Item 2.04. Triggering Events That Accelerate or Increase a Direct Financial
Obligation or an Obligation under an Off-Balance Sheet Arrangement.
As described in the Introductory Note above, on January 19, 2021, the
Unitholders exercised their pre-existing right to exchange LLC Units of Medley
LLC into shares of Class A Common Stock of the Company on a one-for-one basis.
The Unit Exchange is expected to result in an increase in the tax basis of the
tangible and intangible assets of Medley LLC. The increase in tax basis may
reduce the amount of tax that the Company would otherwise be required to pay in
the future. This increase in tax basis may also decrease gains (or increase
losses) on future dispositions of certain capital assets to the extent tax basis
is allocated to those capital assets. The Internal Revenue Service ("IRS") may
challenge all or part of the tax basis increase and increased deductions, and a
court could sustain such a challenge.
As previously disclosed and described in the Company's filings with the
Securities and Exchange Commission, on September 23, 2014, the Company entered
into a Tax Receivable Agreement with the Unitholders (the "Tax Receivable
Agreement") that provides for the payment by the Company to exchanging
Unitholders of 85% of the benefits, if any, that the Company is deemed to
realize as a result of these increases in tax basis and of certain other tax
benefits related to entering into the Tax Receivable Agreement, including tax
benefits attributable to payments under the Tax Receivable Agreement. This
payment obligation is an obligation of the Company and not of Medley LLC. The
Company expects to benefit from the remaining 15% of cash tax savings, if any,
in income tax it realizes. If the Company does not have taxable income, the
Company will not be required (absent circumstances requiring an early
termination payment) to make payments under the Tax Receivable Agreement for
that taxable year because no cash tax savings will have been realized. The term
of the Tax Receivable Agreement will continue until all such tax benefits have
been utilized or expired, unless the Company exercises its right to terminate
the Tax Receivable Agreement for an amount based on the agreed payments
remaining to be made under the agreement (as described in more detail below) or
the Company breaches any of its material obligations under the Tax Receivable
Agreement in which case all obligations generally will be accelerated and due as
if the Company had exercised its right to terminate the Tax Receivable
Agreement.
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Due to the uncertain nature of the ultimate realization of its deferred tax
assets, the Company has established a valuation allowance against the benefit of
its deferred tax assets as reflected in its most recently reported financial
statements. As a result, the Company does not expect to record a liability
associated with the Unit Exchange until the Company can demonstrate that it will
have sufficient taxable income in the future to realize the tax benefits of the
Unit Exchange which would then trigger the payments due under the Tax Receivable
Agreements as described above.
All of the effects of changes in any of the Company's estimates after the date
of the Unit Exchange will be included in net income. Similarly, the effect of
subsequent changes in the enacted tax rates will be included in net income.
In addition, the Tax Receivable Agreement provides that upon certain changes of
control, the Company's (or its successor's) obligations with respect to
exchanged or acquired LLC Units (whether exchanged or acquired before or after
such transaction) would be based on certain assumptions, including that the
Company would have sufficient taxable income to fully utilize the deductions
arising from the increased tax deductions and tax basis and other benefits
related to entering into the Tax Receivable Agreement.
Furthermore, the Company may elect to terminate the Tax Receivable Agreement
early by making an immediate payment equal to the present value of the
anticipated future cash tax savings. In determining such anticipated future cash
tax savings, the Tax Receivable Agreement includes several assumptions,
including (i) that any LLC Units that have not been exchanged are deemed
exchanged for the market value of the shares of Class A Common Stock at the time
of termination, (ii) the Company will have sufficient taxable income in each
future taxable year to fully realize all potential tax savings, (iii) the tax
rates for future years will be those specified in the law as in effect at the
time of termination and (iv) certain non-amortizable assets are deemed disposed
of within specified time periods. In addition, the present value of such
anticipated future cash tax savings are discounted at a rate equal to LIBOR plus
100 basis points.
As a result of the change in control provisions and the early termination right,
the Company could be required to make payments under the Tax Receivable
Agreement that are greater than or less than the specified percentage of the
actual cash tax savings that the Company realizes in respect of the tax
attributes subject to the Tax Receivable Agreement. In these situations, the
Company's obligations under the Tax Receivable Agreement could have a
substantial negative impact on the Company's liquidity. Additionally, the
Company can provide no assurances that the Company would receive sufficient
distributions from Medley LLC in order to enable the Company to make required
payments under the Tax Receivable Agreement after the Company has paid taxes and
other expenses. Based upon the $9.51 closing price of the Class A Common Stock
on January 15, 2021 and interest rate of 1.13%, the Company estimates that, if
the Company were to exercise its termination right in respect of the Tax
Receivable Agreement on January 19, 2021, the aggregate amount of these
termination payments would be approximately $42.0 million. The foregoing number
is merely an estimate and the actual payments could differ materially. The
Company may need to incur additional indebtedness to finance payments under the
Tax Receivable Agreement to the extent its cash resources are insufficient to
meet its obligations under the Tax Receivable Agreement as a result of timing
discrepancies or otherwise.
Decisions made by the Company's active Unitholders with management positions in
the Company in the course of running the Company's business may influence the
timing and amount of payments that are received by an exchanging or selling
existing owner under the Tax Receivable Agreement. For example, the earlier
disposition of assets following an exchange or acquisition transaction generally
will accelerate payments under the Tax Receivable Agreement and increase the
present value of such payments, and the disposition of assets before an exchange
or acquisition transaction will increase an existing owner's tax liability
without giving rise to any rights of an existing owner to receive payments under
the Tax Receivable Agreement. Payments under the Tax Receivable Agreement are
based on the tax reporting positions that the Company will determine. The
Company will not be reimbursed for any payments previously made under the Tax
Receivable Agreement if a tax basis increase is successfully challenged by the
IRS. As a result, in certain circumstances, payments could be made under the Tax
Receivable Agreement in excess of the Company's cash tax savings.
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The foregoing description of the Tax Receivable Agreement is a summary only and
is qualified in its entirety by reference to the full text of such document, a
copy of which is filed as Exhibit 10.3 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2019 and is incorporated herein by
reference.
Item 3.02. Unregistered Sales of Equity Securities.
In connection with the Unit Exchange, on January 19, 2021, the Company issued to
the Unitholders an aggregate of 2,343,686 shares of Class A Common Stock in
exchange for an equivalent number of vested LLC Units held by the Unitholders,
all in accordance with the terms of the Exchange Agreement and Medley LLC's
Fourth Amended and Restated Limited Liability Company Agreement. The Unitholders
have certain registration rights with respect to the shares of Class A Common
Stock delivered in exchange for LLC Units, pursuant to the terms and subject to
the conditions of the Registration Rights Agreement, dated as of September 23,
2014, by and among the Company, Medley Group LLC, and the covered persons from
time to time party thereto (the "Registration Rights Agreement"). Upon giving
effect to the Unit Exchange, there are 3,045,177 shares of the Company's Class A
Common Stock issued and outstanding as of the date of filing of this Current
Report on Form 8-K. The 2,343,686 shares of Class A Common Stock issued in
connection with the Unit Exchange represent 77.0% of the shares of Class A
Common Stock issued and outstanding as of the date of filing of this Current
Report on Form 8-K. In effectuating the Unit Exchange, the Class A Common Stock
was issued to accredited investors in reliance upon the exemption provided by
Section 4(a)(2) of the Securities Act of 1933, as amended, and applicable state
securities laws. Copies of the Exchange Agreement, Medley LLC's Fourth Amended
and Restated Limited Liability Company Agreement, and the Registration Rights
Agreement are filed as Exhibits 10.2, 10.1 and 10.4, respectively, to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019
and are incorporated herein by reference.
Item 5.02. Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
On January 15, 2021, Unitholders' unvested LLC Units in Medley LLC were
cancelled and substituted with substantially similar grants of restricted stock
units covering Class A Common Stock of the Company ("RSUs"). The new RSUs, which
have substantially equivalent terms (including vesting schedules) as the
unvested LLC Units cancelled, were approved by the Company's Board of Directors
and issued pursuant to the Company's 2014 Omnibus Incentive Plan. The Company
issued RSUs covering an aggregate of 293,163 shares of Class A Common Stock in
substitution and cancellation of a like number of unvested LLC Units of Medley
LLC. Of these, an aggregate of 59,753 RSUs were issued to Richard T. Allorto,
Jr. (the Company's Chief Financial Officer) and an aggregate of 55,787 RSUs were
issued to John Fredericks (the Company's General Counsel to August 2020, and a
named executive officer of the Company for fiscal 2019).
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