out of Level I, II or III category as of the beginning of the quarter during which the reclassifications occur. There were no transfers between levels in the fair value hierarchy during the three and nine months ended September 30, 2017. 2020.
When determining the fair value of publicly traded equity securities, the Company uses the quoted closing market price as of the valuation date on the primary market or exchange on which they trade. Our equity method investments for which fair value is measured at NAV per share, or its equivalent, using the practical expedient, are not categorized in the fair value hierarchy.
5. OTHER ASSETS
The components of other assets are as follows:
 As of
 September 30, 2017 December 31, 2016
 (Amounts in thousands)
Fixed assets, net of accumulated depreciation and amortization of $2,507 and $1,816, respectively$4,348
 $4,998
Security deposits1,975
 1,975
Administrative fees receivable (Note 10)1,911
 2,068
Deferred tax assets (Note 11)1,772
 1,584
Due from affiliates (Note 10)1,783
 2,133
Prepaid expenses and taxes887
 2,188
Other assets, excluding assets of consolidated fund942
 2,058
Assets of consolidated fund943
 —
Total other assets$14,561

$17,004
6. LOANS PAYABLE
The Company's loans payable consist of the following:
 As of
 September 30, 2017 December 31, 2016
 (Amounts in thousands)
Term loans under the Credit Suisse Term Loan Facility, net of unamortized discount and debt issuance costs of $1,207 at December 31, 2016$—
 $43,593
Non-recourse promissory notes, net of unamortized discount of $934 and $1,415, respectively9,066
 8,585
Total loans payable$9,066

$52,178
CNB Credit Agreement
On August 19, 2014, the Company entered into a $15.0 million senior secured revolving credit facility with City National Bank, which was amended in August 2015, May 2016 and September 2017 (as amended, the “Revolving Credit Facility”). PursuantPrior to the termsdeconsolidation of Amendment Number Three to Credit Agreement dated September 22, 2017 toSTRF on April 6, 2020, the Revolving Credit Facility ("the Amendment"), the maturity date was extended to March 31, 2020. The Amendment also provides for an incremental facility in an amount up to $10.0 million upon the fulfillmentCompany's investments of certain customary conditions,consolidated fund were treated as well as other changes. The Company intendsinvestments at fair value and any realized and unrealized gains and losses from those investments were recorded through the


F- 18
Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
(Unaudited)




Company's condensed consolidated statements of operations. The Company's treatment was consistent with that of STRF, which is considered an investment company under ASC 946, Financial Services - Investment Companies, for standalone reporting purposes. The fair value of the Company's liability to use any proceedsDB Med Investors at December 31, 2019 was derived from borrowings under the Revolving Credit Facility for general corporate purposes,net asset value of shares of STRF which was held by the Company. On April 6, 2020, such shares were distributed to DB Med Investors in satisfaction of the Company's liability to them. Changes in unrealized losses related to the Company's due to DB Med Investors liability were all included in earnings.
6. LEASES
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the circumstances present. Leases with a term greater than one year are recognized on the balance sheet as right-of-use assets and lease liabilities. Lease liabilities and the corresponding right-of-use assets are recorded based on the present values of lease payments over the expected lease terms. The Company’s expected lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including fundingbut not limited to, the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, or specific characteristics unique to the particular lease that would make it reasonably certain that the Company would exercise such option. The Company has concluded that renewal and early termination options are not reasonably certain of being exercised by the Company and thus not included in the calculation of its working capital needs. Borrowings underright-of-use assets and operating lease liabilities. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Revolving Credit Facility bear interest, atCompany utilizes the optionappropriate incremental borrowing rates, which are the rates that would be incurred to borrow on a collateralized basis, over similar terms, amounts equal to the lease payments in a similar economic environment. Variable payments that do not depend on a rate or index are not included in the lease liability and are recognized as incurred. If significant events, changes in circumstances, or other events indicate that the lease term or other inputs have changed, the Company would reassess lease classification, re-measure the lease liability by using revised inputs as of the reassessment date, and adjust the underlying right-of-use asset.
Substantially all of the Company's operating leases are comprised of its office space in New York City and San Francisco which expire at various times through September 2023. The Company either (i) at an Alternate Base Rate,does not have any contracts that would be classified as defined, plus an applicable margin not to exceed 0.25%a finance lease or (ii) at an Adjusted LIBOR plus an applicable margin not to exceed 2.5%. Asany operating leases that contain variable payments.
The components of lease cost and other information during the three and nine months ended September 30, 2017, there were no amounts drawn under the Revolving Credit Facility. The capitalized terms below2020 and 2019 are defined in the Revolving Credit Facility or the Amendment, where applicable.as follows:
The Revolving Credit Facility also contains financial covenants that require the Company
 For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,
 2020 2019 2020 2019
        
Lease cost(in thousands)
Operating lease costs$634
 $637
 $1,914
 $1,895
Variable lease costs—
 —
 —
 —
Sublease income(110) (113) (329) (342)
Total lease cost$524
 $524
 $1,585
 $1,553

Supplemental balance sheet information related to maintain a Maximum Net Leverage Ratio, as defined, of not greater than 5.0 to 1.0, a Total Leverage Ratio, as defined, of not greater than 7.0 to 1.0 and Core EBITDA, as defined, of not less less than $15.0 million. These ratios are calculated on a trailing twelve months basis and are calculated using the Company’s financial results and include adjustments made to calculate Core EBITDA. Non-compliance with any of the financial or non-financial covenants without cure or waiver would constitute an event of default. The Revolving Credit Facility also contains customary negative covenants and other customary events of default, including defaults based on events of bankruptcy and insolvency, dissolution, nonpayment of principal, interest or fees when due, breach of specified covenants, change in control and material inaccuracy of representations and warranties. There were no events of default under the Revolving Credit Facilityleases as of September 30, 2017.2020 and December 31, 2019 is as follows:
Credit Suisse Term Loan Facility
 As of
 September 30, 2020 December 31, 2019
    
Weighted-average remaining lease term (in years)2.8
 3.5
Weighted-average discount rate8.2% 8.2%

On August 14, 2014,June 29, 2020, the Company entered into a $110.0 million senior secured term loan credit facility (as amended, “Term Loan Facility”)letter agreement with Credit Suisse AG, Cayman Islands Branch, as administrative agent and collateral agent thereunder, Credit Suisse Securities (USA) LLC, as bookrunner and lead arranger, andits landlord for its New York headquarters, pursuant to which the lenders from time-to-time party thereto, which had an original maturity date of June 15, 2019. In February 2017, borrowings under this facility were paid off using the proceedsCompany was granted its request for a concession from the issuance of senior unsecured debt and the Term Loan Facility was terminated.
Interest expense under the Term Loan Facility, including accretion of the note discount and amortization of debt issuance costs, as well as the deferred issuance costs associated with the Revolving Credit facility below,landlord to defer rent payments for the months of May, June, July and August 2020 until 2021. The deferred rent payments, which aggregated to $0.8 million, will be paid back in nine months ending September 30, 2017 and 2016 was $1.5 million and $5.3 million, respectively. There was no interest expense under the Term Loan Facility for the three months ending September 30, 2017 and interest expense for the three months ended September 30, 2016, was $1.8 million.equal monthly installments commencing on January 1, 2021.
Non-Recourse Promissory

F- 19
Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)


In April 2012,2020, the FASB staff issued a question and answer document (“FASB Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the Company borrowed $10.0 millionwould have to determine, on a lease-by-lease basis, if a lease concession was the result of a new arrangement reached with the tenant or if a lease concession was under two non-recourse promissory notes. Proceeds from the borrowings were usedenforceable rights and obligations within the existing lease agreement. The FASB Q&A allows the Company, if certain criteria have been met, to purchase 1,108,033 sharesbypass the lease-by-lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances. The Company elected to apply such relief and availed itself of common stock of SIC, which were pledged as collateralthe election to avoid performing a lease-by-lease analysis for the obligations. Interest onlease concessions received as the notes is paid monthly and is equalconcessions granted as relief were due to the dividends received byCOVID-19 pandemic and result in the Company relatedcash flows to the pledged shares. The Company may prepaylandlord remaining substantially the notes in wholesame or in part at any time without penalty and the lenders may call the notes if certain conditions are met. The notes are scheduled to mature in March 2019. The proceeds from the notes were recorded net of issuance costs of $3.8 million and are being accreted, using the effective interest method, over the term of the non-recourse promissory notes. Total interest expense under these notes, including accretion of the notes discount, was $0.3 millionless.
Future payments for the three months ended September 30, 2017 and 2016, respectively, and $1.0 million for each of the nine months ended September 30, 2017 and 2016. The fair value of the outstanding balance of the notes was $10.2 millionoperating leases as of September 30, 2017 and December 31, 2016.2020 are as follows (in thousands):
Contractual Maturities of Loans Payable
As of September 30, 2017, $10.0 million of future principal payments will be due, relating to loans payable, during the year ended December 31, 2019.
Remaining in 2020 (October 1st through December 31st)
$728
20213,288
20222,441
20231,823
Total future lease payments8,280
Less imputed interest(860)
Operating lease liabilities, at September 30, 2020$7,420
7. OTHER ASSETS
Other assets consist of the following:
 As of
 September 30, 2020 December 31, 2019
    
 (in thousands)
Fixed assets, net of accumulated depreciation and amortization
of $4,386 and $3,847, respectively
$2,041
 $2,564
Security deposits1,975
 1,975
Administrative fees receivable (Note 13)1,252
 1,073
Due from affiliates (Note 13)1,829
 2,693
Prepaid expenses and income taxes2,674
 746
Other assets302
 676
Total other assets$10,073

$9,727
8. SENIOR UNSECURED DEBT
The carrying value of the Company’s senior unsecured debt consists of the following:
 As of
 September 30, 2017 December 31, 2016
 (Amounts in thousands)
2026 Notes, net of unamortized discount and debt issuance costs of $3,360 and $3,802, respectively$50,235
 $49,793
2024 Notes, net of unamortized premium and debt issuance costs of $2,537 at September 30, 201766,463
 —
Total senior unsecured debt$116,698
 $49,793
 As of
 September 30, 2020 December 31, 2019
    
 (in thousands)
2026 Notes, net of unamortized discount and debt issuance costs of $2,308 and $2,584, respectively$51,287
 $51,011
2024 Notes, net of unamortized premium and debt issuance costs of $1,329 and $1,629 respectively67,671
 67,371
Total senior unsecured debt$118,958
 $118,382


F- 20
Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
(Unaudited)


2026 Notes 
On August 9, 2016 and October 18, 2016, the Company issued debt consisting of $53.6 million in aggregate principal amount of senior unsecured notes due 2026 at a stated coupon rate of 6.875% (the "2026 Notes"). The net proceeds from these offerings were used to pay down a portion of the Company's outstanding indebtedness under its Term Loan Facility.term loan facility with Credit Suisse, which was terminated in February 2017. Interest is payable quarterly and interest payments commenced on November 15, 2016.quarterly. The 2026 Notes are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after August 15, 2019 at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments. The 2026 notes were recorded net of discount and direct issuance costs of $3.8 million which are being amortized over the term of the notes using the effective interest rate method. The 2026 Notes are listed on the New York Stock Exchange and tradestrade thereon under the trading symbol “MDLX.” The fair value of the 2026 Notes based on their underlying quoted market price was $52.6$14.6 million as of September 30, 2017.2020.
Interest expense on the 2026 Notes, including accretion of note discount and amortization of debt issuance costs, was $1.0 million and $3.0 million for each of the three months ended September 30, 2020 and 2019. For each of the nine months ended September 30, 2017, respectively,2020 and $0.3 million for the three and nine months ended September 30, 2016.2019, such interest expense was $3.0 million.
2024 Notes
On January 18, 2017 and February 22, 2017, the Company issued $69.0 million in aggregate principal amount of senior unsecured notes due 2024 at a stated coupon rate of 7.25% (the "2024 Notes"). The net proceeds from these offerings were used to pay down the remaining portion of the Company's outstanding indebtedness under its Term Loan Facility with the remaining to be used for general corporate purposes. Interest is payable quarterly and interest payments commenced on April 30, 2017. The 2024 Notes are subject to redemption in whole or in part at any time or from time to time, at the option of the Company, on or after January 30, 2020 at a redemption price per security equal to 100% of the outstanding principal amount thereof plus accrued and unpaid interest payments. The 2024 notes were recorded net of premium and direct issuance costs of $2.8 million which are being amortized over the term of the notes using the effective interest rate method. The 2024 Notes are listed on the New York Stock Exchange and tradestrade thereon under the trading symbol “MDLQ.” The fair value of the 2024 Notes based on their underlying quoted market price was $70.1$20.5 million as of September 30, 2017.2020.
Interest expense on the 2024 Notes, including amortization of debt premium and debt issuance costs, was $1.4 million and $3.5 million for the three and nine months ended September 30, 2017, respectively.  
8. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
The components of accounts payable, accrued expenses and other liabilities are as follows:
 As of
 September 30, 2017 December 31, 2016
 (Amounts in thousands)
Accrued compensation and benefits$2,655
 $7,978
Due to affiliates (Note 10)7,330
 15,533
Revenue share payable (Note 9)4,133
 6,472
Accrued interest1,294
 558
Professional fees240
 425
Deferred rent2,592
 2,833
Deferred tax liabilities (Note 12)170
 202
Performance fee compensation142
 985
Accounts payable and other accrued expenses1,738
 2,192
Liabilities of consolidated fund270
 —
Total accounts payable, accrued expenses and other liabilities$20,564
 $37,178
9. COMMITMENTS AND CONTINGENCIES 
Operating Leases
Medley leases office space in New York City and San Francisco under non-cancelable lease agreements that expire at various times through September 2023. Rent expense was $0.6 million for each of the three months ended September 30, 20172020 and 2016,2019. For each of the nine months ended September 30, 2020 and 2019, such interest expense was $4.1 million.
9. LOANS PAYABLE
Loans payable consist of the following:
 As of
 September 30, 2020 December 31, 2019
    
 (in thousands)
Non-recourse promissory notes$10,000
 $10,000
Total loans payable$10,000

$10,000
In April 2012, the Company borrowed $10.0 million under two non-recourse promissory notes. Proceeds from the borrowings were used to purchase 1,108,033 shares of common stock of SIC, which were pledged as collateral for the obligations. Interest on the notes is paid monthly and is equal to the dividends received by the Company related to the pledged shares. The Company may prepay the notes in whole or in part at any time without penalty and the lenders may call the notes if certain conditions are met. The proceeds from the notes were recorded net of issuance costs of $3.8 million and were being accreted, using the effective interest method, over the original term of the non-recourse promissory notes. During the three months ended September 30, 2020, there was no interest expense under these notes. During the three months ended September 30, 2019, total interest expense under these notes, including accretion of the notes discount, was $0.2 million. During the nine months ended September 30, 2020 and 2019, interest expense under these notes, including accretion of the notes discount, was $0.2 million and $0.7 million, respectively. The notes had an original maturity date of March 31, 2019. Through various amendments dated February 28, 2019, June 28, 2019, December 8, 2019, March 27, 2020 and June 30, 2020, the maturity date had been extended, with the latest amendment, extending the maturity date to December 31, 2020. As consideration paid for the June 28, 2019 amendment, the interest rate on these notes was increased by 1.0% per annum. As consideration received for the June 30, 2020 amendment, the 1.0% increase in the interest per annum is no longer in effect for periods subsequent to June 30, 2020. The fair value of the outstanding balance of the notes was $10.0 million as of September 30, 2020 and December 31, 2019.


F- 21
Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
(Unaudited)


and $1.8Contractual Maturities of Loans Payable
The $10.0 million and $1.9 millionof future principal payments will be due on December 31, 2020. The notes can also be settled in full by delivery of 1,108,033 shares of common stock of Sierra, which were pledged as collateral for the obligations.
10. DUE TO FORMER MINORITY INTEREST HOLDER
This balance consists of the following:
 As of
 September 30, 2020 December 31, 2019
    
 (in thousands)
Due to former minority interest holder, net of unamortized discount of $817 and $1,480, respectively$7,233
 $8,145
Total due to former minority interest holder$7,233
 $8,145

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

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

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

As of September 30, 2020, future payments due to the former minority interest holder, including principal and implied interest, were as follows (in thousands):
Remaining in 2020 (October 1st through December 31st)
$350
20212,700
20224,000
20231,000
Total future payments$8,050
During the three and nine months ended September 30, 20172020, the amortization of the discount was $0.2 million and 2016, respectively.
Future minimum rental payments under non-cancelable leases are$0.7 million, respectively, and is included as follows asa component of interest expense on the Company's condensed consolidated statements of operations. During the three and nine months ended September 30, 2017 (in thousands):2019 the amortization of the discount was $0.3 million and $0.8 million, respectively, and is included as a component of interest expense on the Company's condensed consolidated statements of operations.


Remaining in 2017$675
20182,704
20192,710
20202,833
20212,430
Thereafter4,254
Total future minimum lease payments$15,606
F- 22

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)


11. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER LIABILITIES
Accounts payable, accrued expenses and other liabilities consist of the following:
 As of
 September 30, 2020 December 31, 2019
    
 (in thousands)
Accrued compensation and benefits$3,496
 $6,161
Due to affiliate (Note 13)7,224
 7,212
Revenue share payable (Note 12)7,292
 2,316
Accrued interest1,294
 1,294
Professional fees4,169
 1,481
Due to DB Med Investors, at fair value—
 1,750
Accounts payable and other accrued expenses2,467
 1,672
Total accounts payable, accrued expenses and other liabilities$25,942
 $21,886
 
On June 3, 2016, the Company entered into a Master Investment Agreement with DB MED Investor I LLC and DB MED Investor II LLC ("DB Med Investors’’) to invest in new and existing Medley managed funds (the "Joint Venture"). Under the Master Investment Agreement, as amended (the "MIA"), DB Med Investors have the right upon the occurrence of certain events (the "Put Option Trigger Event") to redeem their interests in the Joint Venture. In October 2019, a Put Option Trigger Event had occurred. On October 22, 2019, Medley LLC, Medley Seed Funding I LLC (“Seed Funding I”) and Medley Seed Funding II LLC (“Seed Funding II”) received notice from DB Med Investors that they exercised their put option right under the MIA. In connection with the exercise of DB Med Investors put option right, the Company reclassified the Joint Venture's minority interest balance from redeemable non-controlling interests in the mezzanine section of its consolidated balance sheet (Note 16) to due to DB Med Investors, a component of accounts payable, accrued expenses and other liabilities, at its then fair value of $18.1 million. In addition, the Company elected to subsequently remeasure the liability under ASC 825, Financial Instruments, with changes recorded through earnings. The fair value of this liability at December 31, 2019 was determined to be $1.8 million which represented the fair value of the remaining assets held in the Medley Seed Funding entities at December 31, 2019, which, as further described below, was distributed to DB Med Investors on April 6, 2020 at its then fair value of $1.5 million.
In accordance with its obligations under the MIA, on October 25, 2019 and October 28, 2019, Seed Funding I distributed to DB Med Investors all of its assets, including all of its shares of MCC, which had an aggregate fair value on the date of transfer of $16.5 million, and cash of less than $0.1 million. Seed Funding II distributed to DB Med Investors all of its assets, including cash of $0.2 million and approximately 82,121 shares held by Seed Investor II in STRF on April 6, 2020.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
Refer to Note 6 to these condensed consolidated financial statements.
Capital Commitments to Funds
As of September 30, 20172020 and December 31, 2016,2019, the Company had aggregate unfunded commitments of $0.3 million and $0.5 million, respectively, to certain long-dated private funds.
Other Commitments
In April 2012, the Company entered into an obligation to pay to a third party a fixed percentage of management and incentive fees received by the Company from SIC.Sierra. The agreement was entered into contemporaneously with the $10.0 million non-recourse promissory notes that were issued to the same parties (Note 6)9). The two transactions were deemed to be related freestanding contracts and the $10.0 million of loan proceeds were allocated to the contracts using their relative fair values. At inception, the Company recognized an obligation of $4.4 million representing the present value of the future cash flows expected to be paid under this agreement. Each quarter the Company performs an analysis to recalculate the fair value of the revenue share obligation. The analysis includes assumptions related to expected future cash flows, present value discount rate and the renewal of the investment advisory agreement with Sierra, which is subject to an annual renewal and may also be terminated by Sierra upon 60 days' notice to the Company. As of September 30, 20172020 and December 31, 2016,2019, this obligation amounted to $4.1$7.3 million and $6.5$2.3 million, respectively, and is recorded as revenue share payable, a component of accounts payable, accrued expenses and other


F- 23
Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)


liabilities on the Company's consolidated balance sheets. The change in the estimated cash flows for this obligation is recorded in Other Income (Expense)other expenses, net on the Company's consolidated statements of operations.
On January 31, 2019, the Company entered into a termination agreement with the lenders which would have become effective upon the closing of the Company's then-pending (and now terminated) merger with Sierra. In accordance with the provisions of the termination agreement, the Company would have paid the lenders $6.5 million on or prior to the merger closing date, reimbursed the lenders for their out of pocket legal fees and entered into a six month $6.5 million promissory note. The promissory note would have borne interest at seven percentage points over the LIBOR Rate, as defined in the termination agreement. Such consideration would have been for the full satisfaction of the two non-recourse promissory notes described in Note 9 as well as the Company's revenue share obligation described above. On May 1, 2020, the Company had received a notice of termination from Sierra, of its previously announced merger. Because the termination agreement and economic terms described above were conditioned upon closing of the merger, the agreement has been effectively rendered void.
Legal Proceedings
From time to time, the Company is involved in various legal proceedings, lawsuits and claims incidental to the conduct of its business. Its business is also subject to extensive regulation, which may result in regulatory proceedings against it. Except as described below, the Company is not currently party to any material legal proceedings.
One of the Company's subsidiaries, MCC Advisors LLC, was named as a defendant in a lawsuit on May 29, 2015, by Moshe Barkat and Modern VideoFilm Holdings, LLC (“MVF Holdings”) against MCC, MOF II, MCC Advisors LLC, Deloitte Transactions and Business Analytics LLP A/K/A Deloitte ERG (“Deloitte”), Scott Avila (“Avila”), Charles Sweet, and Modern VideoFilm, Inc. (“MVF”). The lawsuit is pending in the California Superior Court, Los Angeles County, Central District, as Case No. BC 583437. The lawsuit was filed after MCC, as agent for the lender group, exercised remedies following a series of defaults by MVF and MVF Holdings on a secured loan with an outstanding balance at the time in excess of $65 million. The lawsuit sought damages in excess of $100 million. Deloitte and Avila have settled the claims against them in exchange for payment of $1.5 million. Following a separate lawsuit by Mr. Barkat against MVF’s D&O insurance carrier, the carrier, Charles Sweet and MVF have settled the claims against them. On June 6, 2016, the court granted the Medley defendants’ demurrers on several counts and dismissed Mr. Barkat’s claims with prejudice except with respect to his claim for intentional interference with contract. On March 18, 2018, the court granted the Medley defendants’ motion for summary adjudication with respect to Mr. Barkat’s sole remaining claim against the Medley Defendants for intentional interference. Now that the trial court has ruled in favor of the Medley defendants on all counts, the only remaining claims in the Barkat litigation are MCC and the other defendants continue to dispute the remaining allegations and are vigorously defending the lawsuit while pursuingMOF II’s affirmative counterclaims against Mr. Barkat and MVF Holdings. Holdings, which MCC and MOF II are diligently prosecuting.
On August 29, 2016, MVF Holdings filed another lawsuit in the California Superior Court, Los Angeles County, Central District, as Case No. BC 631888 (the “Derivative Action”), naming MCC Advisors LLC and certain of Medley’s employees as defendants, among others. The plaintiff in the Derivative Action, asserts claims against the defendants for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unfair competition, breach of the implied covenant of good faith and fair dealing, interference with prospective economic advantage, fraud, and declaratory relief. MCC Advisors LLC and the other defendants believe the outstanding claims for alleged interference with Mr. Barkat’s employment contract, and the other causes of action asserted in the Derivative Action are without merit and all defendants intend to continue to assert a vigorous defense.
On May 4, 2017, Medley Capital LLC entered into a Settlement Agreement with CK Pearl Fund, Ltd. and CK Pearl Fund, LP (the “CK Pearl Funds”), pursuant to whichOctober 16, 2020, the CK Pearl Funds granted Medley Capital LLC and its affiliates, managers, officers, directors, employees (the “Medley Parties”) a full release of claims and furtherparties agreed to indemnify the Medley Parties from any liabilities and to reimburse Medley Capital LLC for its reasonable legal fees and expensesa settlement of all claims arising in connection with the following lawsuit: CK PearlHugh Miller matter, the MVF Derivative Action and the MVF chapter 11 proceedings. The settlement was read into the record on October 16, 2020 at a hearing in the MVF Derivative Action. The settlement is binding, subject to bankruptcy court approval in the MVF bankruptcy proceedings. A hearing to approve the settlement is scheduled for November 30, 2020. Pursuant to the settlement, subject to bankruptcy court approval, the Lenders will pay the plaintiffs a total of $5 million. All of the $5 million is being funded by the insurance carriers for the Lenders pro rata based on their participation in the original loan to MVF.
Medley LLC, Medley Capital Corporation, Medley Opportunity Fund Ltd.II LP, Medley Management, Inc., Medley Group, LLC, Brook Taube, and CK PearlSeth Taube (the “Medley Defendants”) were named as defendants, along with other various parties, in a putative class action lawsuit captioned as Royce Solomon, Jodi Belleci, Michael Littlejohn, and Giulianna Lomaglio v. American Web Loan, Inc., AWL, Inc., Mark Curry, MacFarlane Group, Inc., Sol Partners, Medley Opportunity Fund, II, LP, Medley LLC, Medley Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, Seth Taube, DHI Computing Service, Inc., Middlemarch Partners, and John Does 1-100, filed on December 15, 2017, amended on March 9, 2018, and amended a second time on February 15, 2019, in the United States District Court for the Eastern District of Virginia, Newport News Division, as Case No. 4:17-cv-145 (hereinafter, “Class Action 1”). Medley Opportunity Fund II LP and Medley Capital Corporation were also named as defendants, along with various other parties, in a putative class action lawsuit captioned George Hengle and Lula Williams v. Rothstein Kass & Company, P.C.Mark Curry, American Web Loan, Inc., Rothstein-Kass P.A.AWL, Inc., Rothstein Kass &Red Stone, Inc., Medley Opportunity Fund II LP, and Medley Capital Corporation, filed February 13, 2018, in the United States District Court, Eastern District of Virginia, Richmond Division, as Case No. 3:18-cv-100 (“Class Action 2”). Medley Opportunity Fund II LP and Medley Capital Corporation were also named as defendants, along with various other parties, in a putative class action lawsuit captioned John Glatt, Sonji Grandy, Heather Ball,

F- 24

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)
(Unaudited)


Co. LLCDashawn Hunter, and Rothstein, Kass & Company (Cayman); Rothstein Kass & Company, P.C.Michael Corona v. Mark Curry, American Web Loan, Inc., Rothstein-Kass P.A.AWL, Inc., Rothstein Kass & Co. LLCRed Stone, Inc., Medley Opportunity Fund II LP, and Rothstein, Kass & Company (Cayman) v. Medley Capital LLC,Corporation, filed on September 19, 2016,August 9, 2018 in the SuperiorUnited States District Court, Eastern District of New Jersey Law Division: Essex County,Virginia, Newport News Division, as DocketCase No. L-5196-15 (the “Rothstein Lawsuit”4:18-cv-101 (“Class Action 3”) (together with Class Action 1 and Class Action 2, the “Virginia Class Actions”). Pursuant to the settlement, Medley Capital LLC will be filing a motion seeking dismissalOpportunity Fund II LP was also named as a defendant, along with various other parties, in a putative class action lawsuit captioned Christina Williams and Michael Stermel v. Red Stone, Inc. (as successor in interest to MacFarlane Group, Inc.), Medley Opportunity Fund II LP, Mark Curry, Brian McGowan, Vincent Ney, and John Doe entities and individuals, filed June 29, 2018 and amended July 26, 2018, in the Rothstein Litigation. WhileUnited States District Court for the Eastern District of Pennsylvania, as Case No. 2:18-cv-2747 (the “Pennsylvania Class Action”).
On October 26, 2020, Medley Opportunity Fund II LP and Medley Capital Corporation were served with a new complaint in a putative class action lawsuit captioned Charles P. McDaniel v. Mark Curry, American Web Loan, Inc., Red Stone, Inc., Medley Opportunity Fund II LP, and Medley Capital Corporation, filed October 22, 2020, in the Circuit Court of Ohio County, West Virginia, as Case No. 20-C-169 (the “West Virginia Class Action”)(together with the Virginia Class Actions and the Pennsylvania Class Action, the “Class Action Complaints”).
The plaintiffs in the Virgina and Pennsylvania Class Action Complaints filed their putative class actions alleging claims under the Racketeer Influenced and Corrupt Organizations Act, and various other claims arising out of the alleged payday lending activities of American Web Loan. The claims against Medley Opportunity Fund II LP, Medley LLC, will remainMedley Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, and Seth Taube (in Class Action 1, as amended); Medley Opportunity Fund II LP and Medley Capital Corporation (in Class Action 2 and Class Action 3); and Medley Opportunity Fund II LP (in the Pennsylvania Class Action), allege that those defendants in each respective action exercised control over, or improperly derived income from, and/or obtained an improper interest in, American Web Loan’s payday lending activities as a named defendant until it is dismissed orresult of a loan to American Web Loan. The plaintiff in the West Virginia Class Action Complaint filed his putative class action is resolved,alleging claims arising West Virginia state law’s regulating interest rates and other fees in lightconnection with consumer lending activities.
The loan was made by Medley Opportunity Fund II LP in 2011. American Web Loan repaid the loan from Medley Opportunity Fund II LP in full in February of 2015, more than 1 year and 10 months prior to any of the CK Pearl Funds’ agreementloans allegedly made by American Web Loan to indemnify the Medley Partiesalleged class plaintiff representatives in Class Action 1. In Class Action 2, the alleged class plaintiff representatives had not alleged when they received any loans from American Web Loan. In Class Action 3, the alleged class plaintiff representatives claim to have received loans from American Web Loan at various times from February 2015 through April 2018. In the Pennsylvania Class Action, the alleged class plaintiff representatives claim to have received loans from American Web Loan in 2017.
By orders dated August 7, 2018 and September 17, 2018, the Court presiding over the Virginia Class Actions consolidated those cases for all purposes. On October 12, 2018, Plaintiffs in Class Action 3 filed a notice of voluntary dismissal of all claims, and on October 29, 2018, Plaintiffs in Class Action 2 filed a notice of voluntary dismissal of all claims.
On April 16, 2020, the parties to Class Action 1 reached a settlement reflected in a Settlement Agreement (the “Settlement Agreement”) that has been publicly filed in Class Action 1 (ECF No. 414-1). The Settlement Agreement was subject to court approval. At a hearing on November 4, 2020, the court denied the plaintiffs’ motion to approve the settlement and ordered the parties to mediation in front of Judge Novak of the Eastern District of Virginia in December of 2020.
On October 29, 2020, the parties to the Pennsylvania Class Action reached a settlement pursuant to which AWL agreed to make a payment to the plaintiffs and to advance expensesforgive loans that they owed AWL. The Medley Defendants obtained a full release and bore none of the settlement amount. The Pennsylvania Class Action was dismissed with prejudice on their behalf, weNovember 2, 2020.
The Medley Defendants and the other defendants believe the Rothstein litigation no longer constitutes a material pending legal proceeding. The settlement also resolves our affirmative lawsuit against the CK Pearl Funds, Medley Capital LLC v. CK Pearl Fund, Ltd., filed on November 28, 2016,alleged claims asserted in the GrandVirginia Class Action and the West Virginia putative class action are without merit and they are defending these lawsuits vigorously.
On May 11, 2020, the court approved a settlement and dismissed two purported class actions that had been commenced in the Supreme Court of the Cayman IslandsState of New York, County of New York, by alleged stockholders of Medley Capital Corporation, captioned, respectively, Helene Lax v. Brook Taube, et al., Index No. 650503/2019, and Richard Dicristino, et al. v. Brook Taube, et al., Index No. 650510/2019 (together with the Lax Action, the “New York Actions”). Named as defendants in each complaint were Brook Taube, Seth Taube, Jeffrey Tonkel, Arthur S. Ainsberg, Karin Hirtler-Garvey, John E. Mack, Mark Lerdal, Richard T. Allorto, Jr., Medley Capital Corporation (“MCC”), MDLY, Sierra Income Corporation (“Sierra”), and Sierra Management, Inc. The complaints in each of the New York Actions alleged that the individuals named as defendants breached their fiduciary duties in connection with the proposed merger of MCC with and into Sierra, and that the other defendants aided and abetted those alleged breaches of fiduciary duties. Compensatory damages in unspecified amounts were sought. The defendants vigorously denied any wrongdoing or liability with respect to the facts and claims that were asserted, or which could have been asserted, in the New York Actions. None of the defendants paid any consideration to the plaintiffs in connection with the dismissal. The plaintiffs agreed to dismiss the New York Actions in exchange for MCC’s agreement to pay $50,000 in attorneys’ fees and expenses to plaintiffs’ counsel.     

F- 25

Medley LLC
Notes to Condensed Consolidated Financial Services Division, as Cause No. FSD 196Statements
(Unaudited)


While management currently believes that the ultimate outcome of 2016. these proceedings will not have a material adverse effect on the Company’s consolidated financial position or overall trends in consolidated results of operations, litigation is subject to inherent uncertainties. The Company reviews relevant information with respect to litigation and regulatory matters on a quarterly and annual basis. The Company establishes liabilities for litigation and regulatory actions when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no liability is established.
10.13. RELATED PARTY TRANSACTIONS
Substantially all of Medley’s revenue is earned through agreements with its non-consolidated funds for which it collects management and performance fees for providing investment andasset management, services.
From June 2012 through December 2016, Medley was party to an Expense Support and Reimbursement Agreement (“ESA”) with SIC. During the term of the ESA, which expired on December 31, 2016, Medley agreed to pay up to 100% of SIC's operating expenses in order for SIC to achieve a reasonable level of expenses relative to its investment income. Pursuant to the ESA, SIC had a conditional obligation to reimburse Medley for any amounts they funded under the ESA if, within three years of the date on which Medley funded such amounts, SIC met certain financial levels. ESA expenses are recorded within general, administrative,advisory and other expense in the consolidated statements of operations. As of September 30, 2017 there was no outstanding balance due to SIC under the ESA agreement. As of December 31, 2016 there was $7.9 million due to SIC under the ESA agreement. This amount was included in accounts payable, accrued expenses and other liabilities as due to affiliates on the consolidated balance sheets. During the three and nine months ended September 30, 2016, Medley recorded $5.3 million and $16.1 million, respectively, of ESA expenses under this agreement.related services.
Administration Agreements
In January 2011 and April 2012, Medley entered into administration agreements with MCC (the “MCC Admin Agreement”) and SICSierra (the “SIC Admin Agreement”), respectively, whereby, as part of its performance obligation to provide asset management, advisory and other related services, Medley agreed to provide administrative services necessary for the operations of MCC and SIC.Sierra. MCC and SICSierra agreed to pay Medley for the costs and expenses incurred in providing such administrative services, including an allocable portion of Medley’s overhead expenses and an allocable portion of the cost of MCC and SIC’sSierra's officers and their respective staffs.staff.
Additionally, Medley has entered into administration agreements with other entities that it manages (the “Funds Admin Agreements”), whereby Medley agreed to provide administrative services necessary for the operations of these other vehicles.entities. These other entities agreed to payreimburse Medley for the costs and expenses incurred in providing such administrative services, including an allocable portion of Medley’s overhead expenses and an allocable portion of the cost of these other vehicles' officers and their respective staffs.
Medley records these administrative fees as revenue in the period when the performance obligation of providing such administrative services are providedis satisfied and aresuch revenue is included inas a component of other revenues and fees on the consolidated statements of operations. Amounts due from these agreements are included as a component of other assets on the Company's condensed consolidated balance sheets.

Total revenues recorded fromunder these agreements forduring the three and nine months ended September 30, 20172020 and 20162019 are reflected in the table below:
 For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,
 2017 2016 2017 2016
 (Amounts in thousands)
MCC Admin Agreement$860
 $991
 $2,932
 $3,019
SIC Admin Agreement746
 780
 2,335
 1,997
Funds Admin Agreements305
 252
 924
 630
Total administrative fees from related parties$1,911
 $2,023
 $6,191
 $5,646

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


 For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,
 2020 2019 2020 2019
        
 (in thousands)
MCC Admin Agreement$465
 $822
 $1,747
 $2,437
SIC Admin Agreement432
 980
 1,803
 2,158
Fund Admin Agreements295
 273
 876
 732
Total administrative fees from related parties$1,192
 $2,075
 $4,426
 $5,327
Amounts due from related parties under these agreements as of September 30, 2017 and December 31, 2016 are reflected in the table below:below.
As of
As ofSeptember 30, 2020 December 31, 2019
September 30, 2017 December 31, 2016   
(Amounts in thousands)(in thousands)
Amounts due from MCC under the MCC Admin Agreement$860
 $916
$518
 $444
Amounts due from SIC under the SIC Admin Agreement746
 851
439
 382
Amounts due from entities under the Funds Admin Agreements305
 301
Amounts due from entities under the Fund Admin Agreements295
 247
Total administrative fees receivable$1,911
 $2,068
$1,252
 $1,073
InOther Amounts Due From Affiliates

F- 26

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)


The Company also typically facilitates the payment of certain operating costs incurred by the funds that it manages. These costs are normally reimbursed by such funds and are included in due from affiliates, a component of other assets on the Company's condensed consolidated balance sheets. Amounts due from affiliates are reflected in the table below.

Additionally, in connection with the amended and restated limited liability agreement of Medley LLC, Medley LLC agreed to, at the sole discretion of the managing member, reimburse Medley Management Inc. for all expenses incurred, other than expenses incurred in connection with its income tax obligations. From time to time, the Companycompany may also advance funds to Medley Management Inc. to cover its operating needs.For each of the three months ended September 30, 2017 and 2016, the Company recorded expense reimbursements of $0.4 million. For each of the nine months ended September 30, 2017 and 2016,2020, the Company recorded expense reimbursementsreimbursable expenses of $1.3 million. The expense reimbursements$1.8 million and $5.5 million, respectively, which were recorded as a component of Other income (expense), netgeneral, administrative and other expenses on the consolidated statements of operations. As of September 30, 20172020 and December 31, 2016,2019, amounts due tofrom Medley Management Inc. was $0.3 millionare included in the table below.

 As of
 September 30, 2020 December 31, 2019
    
 (in thousands)
Amounts due from MCC$53
 $209
Amounts due from SIC116
 578
Amounts due from long-dated private funds95
 801
Amounts due from separately managed accounts134
 199
Amounts due from Medley Management Inc.1,431
 906
Due from Affiliates$1,829
 $2,693
Amounts Due to Affiliates
Amounts due to affiliates reflects a clawback obligation of carried interest tax distributions that were received by the Company that would need to be paid back to the respective funds, if the funds were liquidated at fair value as of the end of the reporting period. The Company’s actual obligation, however, would not become payable or realized until the end of a fund’s life. Amounts due to affiliates at September 30, 2020 and $0.5 million and was recorded as a component of other assets on the consolidated balance sheets.December 31, 2019 were $7.2 million.
Organization Agreement
Pursuant to the organization agreement between Medley Management Inc. and Medley LLC, Medley Management Inc. may from time to time make grants of restricted stock units or other awards providing the holder with the contractual right to receive cash payments pursuant to an equity plan to employees, advisors or other persons, as defined, in respect of Medley LLC and its subsidiaries. These awards may entitle the holder thereof to receive dividends paid with respect to the shares of Class A common stock underlying such awards as if such holder were a holder of record of the underlying shares of Class A common stock. Medley LLC has agreed that it assumes any obligation to pay such dividend equivalent amounts to the holders of the respective awards. Additionally, pursuant to this agreement, the number of LLC Units held by Medley Management Inc., shall, at all times, equal the number of shares of Class A common stock outstanding and Medley LLC has agreed to issue additional LLC units equal to the number of shares of Medley Management Inc. issued pursuant to its equity plan.
Expense Support Agreement
On June 12, 2020, the Company and MCC entered into an Expense Support Agreement (the “ESA”) under which the Company agreed to cap the MCC management fee and all of MCC's other operating expenses (except interest expense, certain extraordinary strategic transaction expenses, and other expenses approved by the MCC Special Committee) at $667,000 per month (the “Cap”). Under the ESA, the Cap is effective from June 1, 2020 through December 31, 2020. During the three and nine months ended September 30, 2020, the Company recorded $0.4 million and $0.7 million, respectively, for ESA expenses under this agreement. The ESA expenses are presented as a reduction of management fees in the Company's condensed consolidated statement of operations and as a reduction to management fees receivable on the Company's condensed consolidated balance sheets.
Investment Management Agreement and Administration Agreement
In connection with the Expense Support Agreement, MCC extended the term of the amended and restated investment management agreement between the Company and MCC (the “Investment Management Agreement”) and the Administration Agreement through the quarter ended December 31, 2020. In connection with the foregoing, on June 12, 2020, the Board of MCC approved an amendment to the Investment Management Agreement and an amendment to the Administration Agreement to provide, in each case, that such agreement may be terminated by the Company or MCC with 30 days’ notice, rather than 60 days’ notice.

F- 27

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Investments
Refer to Note 3 "4, Investments," for more information related to the Company's investments in related parties.
Exchange Agreement
Prior to the completion of the Company's IPO, Medley LLC's limited liability agreement was restated among other things, to modify its capital structure by reclassifying the interests held by its then existing owners (i.e. the members of Medley prior to the IPO) into the LLC Units. Medley’s existing owners also entered into an exchange agreement under which they (or certain permitted transferees thereof) have the right (subject to the terms of the exchange agreement as described therein), to exchange their LLC Units for shares of Medley Management Inc.’s Class A common stock on a one-for-one basis at fair value, subject to customary conversion rate adjustments for stock splits (including the Company's one-for-ten reverse stock split of Common Stock effected on October 30, 2020), stock dividends and reclassifications.
11.14. INCOME TAXES
Deferred income taxes reflect the net effect of temporary differences between the tax basis of an asset or liability and its reported amount inon the Company’s condensed consolidated balance sheets. These temporary differences result in taxable or deductible amounts in future years. AsDue to the uncertain nature of the ultimate realization of its net deferred tax assets, the Company has established a full valuation allowance, as of September 30, 20172020 and December 31, 2016,2019, against the Company had totalbenefits 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 $1.8the net deferred tax assets will be recorded in future operations as a reduction of the Company’s income tax expense. Excluding the impact of the full valuation allowance, the Company's net deferred tax assets were $3.2 million and $1.6$3.7 million respectively, whichas of September 30, 2020 and December 31, 2019, respectively. The Company's deferred tax assets consists primarily of temporary differences relating to certain accrued expenses, stockstock-based compensation, unrealized losses and a tax benefit relating to tax goodwill. Total deferred tax liabilities were $0.2 million as of September 30, 2017 and December 31, 2016 and consists primarily of temporary differences relating to accrued fee income and accumulated net unrealized losses. The provision for deferred income taxes results from temporary differences arising principally from stock compensation, certain accrued expenses, deferred rent, fee income accruals and depreciation.

The Company’s effective tax rate was 5.1%2.5% and 12.4%1.5% for the three months ended September 30, 20172020 and 2016,2019, respectively and 3.3%2.2% and 6.2%1.4% for the nine months ended September 30, 20172020 and 2016,2019, respectively.The quarterly provision for income taxes is determined based on the Company’s estimated full year effective tax rate adjusted by the amount of tax attributable to infrequent or unusual items that are recognized on a discrete basis in the income tax provision in the quarter in which they occur. The Company is subject to New York City unincorporated business tax attributable to its operations apportioned to New York City.

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


During the three and nine months ended September 30, 2017, there was a $0.1 million and $0.2 million impact to2020, the Company's effective tax rate was impacted by a full valuation allowance being provided by the Company on its projected annual net deferred tax assets as well as losses allocated to non-controlling interests which are not subject to subject to federal, state and city corporate income taxes, as well as a true-up of a return to provision adjustment. During the three and nine months ended September 30, 2019, the Company's effective tax provision forrate was impacted primarily by losses allocated to non-controlling interests which are not subject to subject to federal, state and city corporate income taxes, as well as discrete items associated with the vesting of restricted LLC unitsUnits and forfeiturepayment of RSUs, respectively.dividend equivalent payments on restricted stock units.
Interest expense and penalties related to income tax matters are recognized as a component of the provision for income taxes and were not significant during the three and nine months ended September 30, 20172020 and 2016.2019. As of September 30, 2017 and December 31, 2016 and during the three and nine months ended September 30, 20172020 and 2016,2019, there were no uncertain tax positions taken that were not more likely than not to be sustained. Certain subsidiaries of the Company are no longer subject to tax examinations by taxing authorities for tax years prior to 2012.
12.15. COMPENSATION EXPENSE
Compensation generally includes salaries, bonuses, equity and profit sharing awards. Bonuses, equity and profit sharing awards are accrued over the service period to which they relate. Guaranteed payments made to ourthe Company's senior professionals who are members of Medley LLC are recognized as compensation expense. The guaranteed payments to the Company’s Co-Chief Executive Officers are performance based and are periodically set subject to maximums based on the Company’s total assets under management. Such maximums aggregated to $0.6$0.8 million for each of the Co-Chief Executive Officersand $1.3 million during each of the three months ended September 30, 20172020 and 2016,2019, respectively. Such maximums aggregated to $2.3 million and $1.9$3.8 million during each of the nine months ended September 30, 20172020 and 2016.2019, respectively. During the three and nine months ended September 30, 20172020, the Company's Co-Chief Executive Officers received guaranteed payments in the aggregate of $0.2 million and 2016, neither$0.8 million, respectively. Neither of the Company’s Co-Chief Executive Officers received any guaranteed payments.
Performance Fee Compensation
In October 2010 and January 2014, the Company granted shares of vested profit interests in certain subsidiaries to select employees. These awards are viewed as a profit-sharing arrangement and are accounted for under ASC 710, which requires compensation expense to be recognized over the vesting period, which is usually the period over which service is provided. The shares were vested at grant date, subject to a divestiture percentage based on percentage of service completed from the award grant date to the employee’s termination date. The Company adjusts the related liability quarterly based on changes in estimated cash flows for the profit interests.
In February 2015 and March 2016, the Company granted incentive cash bonus awards to select employees. These awards entitle employees to receive cash compensation based on distributed performance fees received by the Company from certain institutional funds. Eligibility to receive payments pursuant to these incentive awards is based on continued employment and ceases automatically upon termination of employment. Performance compensation expense is recorded based on the fair value of the incentive awards at the date of grant and is recognized on a straight-line basis over the expected requisite service period.  The performance compensation liability is subject to re-measurement at the end of each reporting period and any changes in the liability are recognized in such reporting period.
For each ofduring the three months ended September 30, 2017 and 2016, there was a reversal of performance fee compensation of less than $0.1 million and $0.2 million, respectively. For the nine months ended September 30, 2017, the Company recorded a reversal of performance fee compensation expense of $0.8 million. For the nine months ended September 30, 2016, the Company recorded a reversal of performance fee compensation of $0.2 million. As of September 30, 2017 and December 31, 2016, the total performance fee compensation payable for these awards was $0.1 million and $1.0 million, respectively, and is included as a component of accounts payable, accrued expenses and other liabilities on the Company's condensed consolidated balance sheets.2019.

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Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)


Retirement Plan
The Company sponsors a defined-contribution 401(k)401(K) retirement plan that covers all employees. Employees are eligible to participate in the plan immediately, and participants are 100% vested from the date of eligibility. The Company makes contributions to the plan of 3% of an employee’s eligible wages through June 30, 2020, up to a maximum limit as determined by the Internal Revenue Service. The Company also pays all administrative fees related to the plan. TheDuring the three and nine months ended September 30, 2020, the Company's accrued contributions to the plan were $0.4less than $0.1 million each forand $0.3 million, respectively. During the three and nine months ended September 30, 20172019, the Company's accrued contributions to the plan were less than $0.1 million and 2016,$0.4 million, respectively. As of September 30, 20172020 and December 31, 20162019 the Company's outstanding liability to the plan was $0.4$0.3 million and $0.5$0.4 million, respectively.
Stock-Based Compensation
In connection with the IPO of Medley Management Inc., Medley Management Inc. and Medley LLC adopted the Medley Management Inc. 2014 Omnibus Incentive Plan (the “Plan”(as amended, the "Plan"). The purpose of the Plan is to provide a means through which the Company may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors (and prospective directors, officers, employees, consultants and advisors) of the Company can acquire and maintain an equity interest in the managing member of the Company, Medley Management Inc., or be paid incentive compensation, including incentive compensation measured by reference to the value of Medley Management Inc.’s Class A common stock or Medley LLC’s unit interests, thereby strengthening their commitment to the welfare of the Company and aligning their interests with those of

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


the Medley Management Inc.’s's stockholders. The Plan provides for the issuance of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), restricted LLC Units of Medley LLC, stock bonuses, other stock-based awards and cash awards. As the grant of these awards are primarily for the benefit of the employees of Medley LLC, stock compensation is recognized in Medley LLC’sLLC's separate consolidated financial statements through a corresponding credit to members’members' equity (deficit), representing a capital contribution by Medley Management Inc.
Stock-basedThe fair value of RSUs granted under the Plan is determined to be the fair value of the underlying shares on the date of grant. The fair value of restricted LLC Units of Medley LLC is based on the public share price of MDLY at date of grant, adjusted for different distribution rights. The aggregate fair value of these awards is charged to compensation was $1.2 million and $0.9 million forexpense on a straight-line basis over the vesting period, which is generally up to five years, with the exception of certain restricted LLC Units that will only vest upon certain conditions such as death, disability, termination without cause or change of control. For these awards, compensation expense is recognized when such condition is met.
During the three months ended September 30, 20172020 and 2016, respectively,2019, stock-based compensation was $1.1 million and $2.0 million, and $2.7 million duringrespectively. Stock-based compensation for the nine months ended September 30, 20172020 and 2016,2019 was $2.9 million and $5.2 million, respectively. Stock-based compensation was recorded as compensation and benefits on the consolidated statements of operations and contributions on the consolidated statements of changes in equity and redeemable non-controlling interests.
13.16. REDEEMABLE NON-CONTROLLING INTERESTS
Changes in redeemable non-controlling interests during the nine months ended September 30, 20172020 and 2016 are2019 is reflected in the table below:below (in thousands).
 For the Nine Months Ended September 30,
 2017 2016
 (Amounts in thousands)
Beginning balance$30,805
 $—
Net income attributable to redeemable non-controlling interests in consolidated subsidiaries4,699
 1,116
Contributions23,000
 12,000
Distributions(4,540) (675)
Change in fair value of available-for-sale securities(28) 31
Reclassification of redeemable non-controlling interest—
 12,196
Ending balance$53,936
 $24,668
 For the Nine Months Ended September 30,
 2020 2019
    
Balance at beginning of the period$(748) $23,186
Net loss attributable to redeemable non-controlling interests in consolidated subsidiaries(4) (321)
Distributions—
 (2,362)
Fair value adjustment to redeemable non-controlling interests752
 —
Balance at end of the period$—
 $20,503
As of January 1, 2020, the Company's redeemable non-controlling interests balance was comprised of one minority interest holder's membership units in STRF Advisors LLC. As of January 1, 2019, in addition to this minority interest holder, the Company's redeemable non-controlling interests balance was also comprised of DB MED Investor I LLC and DB MED Investor II LLC (‘DB Med Investors’’) preferred interest in a joint venture, as further described below.
Redeemable Non-Controlling Interest in STRF Advisors LLC
In JanuaryOctober 2016, the Company executed an amendment to SIC Advisors' operating agreement for STRF Advisors LLC which provided the Company with

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Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)


the right to redeem membership units owned by the minority interest holder.holder, Strategic Capital Advisory Services, LLC. The Company’s redemption right is triggered by the termination of the dealer manager agreement between SICSTRF and SC Distributors LLC, an affiliate of the minority interest holder. As a result of this redemption feature, the Company reclassified the non-controlling interest in SICSTRF Advisors from the equity section toLLC was classified as a component of redeemable non-controlling interests in the mezzanine section of the Company's condensed consolidated balance sheets.
On February 5, 2020, a termination event occurred and as a result, the Company reclassified STRF Advisors LLC s minority interest balance from redeemable non-controlling interests in the mezzanine section of its condensed consolidated balance sheet based onto due to former minority interest holder, net at its fair value as of the amendment date.then current redemption value. The fairredemption value of the non-controlling interest was determined to be $12.2 million on the date of the amendmentzero and was adjusted through a $0.1 million charge to members' deficit. There were no changes in its redemption value through September 30, 2020.
During the nine months ended September 30, 2020, net losses allocated to this redeemable non-controlling interests in Medley LLC.interest were less than $0.1 million. There were no net losses allocated to this redeemable non-controlling interest during the three months ended September 30, 2020. During each of the three and nine months ended September 30, 2017,2019, net incomelosses allocated to this redeemable non-controlling interest was $1.2 million and $3.1 million, respectively, and distributions paid were $1.0 million and $3.1 million, respectively.less than $0.1 million. As of September 30, 2017,2020, the balance of thethis redeemable non-controlling interest was zero.
Redeemable Non-Controlling Interests in SIC Advisors LLC was $13.4 million.Joint Venture
On June 3, 2016, the Company entered into a Master Investment Agreement with DB MED Investor I LLC and DB MED Investor II LLC (the ‘‘Investors’’)Med Investors to invest up to $50.0 million in new and existing Medley managed funds (the ‘‘Joint Venture’’). The Company agreed to contribute up to $10.0 million and an interest in STRF Advisors LLC, the investment advisor to Sierra Total Return Fund,STRF, in exchange for common equity interests in the Joint Venture. On June 6, 2017, the Company entered into an amendment to its Master Investment Agreement with the Investors, which provided for, among other things, an increase in the Company’s capital contribution to up to $13.8 million and extended the term of the Joint Venture from seven to ten years. TheDB Med Investors agreed to invest up to $40.0 million in exchange for preferred equity interests in the Joint Venture. AsTotal contributions to the Joint Venture amounted to $53.8 million and were used to purchase $51.8 million of June 30, 2017,MCC shares on the Companyopen market and the Investors had fully satisfied their capital contributions.seed fund $2.0 million to STRF. On account of the preferred equity interests, theDB Med Investors willwas entitled to receive an 8% preferred distribution, 15% of the Joint Venture’s profits, and all of the profits from the contributed interest in STRF Advisors LLC. The Company could make a capital contribution to fund the 8% preferred distribution but was limited to one contribution in any rolling twelve month period without the prior written consent of DB Med Investors. Medley hashad the option, subject to certain conditions, to cause the Joint Venture to redeem the DB Med Investors’ interestinterests in exchange for repayment of the outstanding investment amount at the time of redemption, plus certain other considerations. TheDB Med Investors havehad the right, after ten years, to redeem their interests in the Joint Venture. As such,DB Med Investors also had the Investors’ interestright upon the occurrence of certain events (the "Put Option Trigger Event") to redeem their interests in the Joint Venture. Upon a Put Option Trigger Event DB Med Investors have the right to exercise a put option in which they would be entitled to put their preferred interests back to the Joint Venture. The Joint Venture is includedcan satisfy the put in cash or in kind in an amount equal to the amount necessary to satisfy the Fund Share Interest Redemption Price, as a component of redeemable non-controlling interests on the Company’s consolidated balance sheets and amounted to $40.8 million as of September 30, 2017. defined.
Total contributions to the Joint Venture amounted to $53.8 million through September 30, 20172019 and were used to purchase $51.8 million of MCC shares on the open market and seed fund $2.0 million to STRF. During the three months and nine months ended September 30, 2017, net2019, income allocated to this non-controlling interest was $0.9 million and $1.8 million, respectively. For$1.7 million. During the nine months ended September 30, 2017, there was no other comprehensive income as a result of changes in the fair value of MCC shares2019, losses allocated to this non-controlling interest.

Medley LLC
Notesinterest was $0.3 million. Distributions paid to Condensed Consolidated Financial Statements (unaudited)


Distributions paidthis non-controlling interest during the three and nine months endedending September 30, 20172019 were $0.5$0.8 million and $1.4$2.4 million, respectively.
In October 2016,2019, the Joint Venture did not make the 8% preferred distribution resulting in a Put Option Trigger Event. On October 22, 2019, Medley LLC, Medley Seed Funding I LLC (“Seed Funding I”), Medley Seed Funding II LLC (“Seed Funding II”), and Medley Seed Funding III LLC (“Seed Funding III”) received notice from DB Med Investors that they exercised their put option rights under the amended Master Investment Agreement (the “Agreement”). In connection with the exercise of DB Med Investors put option right, the Company executed an operating agreement for STRF Advisors LLC which providedreclassified the Company with the right to redeem membership units owned by theJoint Venture's minority interest holder. The Company’s redemption right is triggered by the termination of the dealer manager agreement between STRF and SC Distributors LLC, an affiliate of the minority interest holder. As a result of this redemption feature, the non-controlling interest in STRF Advisors LLC is classified as inbalance from redeemable non-controlling interests in the mezzanine section of theits consolidated balance sheet. During the threesheet to due to DB Med Investors (Note 11), a component of accounts payable, accrued expenses and nine months ended September 30, 2017, net losses allocated toother liabilities, at its then fair value. As a result of this reclassification, there was no redeemable non-controlling interest was $0.1 million and $0.2 million, respectively. As of September 30, 2017, the balance of the redeemable non-controlling interest in STRF Advisors LLC was $(0.2) million.at December 31, 2019 or periods ended thereafter.
14.17. MARKET AND OTHER RISK FACTORS
Due to the nature of the Medley funds’ investment strategy, their portfolio of investments has significant market and credit risk. As a result, the Company is subject to market and other risk factors, including, but not limited to the following:
COVID-19
On March 11, 2020, the World Health Organization declared the spread of COVID-19 a pandemic. In response, on March 27, 2020 the President of the United States signed the Coronavirus Aid, Relief, and Economic Security (CARES) Act into law and

F- 30

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)


the United States Congress continues to discuss additional stimulus measures. Several governments in jurisdictions that encompass the Company’s offices and operations have implemented extended strict social distancing measures. In response, the Company has implemented remote work arrangements for virtually all of its employees and restricted business travel. These arrangements have not materially affected our ability to maintain and conduct our business operations, including the operation of financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. While the COVID-19 pandemic has adversely affected the global economy, the nature and extent of COVID-19’s effect on the Company’s operational and financial performance will depend on future developments, including the course of the pandemic, the success of governments in relaxing social distancing measures and restarting economic activity, the efficacy of monetary and fiscal measures taken or that may be taken in the future, and the potential for structural damage to the economy due to the sharp drop in aggregate demand and, particularly in the U.S., a high level of unemployment, all of which are uncertain and difficult to predict considering the rapidly evolving landscape.
Market Risk
The market price of investments may significantly fluctuate during the period of investment. Investments may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of an investment may decline due to general market conditions that are not specifically related to such investment, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. 
Credit Risk
There are no restrictions on the credit quality of the investments the Company intends to make. Investments may be deemed by nationally recognized rating agencies to have substantial vulnerability to default in payment of interest and/or principal. Some investments may have low-quality ratings or be unrated. Lower rated and unrated investments have major risk exposure to adverse conditions and are considered to be predominantly speculative. Generally, such investments offer a higher return potential than higher rated investments, but involve greater volatility of price and greater risk of loss of income and principal.
In general, the ratings of nationally recognized rating organizations represent the opinions of agencies as to the quality of the securities they rate. Such ratings, however, are relative and subjective; they are not absolute standards of quality and do not evaluate the market value risk of the relevant securities. It is also possible that a rating agency might not change its rating of a particular issue on a timely basis to reflect subsequent events. The Company may use these ratings as initial criteria for the selection of portfolio assets for the Company but is not required to utilize them.
Limited Liquidity of Investments
The funds managed by the Company invest and intend to continue to invest in investments that may not be readily marketable. Illiquid investments may trade at a discount from comparable, more liquid investments and, at times there may be no market at all for such investments. Subordinate investments may be less marketable, or in some instances illiquid, because of the absence of registration under federal securities laws, contractual restrictions on transfer, the small size of the market or the small size of the issue (relative to issues of comparable interests). As a result, the funds managed by the Company may encounter difficulty in selling its investments or may, if required to liquidate investments to satisfy redemption requests of its investors or debt service obligations, be compelled to sell such investments at less than fair value. 
Counterparty Risk
Some of the markets in which the Company, on behalf of its underlying funds, may affect its transactions are “over-the-counter” or “interdealer” markets. The participants in such markets are typically not subject to credit evaluation and regulatory oversight, unlike members of exchange-based markets. This exposes the Company to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the applicable contract (whether or not such dispute is bona fide) or because of a credit or liquidity problem, causing the Company to suffer loss. Such “counterparty risk” is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the Company has concentrated its transactions with a single or small group of counterparties. 

Medley LLC
Notes to Condensed Consolidated Financial Statements (unaudited)


15.18. SUBSEQUENT EVENTS
Management has evaluated subsequent events through the date of issuance of thethese condensed consolidated financial statements included herein. There have been no subsequent events that occurred during such period that would require disclosure in this Form 10-Q, other than those events disclosed elsewhere in the condensed consolidated financial statements, or would be required to be recognized in the condensed consolidated financial statements as of and for the nine months ended September 30, 2017.2020.

F- 31

Medley LLC
Notes to Condensed Consolidated Financial Statements
(Unaudited)






F- 32



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Form 10-Q and our financial statements included in our Annual Report on Form 10-K. 10-K for the fiscal year ended December 31, 2019.
.


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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 the U.S. that have revenues between $50 million and $1 billion. We generally hold these loans to maturity. Our national direct origination franchise with over 85 people, provides capital to the middle market in the U.S. Over the past 1518 years, we have provided capital to over 380400 companies across 35 industries in North America.
We manage threetwo permanent capital vehicles, two of which are BDCs, and one interval fund, as well as long-dated private funds and SMAs, focusing on senior secured credit.
Permanent capital vehicles: MCC and SIC have a total AUM of $1.1 billion as of September 30, 2020.
Long-dated private funds and SMAs: MOF II, MOF III, MOF III Offshore, MCOF, Aspect, Aspect B, MCC JV, SIC JV and SMAs, have a total AUM of $2.3 billion as of September 30, 2020.
As of September 30, 2017,2020, we had $5.3$3.4 billion of AUM, $2.4$1.1 billion in permanent capital vehicles and $2.9$2.3 billion in long-dated private funds and SMAs. Our year over year AUM growth as of September 30, 2017 was 6% and2020 declined by 20% year-over-year, which was driven primarily by distributions and changes in large part by the growth of our long-dated private funds and SMAs.fund values. Our compounded annual AUM growth rate from December 31, 2010 through September 30, 20172020 was 28%13% and our compounded annual Fee Earning AUM growth rate was 20%6%, both of which have been driven in large part by the growth in our permanent capital vehicles. As of September 30, 2017,2020, we had $3.2$1.7 billion of Fee Earning AUM $2.2which consisted of $1.0 billion in permanent capital vehicles and $1.0$0.7 billion in long-dated private funds and SMAs. Our Fee Earning AUM as of September 30, 2020 declined by 28% year-over-year which was driven primarily by changes in fund values and capital reductions resulting from debt repayments and distributions. 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 our Annual Report on Form 10-K.10-K for the year ended December 31, 2019.
Direct origination, careful 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, such as the turmoil in the global capital markets from 2007 to 2009.conditions. Since our inception in 2006, we have adhered 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 directly originate, 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.
Our senior management team has, on average, over 20 years of experience in credit, including originating, underwriting, principal investing and loan structuring. We have made significant investments in our corporate infrastructure and have over 85 employees, including over 45 investment, origination and credit management professionals, and over 40 operations, accounting, legal, compliance and marketing professionals, each with extensive experience in their respective disciplines.
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 vehicles 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 also paid quarterly in cash.
We also may earn carried interest from our long-dated funds and contractual performance fees from our long-dated private funds and SMAs. Typically, these performance fees are 15.0% to 20.0% of the total return above a hurdle rate. These performanceCarried 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 vehicles 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 (i) the sum of cumulative realized capital losses and unrealized capital depreciation from (ii) 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 three and nine months ended September 30, 2017, 87.9%,2020, 75% and 85.1%80%, respectively, of our revenues were generated from management fees and performance fees derived primarily from net interest income on senior secured loans.fees.
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. Performance fee compensation is related to performance fees, generally consisting of incentive allocations in our long-dated private funds that we grant to certain of our professionals. General and administrative expenses include costs primarily related to professional services, office rent and


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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, and, in 2016, expense support agreement expenses related to SIC.items.
Registered Public Offering of Medley LLC Notes
On August 9, 2016, Medley LLC completed a registered public offering of $25.0 million of an aggregate principal amount of $25.0 million of 6.875% senior notes due 2026 (the "2026 Notes") at a public offering price of 100% of the principal amount. On October 18, 2016, Medley LLC completed a public offering of an additional $28.6 million in aggregate principal amount of 2026 Notes at a public offering price of $24.45 for each $25.00 principal amount of notes. The notes mature on August 15, 2026 and interest is payable quarterly. The notes will be redeemable in whole or in part at our option on or after August 15, 2019 at a redemption price of 100% of the aggregate principal amount plus accrued and unpaid interest payments. We used the net proceeds from the offering to repay a portion of the outstanding indebtedness under the Company's Term Loan Facility. The 2026 Notes are listed on the New York Stock Exchange and tradestrade thereon under the trading symbol “MDLX.”
On January 18, 2017, Medley LLC completed a registered public offering of $34.5 million of an aggregate principal amount of $34.5 million of 7.25% senior notes due 2024 (the “2024 Notes”) at a public offering price of 100% of the principal amount. On February 22, 2017, Medley LLC completed a public offering of an additional $34.5 million in aggregate principal amount of 2024 Notes at a public offering price of $25.25 for each $25.00 principal amount of notes. The 2024 Notes mature on January 30, 2024 and interest is payable quarterly commencing on April 30, 2017. The notes will be redeemable in whole or in part at our option on or after January 30, 2020 at a redemption price of 100% of the aggregate principal amount plus accrued and unpaid interest payment.payments. We used the net proceeds from the offering to repay the remaining outstanding indebtedness under the Term Loan FacilityFacility.
Reorganization and for general corporate purposes. The 2024 Notes are listed on the New York Stock Exchange and trade thereon under the trading symbol “MDLQ.”
Medley LLC ReorganizationInitial Public Offering
In connection with the initial public offeringIPO, Medley Management Inc. issued 100 shares of Class B common stock to Medley Group LLC (“IPO”Medley Group”), an entity wholly owned by the pre-IPO members of Medley LLC. For so long as the pre-IPO members and then-current Medley personnel hold at least 10% of the aggregate number of shares of Class A common stock and LLC Units (excluding those LLC Units held by Medley Management Inc.,) then outstanding, the Class B common stock entitles Medley Group to a number of votes that is equal to 10 times the aggregate number of LLC Units held by all non-managing members of Medley LLC that do not themselves hold shares of Class B common stock and entitle each other holder of Class B common stock, without regard to the number of shares of Class B common stock held by such other holder, to a number of votes that is equal to 10 times the number of membership units held by such holder.
In connection with the IPO, Medley LLC amended and restated its limited liability agreement to modify its capital structure by reclassifying the 23,333,333233,333 interests, adjusted for the reverse split described below, held by the pre-IPO members into a single new class of 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 the exchange agreement, to exchange their LLC Units for shares of Medley Management Inc.’s Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications. In addition, pursuant to the amended and restated limited liability agreement, Medley Management Inc. became the sole managing member of Medley LLC. Medley Management Inc. is controlled by the pre-IPO owners.
The pre-IPO owners who are subject to limited exceptions, prohibited from transferring any LLC Units held by them or any shares of Class A common stock received upon exchange of such LLC Units, until the third anniversary of the date of the closing of the IPO of Medley Management Inc. without the consent of the managing member. Thereafter and prior to the fourth and fifth anniversaries of the closing of the IPO of Medley Management Inc., such holders may not transfer more than 33 1/3% and 66 2/3%, respectively, of the number of LLC Units held by them, together with the number of any shares of Class A common stock received by them upon exchange therefor,therefore, without the consent of the managing member.
Reverse Split of LLC Units
On October 30, 2020, MDLY effected a reverse stock split at a ratio of 1-for-10 of all classes of its common stock.  As a result of the reverse stock split, each ten shares of MDLY's outstanding common stock were combined into one share of the respective class of common stock without any change to the par value per share. In accordance with the organization agreement entered into by MDLY and Medley LLC in connection with the IPO of MDLY, our LLC Units were also adjusted at a ratio of 1-for-10 simultaneously with the reverse stock split of MDLY common stock.
As a result of this reverse stock split, all references in these report on Form 10-Q to MDLY common share amounts and the our LLC Units reflect the effect of the reverse stock split.
Our Structure
Medley LLC is a partially owned subsidiary of Medley Management Inc., a holding company whose sole material asset is its a controlling equity interest in Medley LLC. Medley Management Inc. operates and controls all of the business and affairs and consolidates the financial results of Medley LLC and its subsidiaries. Medley Management Inc. owns 100% of the voting interests in Medley LLC and 18.67%19.2% of the issued and outstanding LLC Units of Medley LLC. The remaining LLC Units (81.33%(80.8%) are held


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by Brook Taube, Seth Taube and other members of senior management ("Senior Management Owners"). The LLC Units do not have voting rights. Medley Management Inc. and the Senior Management Owners have also entered into an exchange agreement under which the Senior Management Owners (or certain permitted transferees) have the right (subject to the terms of the exchange agreement), to exchange their equity interest in Medley LLC for shares of Medley Management Inc.'s Class A common stock on a one-for-one basis, subject to customary conversion rate adjustments for stock splits, stock dividends and reclassifications.


Medley Group LLC, an entity wholly-owned by the pre-IPO owners, holds all 10010 issued and outstanding shares of Medley Management Inc.'s Class B common stock. For so long as the 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 by Medley Management Inc.), which we refer to as the “Substantial Ownership Requirement,” the Class B common stock entitles Medley 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 of Medley LLC that do not themselves hold shares of Class B common stock and entitle each other holder of Class B common stock, without regard to the number of shares of Class B common stock held by such other holder, to a number of votes that is equal to 10 times the number of LLC Units held by such holder. For purposes of calculating the Substantial Ownership Requirement, (1) shares of Class A common stock deliverable to ourthe pre-IPO owners and then-current Medley personnel pursuant to outstanding equity awards will be deemed then outstanding and (2) 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 entitle Medley 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 of Medley LLC that do not themselves hold shares of Class B common stock and entitle each other holder of Class B common stock, without regard to the number of shares of Class B common stock held by such other holder, to a number of votes that is equal to the number of LLC Units held by such holder. At the completion of ourthe IPO ourof Medley Management Inc., the pre-IPO owners were comprised of all of the non-managing members of Medley 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 ourMedley Management Inc. 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.
Holders of equity interestsinterest in Medley LLC (other than Medley Management Inc.),Inc) are, subject to limited exceptions, prohibited from transferring any LLC Units held by them as of September 23, 2014 (the date of consummation of the IPO of Medley Management Inc.), or any shares of Medley Management Inc.'s Class A common stock received upon exchange of such LLC Units, until September 23, 2017, without Medley Management Inc.'s consent. Thereafter and prior to September 23, 2018 and September 23, 2019, such holders may not transfer more than 33 1/3% and 66 2/3%, respectively, of the number of any shares of Medley LLC's equity interestsinterest held by them as of September 23, 2014 (the date of consummation of the IPO of Medley Management Inc.)'s IPO), together with the number of any shares of Medley managementManagement Inc.'s Class A common stock received by them upon exchange therefor, without our consent.the consent of Medley Management Inc. While this agreement could be amended or waived by Medley Management Inc., the holders of the equity interests in Medley LLC (other than Medley Management Inc.) have advised us that they do not intend to seek any waivers of these restrictions.



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The diagram below depicts our organizational structure (excluding those operating subsidiaries with no material operations or assets) as of October 31, 2017:November 12, 2020:
orgcharta06.jpgorgch201908025a01.jpg
(1)The Class B common stock provides Medley Group LLC with a number of votes that is equal to 10 times the aggregate number of LLC Units held by all non-managing members of Medley LLC. From and after the time that the Substantial Ownership Requirement is no longer satisfied, the Class B common stock will provide Medley Group LLC with a number of votes that is equal to the aggregate number of LLC Units held by all non-managing members of Medley LLC that do not themselves hold shares of Class B common stock.
(2)If our pre-IPO owners exchanged all of their vested and unvested LLC Units for shares of Class A common stock, they would hold 81.3%80.8% of the outstanding shares of Class A common stock, entitling them to an equivalent percentage of economic interests and voting power in Medley Management Inc., Medley Group LLC would hold no voting power or economic interests in Medley Management Inc. and Medley Management Inc. would hold 100% of outstanding LLC Units and 100% of the voting power in Medley LLC.
(3)Strategic Capital Advisory Services,Medley LLC owns 20% of SIC Advisors LLC and is entitled to receive distributions of up to 20%holds 96.5% of the gross cash proceeds received by SIC Advisors LLC from the management and incentive fees payable by Sierra Income Corporation to SIC Advisors LLC, net of certain expenses, as well as 20% of the returns of the investments held at SIC AdvisorsClass B economic interests in Medley (Aspect) Management LLC.
(4)Medley LLC holds 96.5%95.5% of the Class B economic interests in each of MCOF Management LLC, and Medley (Aspect) Management LLC.
(5)Medley LLC holds 100% of the outstanding Common Interest, and DB Med Investor I LLC holds 100% of the outstanding Preferred Interest in each of Medley Seed Funding I LLC and Medley Seed Funding II LLC.


(6)Medley Seed Funding III LLC holds 100% of the Senior Preferred Interest, Strategic Capital Advisory Services, LLC holds 100% of the Junior Preferred Interest and Medley LLC holds 100% of the Common Interest in STRF Advisors LLC.
(7)Medley LLC holds 100% of the outstanding Common Interest, and DB MED Investor II LLC holds 100% of the outstanding Preferred Interest in Medley Seed Funding III LLC.
(8)Medley GP Holdings LLC holds 96.5%95.5% of the Class B economic interests in each of MCOF GP LLC, and Medley (Aspect) GP LLC.
(9)(6)Certain employees, former employees and former members of Medley LLC hold approximately 40%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 performance feescarried interest earned from MOF II.
(7)Medley GP Holdings LLC holds 96.5% of the Class B economic interests in Medley (Aspect) GP LLC.


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(8)Certain employees and former employees of Medley LLC hold approximately 70.1% of the limited liability company interests in Medley Caddo Investors LLC, entitling the holders to share the carried earned from Caddo Investors Holdings I LLC.
(9)Certain employees and former employees of Medley LLC hold approximately 69.9% of the limited liability company interests in Medley Real D Investors LLC, entitling the holders to share the carried earned from Medley Real D (Annuity) LLC.
(10)Certain employees and former employees of Medley LLC hold approximately 70.2% of the limited liability company interests in Medley Avantor Investors LLC, entitling the holders to share the carried earned from Medley Tactical Opportunities LLC.
(11)Certain employees and former employees of Medley LLC hold approximately 70.1% of the limited liability company interests in Medley Cloverleaf Investors LLC, entitling the holders to share the carried earned from Medley Chiller Holdings LLC.
.
Termination of Agreement and Plan of Merger
On July 29, 2019, we entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MDLY Merger Agreement”), by and among the Company, Sierra Income Corporation (“Sierra”), and Sierra Management, Inc., a wholly owned subsidiary of 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, on July 29, 2019, Medley Capital Corporation (“MCC”) and Sierra entered into the Amended and Restated Agreement and Plan of Merger, dated as of July 29, 2019 (the “Amended MCC Merger Agreement”), by and between MCC and Sierra, pursuant to which MCC would have, on the terms and subject to the conditions set forth in the Amended MCC Merger Agreement, merged with and into Sierra, with Sierra as the surviving company in the merger (the “MCC Merger”).

On May 1, 2020, 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 before March 31, 2020 (the “Outside Date”).

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

In addition, on May 1, 2020, MCC received a notice of termination from Sierra of the Amended MCC Merger Agreement. Under the Amended MCC Merger Agreement, either party may have, subject to certain conditions, terminated the Amended MCC Merger Agreement if the MCC Merger was not consummated by March 31, 2020. Sierra elected to do so on May 1, 2020. Representatives of Sierra informed MCC that in determining to terminate the Amended MCC Merger Agreement, Sierra considered a number of factors, including, among other factors, changes in the relative valuation of MCC and Sierra, the changed circumstances and the unpredictable economic conditions resulting from the global health crisis caused by the COVID-19 pandemic, and the uncertainty regarding the parties’ ability to satisfy the conditions to closing the MCC Merger in a timely manner.
Transaction expenses related to the MDLY Merger are included in general, administrative and other expenses and primarily consist of professional fees. Such expenses amounted to $1.0 million and $2.1 million for the three months ended September 30, 2020 and 2019, respectively, and $3.5 million for each of the nine months ended September 30, 2020 and 2019.
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 the U.S.
During the firstthree and nine months of 2017,ended September 30, 2020, the domestic economycredit and equity markets exhibited continued growth, and key financial market indicators generated positive readings. Coincident with improving economic growth, LIBOR rates have increased, while credit spreads have tightened.significant volatility, primarily due to the impact of COVID-19. Across the lending spectrum, year over year loan issuance has increased,issuances decreased, driven primarily by several factors, including robustreduced merger and acquisition activity as well as significant refinance activity. Ourand increased volatility and uncertainty due to impacts from COVID-19. As our platform provides us the ability to lend across the capital structure and at varying interest rates, providing our firm may have access to a larger borrower subset over time.during periods of heightened volatility.


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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 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 increasing importance of directly originated private credit investment strategies for institutional investors; (ii) increasing 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) de-leveraging 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 permanent capital vehicles 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, provideswhile uncertain, will ultimately provide attractive investment opportunities. Our ability to identify attractive investments and execute on those investments is dependent on a number of factors, including the general macroeconomic environment, valuation, size and the liquidity of theseavailable in our investment opportunities.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 believeexpect defined contribution plans, retail investors, public institutional investors, pension funds, endowments, sovereign wealth funds and insurance companies are increasingto maintain or increase exposure to directly originated private credit investment products to seek differentiated returns and current yield. Our permanent capital vehicles 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.
The strength of our investment process, operating platform and client servicing capabilities. Following the most recent2008 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.infrastructure, and we expect this to continue during and post the COVID-19 pandemic. Since inception, we have invested heavily in our investment monitoring systems, compliance and enterprise risk management systems to proactively address investor expectations and the evolving regulatory landscape. 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 vehicles 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. As it relates to MCC, these fees are subject to netting against realized and unrealized losses. We are primarily an asset manager of yield-oriented products and our incentive


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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 vehicles 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. Our long-dated private funds and SMAs may have industry standard carried interest performance fee structures andPerformance fees are typically 15.0% to 20.0% of the total return overcontractual fees which do not represent a 6.0% to 8.0% annualized preferred return. We record these fees on an accrual basis,capital allocation to the extent such amountsgeneral partner or investment manager that are contractually due but not paid, and we present this revenue as a separate line itemearned based on the performance of certain funds, typically our consolidated statements of operations. Theseseparately managed accounts. Performance fees are earned based upon fund performance during the period, subject to repayment (clawback).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 our Annual Report on Form 10-K.
Generally, if at10-K for the termination of a fund (and sometimes at interim points in the life of a fund), the fund has not achieved investment returns that (in most cases) exceed the preferred return threshold or (in all cases) the general partner receives net profits over the life of the fund in excess of its allocable share under the applicable partnership agreement, we will be obligated to repay an amount equal to the extent to which carried interest that was previously distributed to us exceeds the amounts to which we are ultimately entitled. Medley has not received any distributions of performance fees through September 30, 2017, other than tax distributions, a portion of which are subject to clawback. As of September 30, 2017, we accrued $7.2 million for clawback obligations that would need to be paid if the funds were liquidated at fair value at the end of the reporting period. Our actual obligation, however, would not become payable or realized until the end of a fund’s life.
For any given period, performance fee revenue on our consolidated statements of operations may include reversals of previously recognized performance fees due to a decrease in the value of a particular fund that results in a decrease of cumulative performance fees earned to date. Since fund return hurdles are cumulative, previously recognized fees also may be reversed in a period of appreciation that is lower than the particular fund's hurdle rate. During the three monthsyear ended September 30, 2017, we reversed $0.4 million of previously recognized performance fees. During the nine months ended September 30, 2017, we reversed $2.7 million of previously recognized performance fees. Cumulative performance fee revenue recognized as of September 30, 2017, was $5.2 million.
Part II Incentive FeesDecember 31, 2019.. For our permanent capital vehicles 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.
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. TheseWe 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.
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 reportedreflected as carried interest within total revenuesinvestment 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 our unaudited condensed consolidated financial statements includedthe 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 Form 10-Q.regard and, for a given fund, carried interest can never be negative over the life of a fund. If upon a hypothetical liquidation of a fund’s investments, at their then current fair values, previously recognized and distributed carried interest would be required to be returned, a liability is established for the potential clawback obligation. During the three and nine months ended September 30, 2020, the Company received carried interest distributions of $0.1 million and $0.2 million, respectively. Prior to these distributions, the Company received a carried interest distribution of $0.3 million from one of its managed funds, which had been fully liquidated as of December 31, 2019. In addition to the receipt of these distributions, the Company has also received tax distributions related to the Company’s allocation of net income, which included an allocation of carried interest. Pursuant to the organizational documents of each respective fund, a portion of these tax distributions may be subject to clawback. As of September 30, 2020 and December 31, 2019, the Company had accrued $7.2 million for clawback obligations that would need to be paid if the funds were liquidated at fair value as of the end of the reporting period. The Company’s actual obligation, however, would not become payable or realized until the end of a fund’s life.


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 by Medley LLC together with other persons. See “Critical Accounting Policies” and Note 2, “Summary of Significant Accounting Policies,” to our unaudited condensed consolidated financial statements included in this Form 10-Q for additional information regarding the manner in which management fees, performance fees, carried interest, investment income and other fees are generated.recognized.


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Expenses
Compensation and Benefits. Compensation and benefits consists primarily of salaries, discretionary bonuses and benefits paid and payable to our employees. Compensation also includesemployees, 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 of Medley 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. Such maximums aggregated to $0.6$0.8 million and $1.3 million for each of the Co-Chief Executive Offices for each of the three months ended September 30, 20172020 and 20162019, respectively, and $1.9$2.2 million for each ofand $3.8 million during the nine months ended September 30, 20172020 and 2016.2019, respectively. During the three and nine months ended September 30, 20172020 our Co-Chief Executive Officers received an aggregate of $0.2 million and 2016, neither$0.8 million, respectively, of guaranteed payments. Neither of our Co-Chief Executive Officers received any guaranteed payments.
Performance Fee Compensation. Performance fee compensation includes compensation related to performance fees, which generally consists of profit interests that we grant to our employees. Depending onpayments during the nature of each fund, the performance fee participation is generally structured as a fixed percentage or as an annual award. The liability is recorded subject to the vesting of the profit interests grantedthree and is calculated based upon the net present value of the projected performance fees to be received. Payments to profit interest holders are payable when the performance fees are paid to Medley LLC by the respective fund. It is possible that we may record performance fee compensation during a period in which we do not record any performance fee revenue or we have a reversal of previously recognized performance fee revenue.nine months ended September 30, 2019.
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 and, in 2016, SIC expenses under an expense support and reimbursement agreement.items.
Other Income (Expense)
Dividend Income. Dividend income consists of dividends associated with our investmentsinvestment in SIC and, prior to December 31, 2019, our investment in shares of MCC. Dividends are recognized on an accrual basis to the extent that such amounts are declared and expected to be collected.
Interest Expense. Interest expense consists primarily of interest expense relating to debt incurred by us.
Other Income (Expenses),(Income) Expenses, Net. Other income (expenses), net consists primarily of expenses associated with our revenue share payable equity income (loss) and, prior to December 31, 2019, unrealized gains (losses) associated withfrom our equity method investments.investment in shares of MCC.
Provision for (Benefit from) Income Taxes. We are treated as a partnership for income tax purposes and are therefore not subject to U.S. federal, state and local corporate income taxes. We areThe Company is subject to New York City’sCity unincorporated business tax attributable to taxable income allocatedallocable to New York City.
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 in Medley LLC. Net income (loss) attributable to non-controlling interests in Medley LLC represents the ownership interests that non-managing members’ hold in Medley 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 MCC and SIC, both of which are BDCs. The capital managed by MCC and SIC is permanently committed to these funds and cannot be redeemed by investors.


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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 and Core EBITDA 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 comparable U.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 with U.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 with U.S. GAAP, see "Reconciliation of Certain Non-GAAP Performance Measures to Consolidated U.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.the IPO of Medley Ma. It is calculated by adjusting net income (loss) attributable to Medley 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 the IPO of Medley Management Inc.,'s 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.
Key Performance Indicators
When we review our performance we focus on the indicators described below:
For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,
For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,2020 2019 2020 2019
2017 2016 2017 2016       
(Amounts in thousands, except AUM, share and per share amounts)(dollars in thousands, except AUM, share and per share amounts)
Consolidated Financial Data: 
  
    
 
  
    
Net income attributable to Medley LLC$3,022
 $693
 $10,949
 $2,216
Net loss attributable to Medley LLC$(1,965) $(3,472) $(17,099) $(5,058)
              
Non-GAAP Data: 
  
    
 
  
    
Core Net Income$4,348
 $7,027
 $14,429
 $20,778
Core Net Income (Loss)$(1,022) $(998) $(11,542) $526
Core EBITDA$7,592
 $9,819
 $23,737
 $28,638
$1,675
 $2,123
 $(3,259) $9,830
              
Other Data (at period end, in millions): 
  
    
 
  
    
AUM$5,296
 $5,011
 $5,296
 $5,011
$3,408
 $4,271
 $3,408
 $4,271
Fee Earning AUM$3,241
 $3,111
 $3,241
 $3,111
$1,670
 $2,320
 $1,670
 $2,320
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 table below provides the roll forward of AUM for the three months endedending September 30, 2017. 2020.
      % of AUM      % of AUM
Permanent
Capital
Vehicles
 
Long-dated
Private Funds
and SMAs
 Total 
Permanent
Capital
Vehicles
 
Long-dated
Private Funds
and SMAs
Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs		 Total Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs
(Dollars in millions)             
Beginning balance, June 30, 2017$2,497
 $2,941
 $5,438
 46% 54%
(Dollars in millions)    
Ending balance, June 30, 2020$1,156
 $2,439
 $3,595
 32% 68%
Commitments (1)
(72) 1
 (71)  
  
—
 —
 —
    
Capital reduction (2)
—
 —
 —
  
  
Capital reductions (2)
(66) (113) (179)    
Distributions (3)
(24) (26) (50)  
  
—
 (18) (18)    
Change in fund value (4)
(8) (13) (21)  
  
25
 (15) 10
    
Ending balance, September 30, 2017$2,393
 $2,903
 $5,296
 45% 55%
Ending balance, September 30, 2020$1,115
 $2,293
 $3,408
 33% 67%
(1) 
With respect to permanent capital vehicles, represents a decreasedecreases during the period for debt repayments offset, in leveragepart, by equity and increases through equity as well as any changes in available undrawn borrowings or capital commitments, subject to restrictions.debt offerings. With respect to long-dated private funds and SMAs, represents new commitments or gross inflows, respectively, 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 $187.0 million to $5.3$3.4 billion as of September 30, 20172020 compared to $5.4 billion of AUM as of June 30, 2017.2020. Our permanent capital vehicles decreased $104.0AUM by $41.0 million as of September 30, 2017, primarily due to a reduction in commitments, reduction of debt2020 and distributions. Ourour long-dated private funds and SMAs decreased AUM by $38.0$146.0 million primarily due to distributions as some of our vehicles are no longerSeptember 30, 2020 in their investment period.each case as compared with June 30, 2020.
The table below provides the roll forward of AUM for the nine months endedending September 30, 2017. 2020.
      % of AUM      % of AUM
Permanent
Capital
Vehicles
 
Long-dated
Private Funds
and SMAs
 Total 
Permanent
Capital
Vehicles
 
Long-dated
Private Funds
and SMAs
Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs		 Total Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs
(Dollars in millions)             
Beginning balance, December 31, 2016$2,527
 $2,808
 $5,335
 47% 53%
(Dollars in millions)    
Ending balance, December 31, 2019$1,548
 $2,574
 $4,122
 38% 62%
Commitments (1)
(12) 240
 228
  
  
(33) (12) (45)    
Capital reduction (2)
(44) —
 (44)  
  
Capital reductions (2)
(234) (164) (398)    
Distributions (3)
(76) (133) (209)  
  
(21) (66) (87)    
Change in fund value (4)
(2) (12) (14)  
  
(145) (39) (184)    
Ending balance, September 30, 2017$2,393
 $2,903
 $5,296
 45% 55%
Ending balance, September 30, 2020$1,115
 $2,293
 $3,408
 33% 67%
(1) 
With respect to permanent capital vehicles, represents a decreasedecreases during the period for debt repayments offset, in leveragepart, by equity and increases through equity as well as any changes in available undrawn borrowings or capital commitments, subject to restrictions.debt offerings. With respect to long-dated private funds and SMAs, represents new commitments or gross inflows, respectively, 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 was $5.3decreased by $714.0 million to $3.4 billion as of September 30, 20172020 compared to $5.3 billion of AUM as of December 31, 2016.2019. Our permanent capital vehicles decreased AUM by $134.0$433.0 million as of September 30, 2017, primarily due to a reduction of debt2020 and distributions. Our


our long-dated private funds and SMAs increaseddecreased AUM by $95.0$281.0 million or 3%, primarily associatedas of September 30, 2020 in each case as compared with new debt commitments, partly offset by distributions as some of our vehicles are no longer in the investment period.December 31, 2019.


11




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);
for certain funds within the investment period in the 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 thetheir investment period and certain managed accounts within their investment period, the amount of limited partner invested capital, or 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
As ofSeptember 30, 2020 December 31, 2019
September 30, 2017 December 31, 2016   
(Amounts in millions)(in millions)
Fee earning AUM based on gross asset value$2,191
 $2,207
$995
 $1,361
Fee earning AUM based on capital commitments126
 113
Fee earning AUM based on invested capital or NAV924
 870
Fee earning AUM based on invested capital, NAV or capital commitments675
 777
Total fee earning AUM$3,241
 $3,190
$1,670
 $2,138
As of September 30, 2017,2020, fee earning AUM based on gross asset value decreased by $16.0$366 million, compared to December 31, 2016.2019. The decrease in fee earning AUM based on gross asset value was due primarily to an decreasechanges in equity raised as well as distributions.fund value, distributions and debt repayments representing capital reductions.
As of September 30, 2017, fee earning AUM based on capital commitments increased $13.0 million compared to December 31, 2016. The increase in fee earning AUM based on capital commitments was due to additional capital raised in one of our funds.
As of September 30, 2017, feeFee earning AUM based on invested capital, NAV or NAV increasedcapital commitments as of September 30, 2020 decreased by $54.0$102 million or 6%, compared to December 31, 2016.2019. The increase in fee earning AUM based on invested capital or NAVdecrease was primarily due primarily to capital deployment from our long-dated private funds and SMAs, partially offset by distributions of income andthe return of portfolio investment capital by our long-dated private funds and SMAs as some of our vehicles are no longer into the investment period.respective funds.


The table below presents the roll forward of fee earning AUM for the three months endedending September 30, 2017. 2020.
       % of Fee Earning AUM
 Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs		 Total Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs
 (Dollars in millions)    
Beginning balance, June 30, 2017$2,259
 $1,020
 $3,279
 69% 31%
Commitments (1)
(37) 74
 37
  
  
Capital reduction (2)
—
 —
 —
  
  
Distributions (3)
(23) (36) (59)  
  
Change in fund value (4)
(8) (8) (16)  
  
Ending balance, September 30, 2017$2,191
 $1,050
 $3,241
 68% 32%
(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.
(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 $38.0 million, or 1% to $3.2 billion as of September 30, 2017 compared to total fee earning AUM of $3.3 billion as of June 30, 2017, due primarily to distributions from permanent capital vehicles and private funds and SMAs partly offset by capital deployment by our private funds and SMAs.
       % of Fee Earning AUM
 Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs		 Total Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs
          
 (Dollars in millions)    
Ending balance, June 30, 2020$983
 $674
 $1,657
 59% 41%
Commitments (1)
—
 25
 25
    
Capital reduction(2)
(14) —
 (14)    
Distributions (3)
—
 (14) (14)    
Change in fund value (4)
26
 (10) 16
    
Ending balance, September 30, 2020$995
 $675
 $1,670
 60% 40%
The table below presents the roll forward of fee earning AUM for the nine months ended September 30, 2017.

12


       % of Fee Earning AUM
 Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs		 Total Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs
 (Dollars in millions)    
Beginning balance, December 31, 2016$2,207
 $983
 $3,190
 69% 31%
Commitments (1)
60
 231
 291
  
  
Capital reduction (2)
—
 —
 —
  
  
Distributions (3)
(74) (147) (221)  
  
Change in fund value (4)
(2) (17) (19)  
  
Ending balance, September 30, 2017$2,191
 $1,050
 $3,241
 68% 32%

(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.
(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 increased by $51.0$13 million or 2%, to $3.2$1.7 billion as of September 30, 20172020 compared to totalJune 30, 2020, due primarily to permanent reductions in leverage during the period.

The table below presents the roll forward of fee earning AUM of $3.2for the nine months ending September 30, 2020.
       % of Fee Earning AUM
 Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs		 Total Permanent
Capital
Vehicles		 Long-dated
Private Funds
and SMAs
          
 (Dollars in millions)    
Ending balance, December 31, 2019$1,361
 $777
 $2,138
 64% 36%
Commitments (1)
(91) 59
 (32)    
Capital reduction(2)
(106) —
 (106)    
Distributions (3)
(21) (90) (111)    
Change in fund value (4)
(148) (71) (219)    
Ending balance, September 30, 2020$995
 $675
 $1,670
 60% 40%
(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.
(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 $468 million, or 22%, to $1.7 billion as of September 30, 2020 compared to December 31, 2016,2019, due primarily to distributions, debt repayments representing capital deployment by our private fundsreductions and SMAs, partly offset by distributions from all permanent capital vehicles and private funds and SMAs.changes in fund value.


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, in April 2012. SIC primarily focuses on direct lending to middle market borrowers in the U.S.United States. Since inception, we have provided capital for a total of 332461 investments and have invested a total of $2.0$2.6 billion. As of September 30, 2017,2020, fee earning AUM was $1.2 billion.$689 million. The performance for SIC as of September 30, 20172020 is summarized below: 
Annualized Net Total Return(1):
6.21.0%
Annualized Realized Losses on Invested Capital:Capital0.81.6%
Average Recovery(3):
74.156.0%
 


13



Medley Capital Corporation (MCC)
We launched MCC, our first permanent capital vehicle in January 2011. MCC primarily focuses on direct lending to private middle market borrowers in the U.S.United States. Since inception, we have provided capital for a total of 200258 investments and have invested a total of $2.1$2.2 billion. As of September 30, 2017, excluding Medley SBIC LP,2020, fee earning AUM was $720$306 million. The performance for MCC as of September 30, 20172020 is summarized below:
Annualized Net Total Return(2):
6.9(5.8)%
Annualized Realized Losses on Invested Capital:Capital2.03.3%
Average Recovery(3):
45.035.0%
Medley SBIC LP (Medley SBIC)
We launched Medley SBIC in March 2013 as a wholly owned subsidiary of MCC. Medley SBIC lends to smaller middle market private borrowers that we otherwise would not target in our other funds, due primarily to size. Since inception, we have provided capital for a total of 41 investments and have invested a total of $407 million. As of September 30, 2017, fee earning AUM was $240 million. The performance for Medley SBIC fund as of September 30, 2017 is summarized below: 
Gross Portfolio Internal Rate of Return(4):
12.9%
Net Investor Internal Rate of Return(5):
15.5%
Annualized Realized Losses on Invested Capital:—%
Average Recovery:N/A
Medley Opportunity Fund II LP (MOF II)
MOF II is a long-dated private investment fund that we launched in December 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 7387 investments and have invested a total of $911$979 million. As of September 30, 2017,2020, fee earning AUM was $366$81 million. MOF II is currently fully invested and actively managing its assets. The performance for MOF II as of September 30, 2017,2020 is summarized below:
Gross Portfolio Internal Rate of Return(4):
12.05.1%
Net Investor Internal Rate of Return(6)(5):
6.41.2%
Annualized Realized Losses on Invested Capital:1.73.2%
Average Recovery(3):
NM38.8
%
Medley Opportunity Fund III LP (MOF III)
MOF III is a long-dated private investment fund that we launched in December 2014. MOF III lends to middle market private borrowers in the U.S., with a focus on providing senior secured loans. Since inception, we have provided capital for a total of 3554 investments and have invested a total of $156$219 million. As of September 30, 2017,2020, fee earning AUM was $113$61 million. The performance for MOF III as of September 30, 20172020 is summarized below: 


Gross Portfolio Internal Rate of Return(4):
11.78.6%
Net Investor Internal Rate of Return(5):
4.8%
Annualized Realized Losses on Invested Capital:0.4%
Average Recovery3:
41.6
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 of Medley LLC serve as the investment adviser for our SMAs. Since inception, we have provided capital for a total of 251 investments and have invested a total of $1.3 billion. As of September 30, 2020, fee earning AUM in our SMAs was $429 million. The aggregate performance of our SMAs as of September 30, 2020 is summarized below:
Gross Portfolio Internal Rate of Return(4):
6.3%
Net Investor Internal Rate of Return(6):
5.85.1%
Annualized Realized Losses on Invested Capital:—1.1%
Average Recovery:Recovery(3):
N/A32.5
%
Other Long-Dated Private Funds and Permanent Capital Vehicles
We launched STRF, a public non-traded permanent capital vehicle, in June 2017. TheMedley Opportunity Fund seeks to provide a total return through a combination of current income and long-term capital appreciation by investing in a portfolio of debt securities and fixed-income related equity securities.
We launched Offshore III LP (“MOF III OffshoreOffshore”) in May 2017. MOF III Offshore invests in senior secured loans made to middle market private borrowers in the US.

We launched AspectAspect-Medley Investment Platform A LP (“Aspect”) in November 2016 and Aspect-Medley Investment Platform B LP (“Aspect-B”) in May 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.



14



We launched MCOFMedley Credit Opportunity Fund (“MCOF”) in July 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.
The performance of STRF,Aspect, Aspect-B, MCOF and MOF III Offshore Aspect, and MCOF as of September 30, 20172020 is not meaningful given the funds' limited operations and capital invested to date.
Separately Managed Accounts (SMAs)
In the case of our SMAs, the investor, rather than us, may control the assets or investment vehicle that holds or has custody of the related investments. Certain subsidiaries of Medley LLC serve as the investment adviser for our SMAs. Since inception, we have provided capital for a total of 159 investments and have invested a total of $900 million. As of September 30, 2017, fee earning AUM in our SMAs was $499 million. The aggregate performance of our SMAs as of September 30, 2017, is summarized below:
Gross Portfolio Internal Rate of Return(4):
9.9%
Net Investor Internal Rate of Return(7):
7.9%
Annualized Realized Losses on Invested Capital:0.7%
Average Recovery(3):
49.5%

(1) 
Annualized Net Total Return for SIC represents the annualized return assuming an investment at the initial public offering price,SIC’s inception, reinvestments of all dividends and distributions at prices obtained under SIC’s dividend reinvestment plan and selling at the NAV as of the measurement date.no sales charge.
(2) 
AnnualizedAnnual Net Total Return for MCC including Medley SBIC, represents the annualized return assuming an investment at the initial public offering price, reinvestments of all dividends and distributions at prices obtained under MCC's dividend reinvestment plan and selling at NAV as of the measurement date.
(3) 
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. For MOF II, we have presented the Average Recovery as “NM” or “Not Meaningful” because we believe the number of realized losses for each respective vehicle is not sufficient to provide an accurate representation of the expected Average Recovery for each vehicle.
(4) 
For Medley SBIC, MOF II, MOF III, and SMAs, the Gross Portfolio Internal Rate of Return represents the cumulative investment performance from inception of each respective fund through September 30, 2017.2020. The Gross Portfolio Internal Rate of Return includes both 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.


realized at the investment’s most recent fair value, as calculated in accordance with U.S. GAAP. There can be no assurance that the investments will be realized at these fair values and actual results may differ significantly.
(5) 
Earnings from Medley SBIC are paid to MCC. The Net Internal Rate of Return for Medley SBIC was calculated based upon i) the actual cash contribution and distributions to/from MCC and Medley SBIC ii) an allocable portion of MCC’s management and incentive fees and general fund related expenses and iii) assumes the NAV as of the measurement date is distributed to MCC. As of September 30, 2017, Medley SBIC Net Internal Rate of Return as described above assuming only the inclusion of management fees was 19.3%.
(6)
Net Investor 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.
(7)(6) 
Net Investor Internal Rate of Return for our SMAs was calculated using the Gross Portfolio Internal Rate of Return, as described in note 4, and includes the actual management fees, incentive fees and general fund related expenses.


15



Results of Operations
The following table and discussion sets forth information regarding our consolidated results of operations for the three and nine months ended September 30, 20172020 and 2016. The unaudited2019. Our consolidated financial statementsresults of Medleyoperations have been prepared on substantially the same basis for all historical periods presented.
For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,
For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,2020 2019 2020 2019
2017 2016 2017 2016       
(Amounts in thousands, except AUM data)(in thousands, except AUM data)
Revenues 
  
  
  
 
  
  
  
Management fees$14,838
 $15,262
 $41,934
 $50,220
Performance fees(202) 1,446
 (1,846) 1,706
Management fees (there were no Part I incentive fees during the periods presented)$6,275
 $9,607
 $19,807
 $30,728
Other revenues and fees2,016
 2,172
 7,004
 5,851
1,635
 2,621
 6,269
 7,731
Investment income (loss):       
Carried interest(3) (142) 83
 651
Other investment income (loss), net419
 (550) (1,384) (922)
Total Revenues16,652
 18,880
 47,092
 57,777
8,326
 11,536
 24,775
 38,188
              
Expenses 
  
  
  
 
  
  
  
Compensation and benefits6,382
 6,964
 17,881
 21,396
4,040
 7,090
 17,119
 22,069
Performance fee compensation(14) (212) (845) (238)
General, administrative and other expenses3,510
 8,801
 8,932
 25,679
3,599
 5,403
 11,682
 12,763
Total Expenses9,878
 15,553
 25,968
 46,837
7,639
 12,493
 28,801
 34,832
              
Other Income (Expense) 
  
    
 
  
    
Dividend income1,428
 312
 2,896
 755
—
 182
 137
 942
Interest expense(2,718) (2,403) (9,131) (6,593)(2,535) (2,874) (7,950) (8,646)
Other income (expense), net(282) 55
 1,299
 (1,559)
Total Other Expense, Net(1,572) (2,036) (4,936) (7,397)
Income before income taxes5,202
 1,291
 16,188
 3,543
Provision for income taxes263
 160
 530
 221
Net Income4,939
 1,131
 15,658
 3,322
Other (expenses) income, net(167) 1,768
 (5,592) (641)
Total Other Expenses, Net(2,702) (924) (13,405) (8,345)
Loss before income taxes(2,015) (1,881) (17,431) (4,989)
Benefit from income taxes(51) (28) (392) (71)
Net Loss(1,964) (1,853) (17,039) (4,918)
Net income attributable to redeemable non-controlling interests and non-controlling interests in consolidated subsidiaries1,917
 438
 4,709
 1,106
1
 1,619
 60
 140
Net Income Attributable to Medley LLC$3,022
 $693
 $10,949
 $2,216
Net Loss Attributable to Medley LLC.$(1,965) $(3,472) $(17,099) $(5,058)
              
Other data (at period end, in millions):              
AUM$5,296
 $5,011
 $5,296
 $5,011
$3,408
 $4,271
 $3,408
 $4,271
Fee earning AUM$3,241
 $3,111
 $3,241
 $3,111
$1,670
 $2,320
 $1,670
 $2,320



16



Three Months Ended September 30, 20172020 Compared to Three Months Ended September 30, 20162019
Revenues
Management Fees. Total management fees decreased by $0.4$3.3 million, or 3%35%, to $14.8$6.3 million forduring the three months ended September 30, 20172020 as compared to the three months ended September 30, 2016. 2019.
Our management fees from permanent capital vehicles decreased by $0.9$2.5 million, or 39%, during the three months ended September 30, 20172020 as compared to the same period in 2016.2019. The decrease was due primarily to a decline in Part I incentive fees of $1.1 million from SIC, offset in part by an increase inlower base management fees from SIC.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. In addition, in accordance with the Expense Support Agreement we entered into with MCC on June 12, 2020, we recorded expenses of $0.4 million which is being reported as a reduction to management fees for the three months ended September 30, 2020.
Our management fees from long-dated private funds and SMAs increased by $0.5 million for the three months ended September 30, 2017, compared to the same period in 2016. The increase was primarily due to an increase in base management fees across most funds.
Performance Fees. Performance fees decreased by $1.6$1.1 million, to a loss of $0.2 millionor 38%, during the three months ended September 30, 20172020 as compared to $1.4 million for the same period in 2016.2019. The variancedecrease was attributeddue primarily to declineslower base management fees as a result of a decrease in the underlyingfee earning assets under management driven by distributions and changes in fund values of our SMAs.value.
Other Revenues and Fees. Other revenues and fees decreased by $0.2$1.0 million, or 7%38%, to $2.0$1.6 million forduring the three months ended September 30, 20172020 as compared to the same period in 2016.2019. The decrease was due primarily to a decrease in administrativelower administration fees fromfor services provided to our permanent capital vehicles.
Investment Income (Loss). Investment income increased by approximately $1.1 million to net investment income of $0.4 million during the three months ended September 30, 2020 compared to the same period in 2019. The increase was due primarily to income from our equity method investments.
Expenses
Compensation and Benefits. Compensation and benefits expenses decreased by $0.6$3.1 million, or 8%43%, to $6.4$4.0 million for the three months ended September 30, 20172020 as compared to the same period in 2016.2019. The decrease was due primarily to lower discretionary compensation accruals.
Performance Fee Compensation. Performance fee compensation increased by $0.2 million during the three months ended September 30, 2017 as compared same period in 2016. The increase was due primarily to a reversal of performance fee compensation during the three months ended September 30, 2016 due to a decrease in Part I incentive fees recognized from one of our permanent capital vehicles.average employee headcount, stock compensation and a reduction in discretionary bonuses.
General, Administrative and Other Expenses. General, administrative and other expenses decreased by $5.3$1.8 million, or 33%, to $3.5$3.6 million for theduring three months ended September 30, 20172020 compared to the same period in 2016.2019. The decrease was due primarily to a $5.3 million decrease in expense support agreementprofessional fees, primarily driven by lower costs associated with our terminated merger with Sierra, and a decrease in across the board expenses related to SIC. The expense support agreement with SIC expiredas a result of headcount reduction, employees working remotely and restrictions on December 31, 2016,travel and other expenses as such, we are no longer responsible for expenses undera result of the expense support agreement relating to SIC.continuing COVID-19 pandemic.
Other Income (Expense)
Dividend Income. DividendThere was no dividend income increased by $1.1 million to $1.4 million forduring the three months ended September 30, 20172020 compared to dividend income of $0.2 million during the same period in 2016.2019. The increasedecrease was primarily due to us no longer holding any shares of MCC and SIC temporarily suspending its dividend income from our investment in available for sale securities due to additional purchases made during 2017.the three months ended September 30, 2020.
Interest Expense. Interest expense increaseddecreased by $0.3 million, or 13%12%, to $2.7$2.5 million for the three months ended September 30, 2017 compared to the same period in 2016. The increase was primarily the result of the refinancing of our indebtedness from the issuance of senior unsecured debt. Average debt outstanding during the three months ended September 30, 20172020 compared to the same period in 2019. The decrease was due primarily to SIC temporary suspending its dividend during the three months ended June 30, 2020, resulting in lower interest being due on our non-recourse promissory notes. Interest on the promissory notes is paid monthly and 2016 was $132.6 million and $105.8 million, respectively.is equal, in part, to the dividends received by us related to the pledged shares of SIC.
Other Income (Expenses), net. Other expenses, net decreased by $1.9 million to $0.2 million during the three months ended September 30, 2020 compared to the same period in 2019. During the three months ended September 30, 2019 we recorded a $2.0 million unrealized gain on shares held of MCC. During the three months ended September 30, 2020, we did not hold any shares of MCC, and as a result there were no unrealized gains or losses recorded in the period. During the three months ended September 30, 2019, all of the unrealized losses on shares held of MCC were allocated to redeemable non-controlling interests in consolidated subsidiaries, which did not have any impact on the net income (expenses), net(loss) attributed to Medley LLC.
Provision for Income Taxes
Our effective income tax rate was a loss of $0.3 million2.5% and 1.5% for the three months ended September 30, 2017 a decrease of $0.3 million as compared to the same period in 2016. The decrease was due primarily to lower income from our investments which we account for under the equity method of accounting.
Provision for Income Taxes
Our provision for income taxes in any given interim period is recorded based on an estimated full-year tax rate adjusted for the tax effect of discrete items in the period they occur. Our effective income tax rate was 5.1%2020 and 12.4% for the three months ended September 30, 2017 and 2016,2019, respectively. Our tax rate is affected by recurring items, such as permanent differences and income allocated to certain redeemable non-controlling interests, which areis not subject to New York City unincorporated business tax. The decreaseU.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. Impacting the effective tax rate was due primarily to the impact of discrete items recorded during the for


17



three months ended September 30, 2016.
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 $1.5 million to $1.9 million for the three months ended September 30, 2017 compared to the same period in 2016. The increase was due primarily to an increase in dividend income earned and allocated to DB MED Investor I LLC,2020 is a third party, basedfull valuation allowance on its preferred ownership interests held in one of our consolidated subsidiaries.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30,2016
Revenues
Management Fees. Total management fees decreased by $8.3 million, or 16%, to $41.9 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. 
Our management fees from permanent capital vehicles decreased by $9.6 million during the nine months ended September 30, 2017 compared to the same period in 2016. The decrease was due to a decline in Part I incentive fees of $6.0 million from SIC and $4.1 million from MCC, offset in part, by an increase in base management fees from SIC.
Our management fees from long-dated private funds and SMAs increased by $1.3 million for the nine months ended September 30, 2017, compared to the same period in 2016. The increase was primarily due to an increase in base management fees from our SMAs.
Performance Fees. There was a reversal of performance fees of $1.8 million during the nine months ended September 30, 2017 compared to an accrual performance fees revenue of $1.7 million for the same period in 2016. The variance was attributed primarily to declines in the underlying fund values of our SMAs.
Other Revenues and Fees. Other revenues and fees increased by $1.2 million, or 20%, to $7.0 million for the nine months ended September 30, 2017 compared to the same period in 2016. The increase was due primarily to an increase in administrative fees from our permanent capital vehicles and other private funds.
Expenses
Compensation and Benefits. Compensation and benefits decreased by $3.5 million, or 16% to $17.9 million for the nine months ended September 30, 2017 compared to the same period in 2016. The variance was due primarily to a decrease in stock compensation expense as a result of forfeited RSUsprojected annual net deferred tax assets as well as lower discretionary compensation accruals, partly offset by an increase in severance charges.
Performance Fee Compensation. There was a reversal in performance fee compensation of $0.8 million during the nine months ended September 30, 2017 as compared to a reversal of performance fee compensation of $0.2 million for the same period in 2016. The variance in performance fee compensation was due primarily to changes in projected future payments.
General, Administrative and Other Expenses. General, administrative and other expenses decreased by $16.7 million to $8.9 million for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease was due primarily to a $16.1 million decrease in expense support agreement expenses related to SIC. The expense support agreement with SIC expired on December 31, 2016, as such, we are no longer responsible for expenses under the expense support agreement relating to SIC. The remaining variance was due primarily to a decrease in professional fees, employee recruitment and other office related expenses.
Other Income (Expense)
Dividend Income. Dividend income increased by $2.1 million to $2.9 million for the nine months ended September 30, 2017 compared to the same period in 2016. The increase was primarily due to dividend income from our investment in available for sale securities due to additional purchases made during 2017.
Interest Expense. Interest expense increased by $2.5 million, or 38%, to $9.1 million for the nine months ended September 30, 2017 compared to the same period in 2016. The increase was primarily due to an acceleration of amortization of debt issuance costs and discount relating to prepayments made on our Term Loan Facility as a result of the refinancing of our indebtedness from the issuance of senior unsecured debt. In addition, our average debt outstanding during the nine months ended September 30, 2017 and 2016 was $126.5 million and $105.5 million, respectively.
Other Income (Expenses), net. Other income (expenses), net increased by $2.9 million to $1.3 million for the nine months ended September 30, 2017 compared to the same period in 2016. The increase was due primarily to the revaluation of our revenue share payable and an impairment charge taken during the nine months ended September 30, 2016 on our investment in CK Pearl Fund LLC offset, in part, by unrealized losses on our investments.
Provision for Income Taxes
Our provision for income taxes in any given interim period is recorded based on an estimated full-year tax rate adjusted for


discrete items in the period they occur. Our effective income tax rate was 3.3% and 6.2% for the nine months ended September 30, 2017 and 2016, respectively. Our tax rate is affected by recurring items, such as permanent differences and income allocated to non-controlling interests which are not subject to New York City unincorporated business tax. The decrease insubject to federal, state and city corporate income taxes, as well as a true-up of a return to provision adjustment. During the three months ended September 30, 2019, our effective tax rate was dueimpacted primarily by gains allocated to the impact of discrete items recorded during the nine months ended September 30, 2016.non-controlling interests which are not subject to subject to federal, state and city corporate income taxes.
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 increaseddecreased by $3.6$1.6 million to $4.7less than $0.1 million for the ninethree months ended September 30, 20172020 as compared to the same period in 2016.2019. The increasedecrease was due primarily to an increase in dividend income earned and allocatedthe allocation of unrealized gains on shares of MCC to DB MED Investor I LLC, a third party,one of our redeemable non-controlling interests, based on its preferred ownership interests held in one of our consolidated subsidiaries.subsidiaries for the three months ended September 30, 2019, whose interests were redeemed in April 2020.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30,2019
Revenues
Management Fees. Total management fees decreased by $10.9 million, or 36%, to $19.8 million during the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019.
Our management fees from permanent capital vehicles decreased by $1.7 million, or 12%, during the nine months ended September 30, 2020 as compared to 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 and changes 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 nine months ended September 30, 2020.
Our management fees from long-dated private funds and SMAs decreased by $0.3 million, or 5%, during the nine months ended September 30, 2020 as compared to the same period in 2019. 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 $1.5 million, or 19%, to $6.3 million during the nine months ended September 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 $1.0 million to a net investment loss of $1.3 million during the nine months ended September 30, 2020 compared to the same period in 2019. The decrease was due to losses from our equity method investments.
Expenses
Compensation and Benefits. Compensation and benefits expenses decreased by $5.0 million, or 22%, to $17.1 million for the nine months ended September 30, 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 $1.1 million, or 8%, to $11.7 million during nine months ended September 30, 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.
Other Income (Expense)
Dividend Income. Dividend income decreased by $0.8 million to $0.1 million during the nine months ended September 30, 2020 compared to the same period in 2019. The decrease was due to us no longer holding any shares of MCC in 2020 and SIC temporary suspending its dividend for the periods commencing April 1, 2020 through September 30, 2020.
Interest Expense. Interest expense decreased by $0.7 million, or 8%, to $8.0 million during the nine months ended September 30, 2020 compared to the same period in 2019. The decrease was due primarily to SIC temporary suspending its dividend effective


18



April 1, 2020 through September 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 $5.0 million to $5.6 million during the nine months ended September 30, 2020 compared to the same period in 2019. This increase was due primarily to the revaluation of our revenue share payable during the nine months ended September 30, 2020, offset in part by a $0.5 million unrealized loss on MCC shares recorded during the nine months ended June 30, 2019. During the nine months ended September 30, 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 2.2% and 1.4% for the nine months ended September 30, 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 is not subject to U.S. federal, state and local corporate income taxes, as well as a true-up of a return to provision adjustment. 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 nine months ended September 30, 2020, our effective tax rate was impacted by a full valuation allowance on our projected annual net deferred tax assets as well as losses allocated to non-controlling interests which are not subject to subject to federal, state and city corporate income taxes. During the nine months ended September 30, 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, 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 decreased by $0.1 million to $0.1 million for the nine months ended September 30, 2020 as compared to the same period 2019. The decrease was due primarily to the allocation of unrealized gains 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 nine months ended September 30, 2019, whose interests were redeemed in April 2020, offset by an allocation of income to minority interests in certain of our carried interest vehicles during the nine months ended September 30, 2020.
Reconciliation of Certain Non-GAAP Performance Measures to Consolidated U.S. GAAP Financial Measures
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 comparable U.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 to Medley LLC is the U.S. GAAP financial measure most comparable to Core Net Income and Core EBITDA.


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The following table is a reconciliation of net income (loss) attributable to Medley LLC on a consolidated basis to Core Net Income (Loss) and Core EBITDA.
For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,For the Three Months Ended
September 30,		 For the Nine Months Ended September 30,
2017 2016 2017 20162020 2019 2020 2019
(Amounts in thousands, except share and per share amounts)(in thousands, except share and per share amounts)
Net income attributable to Medley LLC$3,022
 $693
 $10,949
 $2,216
Net loss attributable to Medley LLC$(1,965) $(3,472) $(17,099) $(5,058)
Reimbursable fund startup expenses596
 5,647
 847
 16,391
—
 22
 1
 283
IPO date award stock-based compensation532
 672
 189
 2,018
—
 282
 —
 555
Other non-core items (1)
238
 211
 2,550
 732
Expenses associated with strategic initiatives992
 2,070
 3,519
 3,486
Other non-core items:    

 

Severance expense(14)
200
 2,103
 1,462
Other (1)
—

—
 120
 —
Income tax expense on adjustments(40) (196) (106) (579)(35)
(100) (186) (202)
Core Net Income$4,348
 $7,027
 $14,429
 $20,778
Core Net Income (Loss)$(1,022) $(998) $(11,542) $526
Interest expense2,718
 2,192
 7,982
 6,382
2,535
 2,874
 7,950
 8,647
Income taxes303
 357
 636
 800
(18) 72
 (206) 130
Depreciation and amortization223
 243
 690
 678
180
 175
 539
 527
Core EBITDA$7,592
 $9,819
 $23,737
 $28,638
$1,675
 $2,123
 $(3,259) $9,830
(1) 
For the three months ended September 30, 2017, other non-core items consist of severance costs to former employees as well as other nonrecurring items. For the nine months ended September 30, 2017, other non-core2020, Other items also consists of $1.2 million in additional interest expense associated with the acceleration of amortization of debt issuance costs and discount relating to prepayments made on our Term Loan Facility as a result of the refinancing of our indebtedness from the issuance of Senior Unsecured Debt and $1.2 million in severance costs to former employees. For the three and nine months ended September 30, 2016, other non-core items consists of a $0.2 million acceleration of debt issuance costs relating to prepayments made on our Term Loan Facility as a result of refinancing of our indebtedness from the issuance of Senior Unsecured Debt. For the nine months ended September 30, 2016, other non-core items also includes a $0.5 millioninclude an impairment loss on one of our investment in CK Pearl Fund.investments.


Liquidity and Capital Resources
Our primary cash flow activities involve: (i)involve generating cash flow from operations, which largely includes management fees; (ii) making distributions to our members and redeemable non-controlling interests; (iii) paying dividends and (iv) borrowings, interest payments and repayments underon our debt facilities.outstanding debt. As of September 30, 2017, our2020, we had $5.8 million in cash and cash equivalents were $39.7 million.
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.
We primarily use cash flows from operations to pay compensation and benefits, general, administrative and other expenses, federal, state and local corporate income taxes, and debt service costscosts. As the impact of the COVID-19 pandemic on the economy and distributionsour operations is fluid and evolves, we will continue to assess our owners. Our cash flows, together with the proceeds from equity and debt issuances, are also used to fund investments in limited partnerships, purchase available for sale securities, purchase fixed assets and other capital items. If cash flows from operations were insufficient to fund distributions, we expect that we would suspend paying such distributions.liquidity needs.
Debt Instruments 
Senior Unsecured Debt
On August 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”). On October 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 on August 15, 2026.
On January 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”). On February 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 on January 30, 2024.
As of September 30, 2017, the2020, our outstanding senior unsecured debt balance was $116.7$119.0 million, and is reflected net of unamortized discount, unamortized premium and debt issuance costs of $5.9$3.6 million.
See Note 78, "Senior Unsecured Debt", to our unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q for additional information on the 2026 Notes and the 2024 Notes.
Revolving Credit Facility
On August 19, 2014, we entered into a $15.0 million senior secured revolving credit facility with City National Bank (as amended, the “Revolving Credit Facility”), as administrative agent and collateral agent thereunder, and the lenders from time to time party thereto. On September 22, 2017 we amended the Revolving Credit Facility to, among other things, extend the maturity date until March 31, 2020 and provide for an incremental facility in an amount up to $10.0 million upon the satisfaction of certain customary conditions. We intend to use any proceeds of borrowings under the Revolving Credit Facility for general corporate purposes, including funding our working capital needs. We have not incurred any borrowings under the Revolving Credit Facility through September 30, 2017. As of September 30, 2017, we were in compliance with the financial covenants under our Revolving Credit Facility.
Interest Rate and Fees
Borrowings under the Revolving Credit Facility bear interest, at the option of the Company, either (i) at ABR, plus an applicable margin not to exceed 0.25 percentage points, or (ii) at an adjusted LIBOR plus an applicable margin not to exceed 2.50 percentage points. In addition to paying interest on any outstanding principal under the Revolving Credit Facility, we are required to pay an unused line fee on the first day of the second month following each fiscal quarter in an amount equal to (i) if the average daily balance for the applicable fiscal quarter was less than $9.0 million, 0.50% per annum, or (ii) if the average daily balance for the applicable fiscal quarter was equal to or greater than $9.0 million, 0.25% per annum.
Guarantees and Collateral
Any obligations under the Revolving Credit Facility are unconditionally and irrevocably guaranteed by certain of Medley LLC’s subsidiaries. In addition, any outstanding borrowings are collateralized by first priority or equivalent security interests in (i) all the capital stock of, or other equity interests in, the borrower and each of the borrower’s and Credit Agreement Guarantors’ direct or indirect domestic subsidiaries and 65% of the capital stock of, or other equity interests in, each of the borrower’s or any subsidiary guarantors’ direct wholly owned first-tier restricted foreign subsidiaries, and (ii) certain tangible and intangible assets of the borrower and the credit agreement guarantors (subject to certain exceptions and qualifications).
None of our non-wholly owned domestic subsidiaries are obligated to guarantee the Revolving Credit Facility.


Certain Covenants and Events of Default
The Revolving Credit Facility contains a number of significant affirmative and negative covenants and customary events of default. Such covenants, among other things, will limit or restrict, subject to certain exceptions, the ability of the borrower and its restricted subsidiaries to:
incur additional indebtedness, make guarantees and enter into hedging arrangements;
create liens on assets;
enter into sale and leaseback transactions;
engage in mergers or consolidations;
make fundamental changes;
pay dividends and distributions or repurchase our capital stock;
make investments, loans and advances, including acquisitions;
engage in certain transactions with affiliates;
make changes in the nature of their business; and
make prepayments of junior debt.
In addition, the credit agreement governing our Revolving Credit Facility contains financial covenants that requires us to maintain a Maximum Net Leverage Ratio of not greater than 5.0 to 1.0, a Total Leverage Ratio of not greater than 7.0 to 1.0, and Core EBITDA of not less less than $15.0 million. These ratios are calculated on a trailing twelve months basis and are calculated using our financial results and include adjustments made to calculate Core EBITDA.
Our Revolving Credit Facility contains certain customary representations and warranties, affirmative covenants and events of default. If an event of default occurs, the lender under the Revolving Credit Facility will be entitled to take various actions, including the acceleration of any amounts due under the Revolving Credit Facility and all actions permitted to be taken by a secured creditor.
Non-Recourse Promissory Notes
In April 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. TheThese notes are scheduled to mature in March 2019.on December 31, 2020.
See Note 69 "Loans Payable" to our condensed consolidated financial statements included in this quarterly report on Form 10-Q for additional information regarding the promissory notes.


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Cash Flows
The significant captions and amounts from our condensed consolidated statements of cash flows are summarized below. Negative amounts represent a net outflow, or use of cash.
 For the Nine Months Ended September 30,
 2017 2016
 (Amounts in thousands)
Statements of cash flows data 
  
Net cash provided by operating activities$5,783
 $8,777
Net cash used in investing activities(34,977) (9,618)
Net cash provided by (used in) financing activities14,419
 (13,420)
Net increase (decrease) in cash and cash equivalents$(14,775) $(14,261)
 For the Nine Months Ended September 30,
 2020 2019
    
 (in thousands)
Statements of cash flows data 
  
Net cash (used in) provided by operating activities$(1,843) $1,424
Net cash (used in) provided by investing activities(460) 182
Net cash used in financing activities(2,251) (7,565)
Net decrease in cash and cash equivalents$(4,554) $(5,959)
Operating Activities
Our net cash flow provided byoutflow from operating activities was $5.8 million and $8.8$1.8 million during the nine months ended September 30, 2017 and 2016, respectively.2020. During the nine months ended September 30, 2017 and 2016,2020, net cash flow provided byused in operating activities was attributed to a net incomeloss of $15.7$17.0 million, and $3.3 million, respectively, non-cash adjustments of $5.6$8.9 million and $4.3 million, respectively, and changesa net increase in operating assets and liabilities of ($15.5) million and $1.1 million, respectively.


$6.3 million.
Investing Activities
Our investing activities generally reflect cash used for acquisitionsto acquire fixed assets, purchase investments, and make capital contributions to our equity method investments. Cash provided by our investing activities generally reflect return of fixed assets,capital distributions received from our equity method investments and purchases of available for sale securities. Purchases of fixed assets wereinvestment held at cost less than $0.1 million forimpairment. During the nine months ended September 30, 20172020, 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 $1.9 million forredeemable 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 nine months ended September 30, 2016. Distributions received from equity method investments during the nine months ended September 30, 2017 and 2016 were less then $0.1 million and $1.2 million, respectively. Excluding the investments held by our consolidated fund, purchases2020, cash used in financing activities consisted of available for sale securities were $35.0 million during the nine months ended September 30, 2017 and $8.8 million during the nine months ended September 30, 2016.
Financing Activities
Distributions(i) distributions to members and redeemable non-controlling interests were $26.3 million for the nine months ended September 30, 2017 and $23.6 million for the nine months ended September 30, 2016. Capital contributions from non-controlling interests and redeemable non-controlling interests resulted in an inflow of cash$0.5 million, (ii) payments to a former minority interest holder of $23.0 million for the nine months ended September 30, 2017 and $12.0 million during the nine months ended September 30, 2016. Repurchases of LLC units represented a use of cash from financing activities of $3.6$1.6 million and $1.2 million for the nine months ended September 30, 2017 and 2016, respectively. Capital contributions(iii) payments of tax withholdings related to equity method investments represented a usenet share settlement of cash from financing activitiesrestricted stock units of $0.2 million for each of the nine months ended September 30, 2017 and 2016, respectively.
On August 9, 2016, Medley LLC completed its first registered public offering of senior unsecured debt and on October 18, 2016, January 18, 2017, and February 22, 2017 Medley LLC completed additional registered public offerings of senior unsecured debt. The proceeds from these offerings, net of offering expenses payable by us, amounted to $116.2$0.1 million. The net proceeds from the offering were used to pay-down the outstanding indebtedness under the Term Loan Facility with the remaining amount to be used for working capital purposes. Repayments of loans payable resulted in an outflow of cash of $44.8 million and $23.8 million for the nine months ended September 30, 2017 and 2016, respectively. Proceeds from the issuance of debt obligations provided an inflow of cash of $69.1 million for the nine months ended September 30, 2017 and $24.2 million for the nine months ended September 30, 2016.
Sources and Uses of Liquidity
Our sources of liquidity are (i) cash on hand, (ii) net working capital, (iii) cash flows from operations, and (iv) realizations on our investments, (v) net proceeds from borrowings underinvestments. Over the Revolving Credit Facilitynext twelve months, we expect that our cash and issuances of publicly-registered debt and (vi) other potential financings. We believe that these sources of liquidity needs will continue to be sufficient to fundmet by cash generated by our working capital requirements and to meet our commitments in the foreseeable future.ongoing operations. We expect that our primary liquidity needs will be comprised of cash to (i) provide capital to facilitate the growth of our existing investment management business, (ii) fund our commitments to funds that we advise, (iii) provide capital to facilitate our expansion into businessbusinesses that are complementary to our existing investment management business,business; (iv) pay operating expenses, including cash compensation to our employees, and payments under the TRA, (v) fund capital expenditures, and (vi) pay income taxes, and (vii) make distributions to our shareholders in accordance with our dividend policy.taxes.  
We intend to use a portion of our available liquidity to fund cash dividends to our common shareholders on a quarterly basis. Our ability to fund cash dividends to our common shareholders is dependent on a myriad of factors, including among others: general economic and business conditions; our strategic plans and prospects; our business and investment opportunities; timing of capital calls by our funds in support of our commitments; our financial condition and operating results; working capital requirements and other anticipated cash needs; contractual restrictions and obligations; legal, tax and regulatory restrictions; restrictions on the payment of distributions by our subsidiaries to us; and other relevant factors.
Critical Accounting Policies
We prepare our condensed consolidated financial statements in accordance with U.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


21



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 unaudited condensed consolidated financial statements included in this Form 10-Q for a summary of our significant accounting policies.


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 specific hurdle rates as defined in the funds’ applicable investment management or partnership agreements.funds, typically, our separately managed accounts. Performance fees are recordedearned based on an accrual basisthe fund performance during the period, subject to the extent such amounts are contractually due.
achievement of minimum return levels in accordance with the respective terms set out in each fund’s investment management agreement. We have elected to adopt Method 2 ofaccount for performance fees in accordance with ASC 605,606, Revenue Recognitionfrom Contracts with Customers, for revenue based onand we will only recognize performance fees when it is probable that a formula. Under this method, wesignificant reversal of such fees will not occur in the future.
Carried Interest
Carried interest are entitled to performance-based fees that can amountrepresent a capital allocation of income to as much as 20.0% of a fund's profits,the general partner or investment manager. Carried interest is allocated to us based on cumulative fund performance to date, subject to certain hurdles. Performance-based fees are assessedthe 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 a percentage of the investment performance of the funds. The performance fee for any periodwe historically had which is based upon an assumed liquidation of thethat fund's net assets on the reporting date, and distribution of the net proceeds in accordance with the fund's income allocation provisions. The performance fees may be subject to reversal to the extent that the performance fees recorded exceeds the amount due to the general partner or investment manager based on a fund's cumulative investment returns.
Performance fees receivable is presented separately in our unaudited condensed consolidated balance sheets included in this Form 10-Q and represents performance fees recognized but not yet collected. The timing of the payment of performance fees due to the general partner or investment manager varies depending on the terms of the applicable fund agreements.
If applicable, we record an accrual for the potential repayment of previously received performance fees which represents amounts that would need to be repaid to the underlying funds if these funds were to be liquidated based on the current fair value of the underlying funds’ investments as of the reporting date, regardless of whether such amounts have been realized. For any given period, carried interest on our condensed 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.


22



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.
Performance Fee Compensation Payable
We have an obligation to pay our professionals a portion of the performance fees earned from certain funds. These amounts are accounted for as compensation expense in conjunction with the recognition of the related performance fee revenue and, until paid, are recognized as performance fee compensation payable. Performance fee compensation is recognized in the same period that the related performance fees are recognized. Performance fee compensation can be reversed during periods when there is a


decline in performance fees that were previously recognized.
Income Taxes
We are treated as a partnership for income tax purposes and are therefore not subject to U.S. federal, state and local tax corporate income taxes. We are subject to New York City unincorporated business tax attributable to taxable income allocable to New York City.
Stock-based Compensation
We account for income taxes usingstock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. Under the asset and liability approach, which requiresfair value recognition provision of this guidance, share-based compensation cost is measured at 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 sustainablegrant date based on its technical merits. Our policythe fair value of the award and is to recognize interestrecognized as expense over the requisite service period and penalties on uncertain tax positions and other tax mattersreduced for actual forfeitures in the period they occur. Stock-based compensation is included as a component of income tax expense. For interim periods, we account for income taxes based on its estimatecompensation and benefits in our consolidated statements of the effective tax rate for the year. Discrete items and changes in its estimate of the annual effective tax rate are recorded in the period they occur.
We analyze our tax filing positions in all of the U.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.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 auditedcondensed consolidated financial statements included in this Form 10-Q.
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 9,12, “Commitments and Contingencies,” to our unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q for a discussion of our commitments and contingencies.
Contractual Obligations
The following table sets forth information relating to our contractual obligations as of September 30, 2017.2020. 
Less than
1 year
 
1 - 3
years
 
4 - 5
years
 
More than
5 years
 Total
Less than
1 year
 
1 - 3
years
 
4 - 5
years
 
More than
5 years
 Total
(Amounts in thousands)(in thousands)
Medley Obligations 
  
  
  
  
 
  
  
  
  
Operating lease obligations (1)
$2,703
 $5,494
 $4,978
 $2,431
 $15,606
$2,526
 $5,146
 $608
 $—
 $8,280
Loans payable (2)
—
 10,000
 —
 —
 10,000
10,000
 —
 —
 —
 10,000
Senior unsecured debt (3)
—
 —
 —
 122,595
 122,595
—
 —
 69,000
 53,595
 122,595
Payable to former minority interest holder of SIC Advisors LLC (Note 10)2,050
 6,000
 —
 —
 8,050
Revenue share payable1,379
 1,692
 1,062
 —
 4,133
781
 1,103
 703
 4,705
 7,292
Capital commitments to funds (4)
330
 —
 —
 —
 330
256
 —
 —
 —
 256
Total$4,412
 $17,186
 $6,040
 $125,026
 $152,664
$15,613
 $12,249
 $70,311
 $58,300
 $156,473
(1) 
We lease office space in New York and San Francisco under non-cancelable 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 6,9, “Loans Payable,” to our condensed consolidated financial statements included in this Form 10-Q.
(3) 
We have included all our obligations described in Note 7,8, “Senior Unsecured Debt,” to our condensed consolidated financial statements included in this Form 10-Q. In addition to the principal amounts above, the Company is required to make quarterly interest payments of $1.2 million related to our 2024 Notes and $0.9 million related to our 2026 Notes.
(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.


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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 September 30, 2017,2020, 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, performance fee revenue,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 performance fee revenuecarried 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 performance fee revenuecarried interest is generally determined on a liquidation basis, as of September 30, 2017,2020, 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 performance fee revenuecarried interest that havehas been recognized would be reversed. We believe that the possibility of all of the existing investments becoming worthless is remote. At September 30, 2017,2020, had we assumed all existing investments were valued at $0, the net amount of performance fee revenuecarried interest subject to additional reversal would have been approximately $5.6$0.8 million.
Performance fee revenueCarried 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 performance fee revenuecarried 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risk is related to our role as general partner or investment advisor to our investment funds and the sensitivity to movements in the fair value of their investments, including the effect on management fees, performance fees and investment income.
The market price of investments may significantly fluctuate during the period of investment. Investments may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of an investment may decline due to general market conditions which are not specifically related to such investment, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment generally. They may also decline due to factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.
Effect on Management Fees
Management fees are generally based on a defined percentage of gross asset values, total committed capital, net invested capital and NAV of the investment funds managed by us as well as a percentage of net interest income over a performance hurdle. Management fees calculated based on fair value of assets or net investment income are affected by short-term changes in market values.
The overall impact of a short-term change in market value may be mitigated by fee definitions that are not based on market value including invested capital and committed capital, market value definitions that exclude the impact of realized and/or unrealized gains and losses, market value definitions based on beginning of the period values or a form of average market value including daily, monthly or quarterly averages, as well as monthly or quarterly payment terms.
As such, based on an incremental 10% short-term increase in fair value of the investments in our permanent capital vehicles, long-dated private funds and SMAs’SMAs as of September 30, 2017,2020, we calculated approximately a $0.8$0.3 million and $1.3 million increase in management fees for the three and nine months ended September 30, 2017,2020, respectively. In the case of a 10% short-term decline in fair value of the investments in our permanent capital, long-dated funds and SMAs’SMAs as of September 30, 2017,2020, we calculated


24



approximately a $1.0$0.5 million and $1.6 million decrease in management fees for the three and nine months ended September 30, 2017,2020, respectively.


Effect on Performance Fees
Performance fees are based on certain specific hurdle rates as defined in the funds' applicable investment management or partnership agreements. The performancePerformance fees for any period are based upon an assumedthe probability that there will not be a significant future revenue reversal of such fees in the future. We exercise significant judgments when determining if any performance fees should be recognized in a given period including the below.
whether the fund is near final liquidation
whether the fair value of the fund's netremaining assets onin the reporting date, and distributionfund is significantly in excess of the net proceedsthreshold at which the Company would earn an incentive fee
the probability of significant fluctuations in accordancethe fair value of the remaining assets
the SMA’s remaining investments are under contract for sale with the fund's income allocation provisions, which cancontractual purchase prices that would result in a performance-based fee to us, subject to certain hurdlesno clawback and benchmarks. The performance fees may be subject to reversal to the extentit is highly likely that the performance fees recorded exceed the amount due to the general partner or investment manager based on a fund's cumulative investment returns.contracts will be consummated
Short-term changes in the fair values of funds' investments may materiallyusually do not impact accrued performance fees depending on the respective funds' performance relative to applicable hurdles.fees. The overall impact of a short-term change in market value may be mitigated by a number of factors including, but not limited to, the way in which carried interest performance fees are calculated, which is not ultimately dependent on short-term moves in fair market value, but rather realize cumulative performance of the investments through the end of the long-dated private funds, and SMAs’SMAs lives. However, short-term moves can meaningfully impact our ability to accrue
We have not recognized any performance fees and receive cash payments in any given period.
As such, based on an incremental 10% short-term increase in fair value of the investments in our long-dated private funds and SMAs’ as of September 30, 2017, we calculated a $14.5 and $16.1 million increase in performance fees forduring the three and nine months ended September 30, 2017, respectively. In the case of a2020. No performance fees would be recognized by an incremental 10% short-term declineincrease or decrease in the fair value of investments inheld by our long-dated private funds and SMAs’ as of September 30, 2017, we calculated a $0.9 million and $1.5 million decrease in performance fees for the three and nine months ended September 30, 2017, respectively.separately management accounts.
Effect on Part I and Part II Incentive Fees
IncentivePart I incentive fees are based on certain specific hurdle rates as defined in our permanent capital vehicles' applicable investment management agreements. The Part II incentive fees are based upon realized gains netted against cumulative realized and unrealized losses. The Part IThese incentive fees are not subject to clawbacks as our carried interest performance fees are.clawback.
Short-term changes in the fair values of the investments of our permanent capital vehicles may materially impact Part II incentive fees depending on the respective vehicle's performance relative to applicable hurdles to the extent there were realized gains that we would otherwise earn Part II incentive fees on.
As such, based on an incremental 10% short-term increase or decrease in fair value of the investments in our permanent capital vehicles as of September 30, 2017,2020, we calculated a $5.5 million increaseno change in Part I and II incentive fees for the three and nine months ended September 30, 2017, respectively.2020. We did not earn any Part I or Part II incentive fees during the three and nine months months ended September 30, 2020.
Effect on Carried Interest
Carried interest are performance based fees that represent a capital allocation of income to the general partner or investment manager. Carried interest are allocated to the Company based on cumulative fund performance to date, subject to the achievement of minimum return levels in accordance with the respective terms set out in each fund’s governing documents.
Short-term changes in the fair values of funds' investments may materially impact accrued carried interest depending on the respective funds' performance relative to applicable return levels. The overall impact of a short-term change in market value may be mitigated by a number of factors including, but not limited to, the way in which carried interest are calculated, which is not ultimately dependent on short-term moves in fair market value, but rather realized cumulative performance of the investments through the end of the long-dated private funds' lives. However, short-term moves can meaningfully impact our ability to accrue carried interest and receive cash payments in any given period.
As such, based on an incremental 10% short-term increase in fair value of the investments in our long-dated private funds as of September 30, 2020, we calculated approximately a $2.4 million increase in carried interest for the nine months ended September 30, 2020. In the case of a 10% short-term decline in fair value of the investments in our permanent capital vehicleslong-dated private funds as of September 30, 2017,2020, we calculated approximately a $0.4 million increase$51 thousand decrease in Part I incentive feescarried interest for the three and nine months ended September 30, 2017.2020.
Interest Rate Risk
As of September 30, 2017,2020, we had $125.8$136.2 million of debt outstanding, net of unamortized discount, premium, and issuance


25



costs, presented as senior unsecured debt, loans payable and senior unsecured debtamount due to former minority interest holder in our unaudited condensed consolidated financial statements included elsewhere in this Form 10-Q. Our debt bears interest at fixed rates, and therefore is not subject to interest rate fluctuation risk.
As credit-oriented investors, we are also subject to interest rate risk through the securities we hold in our funds. A 100 basis point increase in interest rates would be expected to negatively affect prices of securities that accrue interest income at fixed rates and therefore negatively impact net change in unrealized appreciation on the funds' investments. The actual impact is dependent on the average duration of such holdings. Conversely, securities that accrue interest at variable rates would be expected to benefit from a 100 basis points increase in interest rates because these securities would generate higher levels of current income and therefore positively impact interest and dividend income, subject to LIBOR. In the cases where our funds pay management fees based on NAV, we would expect management fees to experience a change in direction and magnitude corresponding to that experienced by the underlying portfolios.
Credit Risk
We are party to agreements providing for various financial services and transactions that contain an element of risk in the event that the counterparties are unable to meet the terms of such agreements. In such agreements, we depend on the respective counterparty to make payment or otherwise perform. We generally endeavor to minimize our risk of exposure by limiting to reputable financial institutions the counterparties with which we enter into financial transactions. In other circumstances, availability of financing from financial institutions may be uncertain due to market events, and we may not be able to access these financing markets.


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Item 4.     Controls and Procedures
Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our co-principal executive officers and principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. Our management, with the participation of our Co-Chief Executive Officers and our Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, and subject to the foregoing, our Co-Chief Executive Officers and our Chief Financial Officer have concluded that, as of the end of the period covered by this report, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2017,2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II.
Item 1.     Legal Proceedings
From time to time, we arethe Company is involved in various legal proceedings, lawsuits and claims incidental to the conduct of ourits business. OurIts business is also subject to extensive regulation, which may result in regulatory proceedings against us.it. Except as described below, we arethe Company is not currently party to any material legal proceedings.
One of the Company's subsidiaries, MCC Advisors LLC, was named as a defendant in a lawsuit on May 29, 2015, by Moshe Barkat and Modern VideoFilm Holdings, LLC (“MVF Holdings”) against MCC, MOF II, MCC Advisors LLC, Deloitte Transactions and Business Analytics LLP A/K/A Deloitte ERG (“Deloitte”), Scott Avila (“Avila”), Charles Sweet, and Modern VideoFilm, Inc. (“MVF”). The lawsuit is pending in the California Superior Court, Los Angeles County, Central District, as Case No. BC 583437. The lawsuit was filed after MCC, as agent for the lender group, exercised remedies following a series of defaults by MVF and MVF Holdings on a secured loan with an outstanding balance at the time in excess of $65 million. The lawsuit sought damages in excess of $100 million. Deloitte and Avila have settled the claims against them in exchange for payment of $1.5 million. Following a separate lawsuit by Mr. Barkat against MVF’s D&O insurance carrier, the carrier, Charles Sweet and MVF have settled the claims against them. On June 6, 2016, the court granted the Medley defendants’ demurrers on several counts and dismissed Mr. Barkat’s claims with prejudice except with respect to his claim for intentional interference with contract. On March 18, 2018, the court granted the Medley defendants’ motion for summary adjudication with respect to Mr. Barkat’s sole remaining claim against the Medley Defendants for intentional interference. Now that the trial court has ruled in favor of the Medley defendants on all counts, the only remaining claims in the Barkat litigation are MCC and the other defendants continue to dispute the remaining allegations and are vigorously defending the lawsuit while pursuingMOF II’s affirmative counterclaims against Mr. Barkat and MVF Holdings. Holdings, which MCC and MOF II are diligently prosecuting.
On August 29, 2016, MVF Holdings filed another lawsuit in the California Superior Court, Los Angeles County, Central District, as Case No. BC 631888 (the “Derivative Action”), naming MCC Advisors LLC and certain of Medley’s employees as defendants, among others. The plaintiff in the Derivative Action, asserts claims against the defendants for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, unfair competition, breach of the implied covenant of good faith and fair dealing, interference with prospective economic advantage, fraud, and declaratory relief. MCC Advisors LLC and the other defendants believe the outstanding claims for alleged interference with Mr. Barkat’s employment contract, and the other causes of action asserted in the Derivative Action are without merit and all defendants intend to continue to assert a vigorous defense. On October 16, 2020, the parties agreed to a settlement of all claims arising in connection with the Hugh Miller matter, the MVF Derivative Action and the MVF chapter 11 proceedings. The settlement was read into the record on October 16, 2020 at a hearing in the MVF Derivative Action. The settlement is binding, subject to bankruptcy court approval in the MVF bankruptcy proceedings. A hearing to approve the settlement is scheduled for November 30, 2020. Pursuant to the settlement, subject to bankruptcy court approval, the Lenders will pay the plaintiffs a total of $5 million. All of the $5 million is being funded by the insurance carriers for the Lenders pro rata based on their participation in the original loan to MVF.
Medley LLC, Medley Capital Corporation, Medley Opportunity Fund II LP, Medley Management, Inc., Medley Group, LLC, Brook Taube, and Seth Taube (the “Medley Defendants”) were named as defendants, along with other various parties, in a putative class action lawsuit captioned as Royce Solomon, Jodi Belleci, Michael Littlejohn, and Giulianna Lomaglio v. American Web Loan, Inc., AWL, Inc., Mark Curry, MacFarlane Group, Inc., Sol Partners, Medley Opportunity Fund, II, LP, Medley LLC, Medley Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, Seth Taube, DHI Computing Service, Inc., Middlemarch Partners, and John Does 1-100, filed on December 15, 2017, amended on March 9, 2018, and amended a second time on February 15, 2019, in the United States District Court for the Eastern District of Virginia, Newport News Division, as Case No. 4:17-cv-145 (hereinafter, “Class Action 1”). Medley Opportunity Fund II LP and Medley Capital Corporation were also named as defendants, along with various other parties, in a putative class action lawsuit captioned George Hengle and Lula Williams v. Mark Curry, American Web Loan, Inc., AWL, Inc., Red Stone, Inc., Medley Opportunity Fund II LP, and Medley Capital Corporation, filed February 13, 2018, in the United States District Court, Eastern District of Virginia, Richmond Division, as Case No. 3:18-cv-100 (“Class Action 2”). Medley Opportunity Fund II LP and Medley Capital Corporation were also named as defendants, along with various other parties, in a putative class action lawsuit captioned John Glatt, Sonji Grandy, Heather Ball, Dashawn Hunter, and Michael Corona v. Mark Curry, American Web Loan, Inc., AWL, Inc., Red Stone, Inc., Medley Opportunity Fund II LP, and Medley Capital Corporation, filed August 9, 2018 in the United States District Court, Eastern District of Virginia, Newport News Division, as Case No. 4:18-cv-101 (“Class Action 3”) (together with Class Action 1 and Class Action 2, the “Virginia Class Actions”). Medley Opportunity Fund II LP was also named as a defendant, along with various other parties, in a putative class action lawsuit captioned Christina Williams and Michael Stermel v. Red Stone, Inc. (as successor in interest to MacFarlane Group, Inc.), Medley Opportunity Fund II LP, Mark Curry, Brian McGowan, Vincent Ney, and John Doe entities and individuals, filed June 29, 2018 and amended July 26, 2018, in the United States District Court for the Eastern District of Pennsylvania, as Case No. 2:18-cv-2747 (the “Pennsylvania Class Action”).
On October 26, 2020, Medley Opportunity Fund II LP and Medley Capital Corporation were served with a new complaint in a putative class action lawsuit captioned Charles P. McDaniel v. Mark Curry, American Web Loan, Inc., Red Stone, Inc., Medley

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Opportunity Fund II LP, and Medley Capital Corporation, filed October 22, 2020, in the Circuit Court of Ohio County, West Virginia, as Case No. 20-C-169 (the “West Virginia Class Action”)(together with the Virginia Class Actions and the Pennsylvania Class Action, the “Class Action Complaints”).
The plaintiffs in the Virgina and Pennsylvania Class Action Complaints filed their putative class actions alleging claims under the Racketeer Influenced and Corrupt Organizations Act, and various other claims arising out of the alleged payday lending activities of American Web Loan. The claims against Medley Opportunity Fund II LP, Medley LLC, Medley Capital Corporation, Medley Management, Inc., Medley Group, LLC, Brook Taube, and Seth Taube (in Class Action 1, as amended); Medley Opportunity Fund II LP and Medley Capital Corporation (in Class Action 2 and Class Action 3); and Medley Opportunity Fund II LP (in the Pennsylvania Class Action), allege that those defendants in each respective action exercised control over, or improperly derived income from, and/or obtained an improper interest in, American Web Loan’s payday lending activities as a result of a loan to American Web Loan. The plaintiff in the West Virginia Class Action Complaint filed his putative class action alleging claims arising West Virginia state law’s regulating interest rates and other fees in connection with consumer lending activities.
The loan was made by Medley Opportunity Fund II LP in 2011. American Web Loan repaid the loan from Medley Opportunity Fund II LP in full in February of 2015, more than 1 year and 10 months prior to any of the loans allegedly made by American Web Loan to the alleged class plaintiff representatives in Class Action 1. In Class Action 2, the alleged class plaintiff representatives had not alleged when they received any loans from American Web Loan. In Class Action 3, the alleged class plaintiff representatives claim to have received loans from American Web Loan at various times from February 2015 through April 2018. In the Pennsylvania Class Action, the alleged class plaintiff representatives claim to have received loans from American Web Loan in 2017.
By orders dated August 7, 2018 and September 17, 2018, the Court presiding over the Virginia Class Actions consolidated those cases for all purposes. On October 12, 2018, Plaintiffs in Class Action 3 filed a notice of voluntary dismissal of all claims, and on October 29, 2018, Plaintiffs in Class Action 2 filed a notice of voluntary dismissal of all claims.
On April 16, 2020, the parties to Class Action 1 reached a settlement reflected in a Settlement Agreement (the “Settlement Agreement”) that has been publicly filed in Class Action 1 (ECF No. 414-1). The Settlement Agreement was subject to court approval. At a hearing on November 4, 2020, the court denied the plaintiffs’ motion to approve the settlement and ordered the parties to mediation in front of Judge Novak of the Eastern District of Virginia in December of 2020.
On October 29, 2020, the parties to the Pennsylvania Class Action reached a settlement pursuant to which AWL agreed to make a payment to the plaintiffs and to forgive loans that they owed AWL. The Medley Defendants obtained a full release and bore none of the settlement amount. The Pennsylvania Class Action was dismissed with prejudice on November 2, 2020.
The Medley Defendants and the other defendants believe the alleged claims asserted in the Virginia Class Action and the West Virginia putative class action are without merit and they are defending these lawsuits vigorously.
On May 11, 2020, the court approved a settlement and dismissed two purported class actions that had been commenced in the Supreme Court of the State of New York, County of New York, by alleged stockholders of Medley Capital Corporation, captioned, respectively, Helene Lax v. Brook Taube, et al., Index No. 650503/2019, and Richard Dicristino, et al. v. Brook Taube, et al., Index No. 650510/2019 (together with the Lax Action, the “New York Actions”). Named as defendants in each complaint were Brook Taube, Seth Taube, Jeffrey Tonkel, Arthur S. Ainsberg, Karin Hirtler-Garvey, John E. Mack, Mark Lerdal, Richard T. Allorto, Jr., Medley Capital Corporation (“MCC”), MDLY, Sierra Income Corporation (“Sierra”), and Sierra Management, Inc. The complaints in each of the New York Actions alleged that the individuals named as defendants breached their fiduciary duties in connection with the proposed merger of MCC with and into Sierra, and that the other defendants aided and abetted those alleged breaches of fiduciary duties. Compensatory damages in unspecified amounts were sought. The defendants vigorously denied any wrongdoing or liability with respect to the facts and claims that were asserted, or which could have been asserted, in the New York Actions. None of the defendants paid any consideration to the plaintiffs in connection with the dismissal. The plaintiffs agreed to dismiss the New York Actions in exchange for MCC’s agreement to pay $50,000 in attorneys’ fees and expenses to plaintiffs’ counsel.     
While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s consolidated financial position or overall trends in consolidated results of operations, litigation is subject to inherent uncertainties. The Company reviews relevant information with respect to litigation and regulatory matters on a quarterly and annual basis. The Company establishes liabilities for litigation and regulatory actions when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no liability is established.

Item 1A.  Risk Factors
For a discussion of our potential risks and uncertainties, see the information under the heading “Risk Factors”“Risk Factors” in Part I., Item 1A. of our Annual Report on Form 10-K for fiscal year ended December 31, 2019, filed with the SEC on March 27, 2020, which is accessible on the SEC's website at www.sec.gov. There wereOther than the items disclosed herein, there have been no material changes during the nine months ended September 30, 2020 to the risk factors previously discloseddiscussed in Part I., Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2016.10-K. Additional risks or uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4.     Mine Safety Disclosures
Not Applicable.
Item 5.     Other Information
Not Applicable.None.

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Item 6.     Exhibits
Exhibit No. Exhibit Description
   
3.1 
Amended and Restated Certificate of FormationIncorporation of Medley LLCManagement Inc. (incorporated by reference to Exhibit 3.1 to Medley LLC’s Registration Statementthe Registrant’s Current Report on Form S-18-K (File No. 333-212514))001-36638) filed on September 29, 2014).
   
3.2 
FourthCertificate of Amendment to the Amended and Restated Limited Liability Company AgreementCertificate of Incorporation of Medley LLC, dated as of September 23, 2014Management Inc. implementing the Reverse Stock Split (incorporated by reference to Exhibit 10.13.1 to the Registrant’s Current Report on Form 8-K (File No. 001-36638) filed on October 22, 2020).
3.3
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Medley Management Inc.’s implementing the Authorized Share Reduction (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36638) filed on October 22, 2020).
3.4
Amended and Restated By-Laws of Medley Management Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-36638) filed on September 29, 2014).
   
4.1 
Indenture, dated August 9, 2016, between Medley LLC and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 of Medley LLC’s Current Report on Form 8-K (File No. 333-212514) filed on August 9,10, 2016).
   
4.2 
First Supplemental Indenture, dated August 9, 2016, between Medley LLC and U.S. Bank National Association, as trustee, including the form of note attached as an exhibit thereto (incorporated by reference to Exhibit 4.2 of Medley LLC’s Current Report on Form 8-K (File 333-212514) filed on August 9,10, 2016).
   
4.3 
Second Supplemental Indenture dated as of October 18, 2016, between Medley LLC and U.S. Bank National Association, as Trustee, with the form of note included therein (incorporated by reference to Exhibit 4.1 of Medley LLC’s Current Report on Form 8-K (File No. 001-37857) filed on October 19, 2016).
   
4.4 
Third Supplemental Indenture, dated January 18, 2017, between Medley LLC and U.S. Bank National Association, as trustee, including the form of note attached as an exhibit thereto (incorporated by reference to Exhibit 4.1 of Medley LLC's Current Report on Form 8-K (File No. 001-37857) filed on January 20, 2017).
   
4.5 
Fourth Supplemental Indenture, dated February 22, 2017, between Medley LLC and U.S. Bank National Association, as trustee, including the form of note attached as an exhibit thereto (incorporated by reference to Exhibit 4.1 of Medley LLC's Current Report on Form 8-K (File No. 001-37857) filed on February 22, 2017).
   
10.1 
Amendment Number Three to CreditSeparation Agreement, dated as of September 22, 2017, by and among the lenders identified on the signatures pages thereto, City National Bank andAugust 13, 2020 between Medley LLC (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 27, 2017).and John Fredericks†
   
31.1* 
Certification by Co-Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2* 
Certification by Co-Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
   
31.3* 
Certification by Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1** 
Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2** 
Certification of Co-Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.3** 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS* XBRL Instance Document
   
101.SCH* XBRL Taxonomy Extension Schema Document*
   
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
* Filed herewith
** Furnished herewith 


† Management contract or compensatory plan in which directors and/or executive officers are eligible to participate
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 MEDLEY LLCMANAGEMENT INC.
 (Registrant)
  
Date: November 14, 201716, 2020By:/s/ Richard T. Allorto, Jr.
  Richard T. Allorto Jr.
  Chief Financial Officer
(Principal Financial Officer and Authorized Signatory) of Medley Management Inc.


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