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Section 1: 10-Q (10-Q)

MC_033118 Q1

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10‑Q

 

 

 

(Mark One)

 

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

For the quarterly period ended March 31, 2018

Or

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

For the transition period from                    to                 

 

Commission File Number: 001‑36418

 

Moelis & Company

(Exact name of registrant as specified in its charter)

 

 

 

Delaware
(State or other jurisdiction of
incorporation or organization)

46‑4500216
(I.R.S. Employer
Identification No.)

399 Park Avenue, 5th Floor, New York NY
(Address of principal executive offices)

10022
(Zip Code)

 

(212) 883‑3800

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and 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, non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

 

 

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

Non‑accelerated filer ☐
(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 13(a) of the Exchange Act 

 

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

 

As of April 19, 2018, there were 40,024,601 shares of Class A common stock, par value $0.01 per share, and 15,222,935 shares of Class B common stock, par value $0.01 per share, outstanding.

 

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

 

 

Page

Part I. Financial Information 

 

Item 1. 

Financial Statements

3

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

42

Item 4. 

Controls and Procedures

42

Part II. Other Information 

 

Item 1. 

Legal Proceedings

44

Item 1A. 

Risk Factors

44

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

42

Item 3. 

Defaults Upon Senior Securities

45

Item 4. 

Mine Safety Disclosures

45

Item 5. 

Other Information

45

Item 6. 

Exhibits

46

Signatures 

47

 

 

2


 

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements

Condensed Consolidated Financial Statements (Unaudited)

 

 

 

Page

Condensed Consolidated Statements of Financial Condition as of March 31, 2018 and December 31, 2017 

4

Condensed Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 

5

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2018 and 2017 

6

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 

7

Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2018 and 2017 

8

Notes to Condensed Consolidated Financial Statements 

9

 

3


 

Table of Contents

Moelis & Company

Condensed Consolidated Statements of Financial Condition

(Unaudited)

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2018

 

2017

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

130,990

 

$

213,191

 

Restricted cash

 

 

598

 

 

703

 

Receivables:

 

 

 

 

 

 

 

Accounts receivable, net of allowance for doubtful accounts of $2,122 and $1,433 as of March 31, 2018 and December 31, 2017, respectively

 

 

45,260

 

 

56,725

 

Other receivables

 

 

15,856

 

 

4,868

 

Total receivables

 

 

61,116

 

 

61,593

 

Deferred compensation

 

 

11,593

 

 

8,848

 

Investments at fair value (cost basis $28,644 and $96,351 as of March 31, 2018 and December 31, 2017, respectively)

 

 

28,186

 

 

96,108

 

Equity method investments

 

 

56,999

 

 

58,848

 

Equipment and leasehold improvements, net

 

 

10,479

 

 

10,458

 

Deferred tax asset

 

 

313,469

 

 

234,000

 

Prepaid expenses and other assets

 

 

14,382

 

 

15,319

 

Total assets

 

$

627,812

 

$

699,068

 

Liabilities and Equity

 

 

 

 

 

 

 

Compensation payable

 

$

56,257

 

$

145,152

 

Accounts payable and accrued expenses

 

 

16,457

 

 

18,323

 

Amount due pursuant to tax receivable agreement

 

 

243,997

 

 

177,148

 

Deferred revenue

 

 

2,924

 

 

4,948

 

Other liabilities

 

 

8,000

 

 

9,241

 

Total liabilities

 

 

327,635

 

 

354,812

 

Commitments and Contingencies (See Note 12)

 

 

 

 

 

 

 

Class A common stock, par value $0.01 per share (1,000,000,000 shares authorized, 41,080,910 issued and 39,959,167 outstanding at March 31, 2018; 1,000,000,000 authorized, 34,163,042 issued and 33,455,626 outstanding at December 31, 2017)

 

 

411

 

 

342

 

Class B common stock, par value $0.01 per share (1,000,000,000 shares authorized, 15,222,935 issued and outstanding at March 31, 2018; 1,000,000,000 authorized, 19,912,230 issued and outstanding at December 31, 2017)

 

 

152

 

 

199

 

Treasury stock, at cost; 1,121,743 and 707,416 shares as of March 31, 2018 and December 31, 2017, respectively

 

 

(43,977)

 

 

(23,188)

 

Additional paid-in-capital

 

 

566,015

 

 

487,163

 

Retained earnings (accumulated deficit)

 

 

(194,386)

 

 

(139,918)

 

Accumulated other comprehensive income (loss)

 

 

1,738

 

 

352

 

Total Moelis & Company equity

 

 

329,953

 

 

324,950

 

Noncontrolling interests

 

 

(29,776)

 

 

19,306

 

Total equity

 

 

300,177

 

 

344,256

 

Total liabilities and equity

 

$

627,812

 

$

699,068

 

See notes to the condensed consolidated financial statements (unaudited).

4


 

Table of Contents

 

Moelis & Company

Condensed Consolidated Statements of Operations

(Unaudited)

(dollars in thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

 

Revenues

 

$

219,418

 

$

173,258

 

Expenses

 

 

 

 

 

 

 

Compensation and benefits

 

 

127,177

 

 

101,726

 

Occupancy

 

 

4,583

 

 

4,180

 

Professional fees

 

 

5,684

 

 

5,241

 

Communication, technology and information services

 

 

7,133

 

 

5,471

 

Travel and related expenses

 

 

11,560

 

 

6,591

 

Depreciation and amortization

 

 

1,055

 

 

857

 

Other expenses

 

 

7,157

 

 

6,158

 

Total expenses

 

 

164,349

 

 

130,224

 

Operating income (loss)

 

 

55,069

 

 

43,034

 

Other income and (expenses)

 

 

587

 

 

238

 

Income (loss) from equity method investments

 

 

888

 

 

3,104

 

Income (loss) before income taxes

 

 

56,544

 

 

46,376

 

Provision for income taxes

 

 

2,563

 

 

6,997

 

Net income (loss)

 

 

53,981

 

 

39,379

 

Net income (loss) attributable to noncontrolling interests

 

 

20,656

 

 

24,101

 

Net income (loss) attributable to Moelis & Company

 

$

33,325

 

$

15,278

 

Weighted-average shares of Class A common stock outstanding

 

 

 

 

 

 

 

Basic

 

 

36,169,566

 

 

26,160,969

 

Diluted

 

 

44,596,534

 

 

32,921,576

 

Net income (loss) per share attributable to holders of shares of Class A common stock

 

 

 

 

 

 

 

Basic

 

$

0.92

 

$

0.58

 

Diluted

 

$

0.75

 

$

0.46

 

Dividends declared per share of Class A common stock

 

$

1.97

 

$

0.37

 

See notes to the condensed consolidated financial statements (unaudited).

5


 

Table of Contents

Moelis & Company

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

 

Net income

 

$

53,981

 

$

39,379

 

Unrealized gain (loss) on investments

 

 

 —

 

 

(125)

 

Foreign currency translation adjustment, net of tax

 

 

1,679

 

 

649

 

Other comprehensive income (loss)

 

 

1,679

 

 

524

 

Comprehensive income (loss)

 

 

55,660

 

 

39,903

 

Less: Comprehensive income attributable to noncontrolling interests

 

 

21,266

 

 

24,379

 

Comprehensive income (loss) attributable to Moelis & Company

 

$

34,394

 

$

15,524

 

See notes to the condensed consolidated financial statements (unaudited).

6


 

Table of Contents

Moelis & Company

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2018

    

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

Net income (loss)

 

$

53,981

 

$

39,379

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Bad debt expense

 

 

671

 

 

379

 

Depreciation and amortization

 

 

1,055

 

 

857

 

(Income) loss from equity method investments

 

 

(888)

 

 

(3,104)

 

Equity-based compensation

 

 

32,244

 

 

25,903

 

Deferred tax provision

 

 

7,302

 

 

(106)

 

Other

 

 

2,603

 

 

1,831

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

11,444

 

 

(11,707)

 

Other receivables

 

 

(7,435)

 

 

2,212

 

Prepaid expenses and other assets

 

 

1,149

 

 

(3,737)

 

Deferred compensation

 

 

(2,726)

 

 

(1,946)

 

Compensation payable

 

 

(89,487)

 

 

(85,706)

 

Accounts payable and accrued expenses

 

 

(1,963)

 

 

3,678

 

Deferred revenue

 

 

(2,024)

 

 

6,527

 

Dividends received

 

 

2,737

 

 

 —

 

Other liabilities

 

 

(1,260)

 

 

310

 

Net cash provided by (used in) operating activities

 

 

7,403

 

 

(25,230)

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of investments

 

 

(7,972)

 

 

(27,955)

 

Proceeds from sales of investments

 

 

75,310

 

 

33,000

 

Note payments received from employees

 

 

204

 

 

403

 

Purchase of equipment and leasehold improvements

 

 

(1,059)

 

 

(1,798)

 

Net cash provided by (used in) investing activities

 

 

66,483

 

 

3,650

 

Cash flows from financing activities

 

 

 

 

 

 

 

Dividends and distributions

 

 

(137,029)

 

 

(129,154)

 

Payments under tax receivable agreement

 

 

 —

 

 

(5,032)

 

Proceeds from exercise of stock options

 

 

365

 

 

 —

 

Payments to settle employee tax obligations on share-based awards

 

 

(20,789)

 

 

(7,534)

 

Class A partnership units and other equity purchased

 

 

(135)

 

 

(101)

 

Net cash provided by (used in) financing activities

 

 

(157,588)

 

 

(141,821)

 

Effect of exchange rate fluctuations on cash, cash equivalents, and restricted cash

 

 

1,396

 

 

771

 

Net increase (decrease) in cash, cash equivalents, and restricted cash

 

 

(82,306)

 

 

(162,630)

 

Cash, cash equivalents, and restricted cash, beginning of period

 

 

213,894

 

 

319,585

 

Cash, cash equivalents, and restricted cash, end of period

 

$

131,588

 

$

156,955

 

Supplemental cash flow disclosure:

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Income taxes

 

$

11,466

 

$

11,369

 

Dividends paid, declared in the prior year

 

$

 —

 

$

68,066

 

Other non-cash activity

 

 

 

 

 

 

 

Dividend equivalents issued

 

$

20,379

 

$

3,706

 

Class A Partnership Units or other equity converted into Class A Common Stock

 

$

20,434

 

$

22,181

 

Cumulative Effect Adjustment upon Adoption of ASU 2016-09

 

$

 —

 

$

658

 

Cumulative Effect Adjustment upon Adoption of ASU 2014-09

 

$

3,155

 

$

 —

 

Forfeiture of fully-vested Group LP units or other equity units

 

$

 —

 

$

36

 

See notes to the condensed consolidated financial statements (unaudited).

 

 

7


 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Moelis & Company

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

(dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained

 

Accumulated

 

 

 

 

 

 

 

 

Class A

 

Class B

 

 

 

Class A

 

Class B

 

 

 

 

Additional

 

Earnings

 

Other

 

 

 

 

 

 

 

 

Common

 

Common

 

Treasury

 

Common

 

Common

 

Treasury

 

Paid-In

 

(Accumulated

 

Comprehensive

 

Noncontrolling

 

Total

 

    

Stock

    

Stock

    

Stock

    

Stock

    

Stock

    

Stock

    

Capital

    

Deficit)

    

Income (Loss)

    

Interests

    

 Equity

Balance as of January 1, 2018

 

34,163,042

 

19,912,230

 

(707,416)

 

$

342

 

$

199

 

$

(23,188)

 

$

487,163

 

$

(139,918)

 

$

352

 

$

19,306

 

$

344,256

Cumulative Effect Adjustment upon Adoption of ASU 2014-09

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,155

 

 

 —

 

 

 —

 

 

3,155

Cumulative Effect Adjustment upon Adoption of ASU 2016-01

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(317)

 

 

317

 

 

 —

 

 

 —

Balance as of January 1, 2018, as adjusted

 

34,163,042

 

19,912,230

 

(707,416)

 

$

342

 

$

199

 

$

(23,188)

 

$

487,163

 

$

(137,080)

 

$

669

 

$

19,306

 

$

347,411

Net income (loss)

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

33,325

 

 

 —

 

 

20,656

 

 

53,981

Other comprehensive income (loss)

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,069

 

 

610

 

 

1,679

Equity-based compensation

 

2,210,079

 

 —

 

 —

 

 

22

 

 

 —

 

 

 —

 

 

31,764

 

 

 —

 

 

 —

 

 

458

 

 

32,244

Equity-based payments to non-employees

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,016

 

 

 —

 

 

 —

 

 

 —

 

 

2,016

Dividends declared ($1.97 per share of Class A Common Stock) and distributions

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

20,379

 

 

(90,631)

 

 

 —

 

 

(66,777)

 

 

(137,029)

Treasury Stock Purchases

 

 —

 

 —

 

(414,327)

 

 

 —

 

 

 —

 

 

(20,789)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(20,789)

Exercise of stock options

 

18,494

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

365

 

 

 —

 

 

 —

 

 

 —

 

 

365

Issuance of Class A common stock and cancellation of Class B common stock in connection with offerings and other exchanges

 

4,689,295

 

(4,689,295)

 

 —

 

 

47

 

 

(47)

 

 

 —

 

 

24,328

 

 

 —

 

 

 —

 

 

(4,029)

 

 

20,299

Balance as of March 31, 2018

 

41,080,910

 

15,222,935

 

(1,121,743)

 

$

411

 

$

152

 

$

(43,977)

 

$

566,015

 

$

(194,386)

 

$

1,738

 

$

(29,776)

 

$

300,177

Balance as of January 1, 2017

 

20,948,998

 

31,138,193

 

(387,890)

 

$

210

 

$

311

 

$

(10,930)

 

$

291,026

 

$

(68,229)

 

$

(543)

 

$

39,596

 

$

251,441

Cumulative Effect Adjustment upon Adoption of ASU 2016-09

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

4,855

 

 

(4,197)

 

 

 —

 

 

 —

 

 

658

Balance as of January 1, 2017, as adjusted

 

20,948,998

 

31,138,193

 

(387,890)

 

$

210

 

$

311

 

$

(10,930)

 

$

295,881

 

$

(72,426)

 

$

(543)

 

$

39,596

 

$

252,099

Net income (loss)

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

15,278

 

 

 —

 

 

24,101

 

 

39,379

Other comprehensive income (loss)

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

246

 

 

278

 

 

524

Equity-based compensation

 

886,818

 

 —

 

 —

 

 

 9

 

 

 —

 

 

 —

 

 

25,206

 

 

 —

 

 

 —

 

 

688

 

 

25,903

Equity-based payments to non-employees

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,874

 

 

 —

 

 

 —

 

 

 —

 

 

1,874

Dividends declared ($0.37 per share of Class A Common Stock) and distributions

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

3,706

 

 

(13,606)

 

 

 —

 

 

(51,188)

 

 

(61,088)

Treasury stock purchases

 

 —

 

 —

 

(205,085)

 

 

 —

 

 

 —

 

 

(7,534)

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(7,534)

Issuance of Class A common stock and acquisition of Class B common stock in connection with follow-on offering

 

5,356,876

 

(5,356,876)

 

 —

 

 

53

 

 

(53)

 

 

 —

 

 

28,374

 

 

 —

 

 

 —

 

 

(6,294)

 

 

22,080

Other

 

 —

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(36)

 

 

 —

 

 

 —

 

 

 —

 

 

(36)

Balance as of March 31, 2017

 

27,192,692

 

25,781,317

 

(592,975)

 

$

272

 

$

258

 

$

(18,464)

 

$

355,005

 

$

(70,754)

 

$

(297)

 

$

7,181

 

$

273,201

 

 

 

 

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1. ORGANIZATION AND BASIS OF PRESENTATION

Moelis & Company and its consolidated subsidiaries (the “Company,” “we,” “our,” or “us”) is a leading global investment bank, incorporated in Delaware. Prior to the Company’s IPO, the business operated as a Delaware limited partnership that commenced operations during 2007. Following the IPO, the operations are owned by Moelis & Company Group LP (“Group LP”), a U.S. Delaware limited partnership, and Group LP is controlled by Moelis & Company. Moelis & Company’s shareholders are entitled to receive a portion of Group LP’s economics through their direct ownership interests in shares of Class A common stock of Moelis & Company. The noncontrolling interest owners of Group LP (not Moelis & Company) receive economics of the operations primarily through their ownership interests in Group LP partnership units.

The Company’s activities as an investment banking advisory firm constitute a single business segment offering clients, including corporations, governments and financial sponsors, a range of advisory services with expertise across all major industries in mergers and acquisitions, recapitalizations and restructurings and other corporate finance matters.

Basis of Presentation—The condensed consolidated financial statements of Moelis & Company include its partnership interests in Group LP, its equity interest in the sole general partner of Group LP, Moelis & Company Group GP LLC (“Group GP”), and its interests in its subsidiaries. Moelis & Company will operate and control all of the business and affairs of Group LP and its operating entity subsidiaries indirectly through its equity interest in Group GP. The Company operates through the following subsidiaries:

· Moelis & Company LLC (“Moelis U.S.”), a Delaware limited liability company, a registered broker‑dealer with the U.S. Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”).

· Moelis & Company International Holdings LLC (“Moelis International”), a Delaware limited liability company, owns the following entities and investments:

·

Moelis & Company UK LLP (“Moelis UK”), a limited liability partnership registered under the laws of England and Wales. In addition to the United Kingdom, Moelis UK maintains operations through the following branches:

·

Moelis & Company UK LLP, French Branch (French branch)

·

Moelis & Company Europe Limited, Frankfurt am Main Branch (German branch)

·

Moelis & Company UK LLP, DIFC Branch (Dubai branch)

·

Moelis & Company Asia Limited (“Moelis Asia”), a limited company incorporated in Hong Kong licensed under the Hong Kong Securities and Futures Ordinance to provide financial advisory services. In addition to Hong Kong, Moelis Asia maintains operations in Beijing China through Hong Kong Moelis & Company Asia Limited Beijing Representative Office, as well as having a wholly-owned Chinese subsidiary, Moelis & Company Consulting (Beijing) Company Limited.

·

Moelis & Company India Private Limited, a private limited company incorporated in Mumbai, India.

·

Moelis & Company Assessoria Financeira Ltda. (“Moelis Brazil”), a limited liability company incorporated in São Paulo, Brazil.

·

An equity method investment in Moelis Australia Limited (“Moelis Australia”), a public company listed on the Australian Securities Exchange

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2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting—The Company prepared the accompanying condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). As permitted by the interim reporting rules and regulations set forth by the SEC, the condensed consolidated financial statements presented exclude certain financial information and footnote disclosures normally included in audited financial statements prepared in accordance with U.S. GAAP. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to fairly present the accompanying unaudited condensed consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

Consolidation—The Company’s policy is to consolidate (i) entities, other than limited partnerships, in which it has a controlling financial interest, (ii) variable interest entities where the Company has a variable interest and is deemed to be the primary beneficiary and (iii) limited partnerships where the Company has ownership of the majority of voting interests. When the Company does not have a controlling interest in an entity, but exerts significant influence over the entity’s operating and financial decisions, the Company applies the equity method of accounting in which it records in earnings its share of income or losses of the entity. All intercompany balances and transactions with the Company’s subsidiaries have been eliminated in consolidation.

Use of Estimates—The preparation of condensed consolidated financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the period in which they are determined to be necessary.

In preparing the condensed consolidated financial statements, management makes estimates and assumptions regarding:

·

the adequacy of the allowance for doubtful accounts;

·

the measurement and realization of deferred taxes;

·

the measurement of amount due pursuant to tax receivable agreement;

·

the measurement and vesting of equity‑based compensation; and

·

other matters that affect the reported amounts and disclosures of contingencies in the financial statements.

 

Cash, Cash Equivalents and Restricted Cash—Cash and cash equivalents include all short‑term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less from the date of purchase.

The Company’s cash is maintained in U.S. and non‑U.S. bank accounts, of which most bank account balances had little or no insurance coverage (most balances are held in U.S. and U.K. accounts which exceeded the U.S. Federal Deposit Insurance Corporation and U.K. Financial Services Compensation Scheme coverage limits). The Company’s cash equivalents are invested primarily in government securities money markets, government debt securities and U.S. Treasury instruments.

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Effective January 1, 2018, the Company adopted ASU 2016-18 which requires restricted cash to be included in the beginning and ending balances of cash and cash equivalents within the condensed consolidated statement of cash flows. As a result, the beginning and ending balances of the prior period in the condensed consolidated statement of cash flows has been adjusted to include restricted cash.

The Company’s restricted cash is comprised of collateral deposits primarily held by certain non-U.S. subsidiaries. These deposits are required for certain direct debit accounts and are used to satisfy future medical claims. A reconciliation of the Company’s cash, cash equivalents and restricted cash as of March 31, 2018 and 2017, is presented below.

 

 

 

 

 

 

 

 

 

    

March 31, 

 

 

 

2018

 

2017

 

Cash

 

$

76,791

 

$

40,184

 

Cash equivalents

 

 

54,199

 

 

116,143

 

Restricted cash

 

 

598

 

 

628

 

Total cash, cash equivalents, and restricted cash shown in the statement of cash flows

 

$

131,588

 

$

156,955

 

 

Additionally, as of December 31, 2017, the Company held cash of $86,032 and cash equivalents of $127,159.

Receivables—The accompanying condensed consolidated statements of financial condition present accounts receivable balances net of allowance for doubtful accounts based on the Company’s assessment of the collectability of customer accounts.

The Company maintains an allowance for doubtful accounts that, in management’s opinion, provides for an adequate reserve to cover losses that may be incurred. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, age of the accounts receivable, and the current economic conditions that may affect a customer’s ability to pay such amounts owed to the Company.

After concluding that a reserved accounts receivable is no longer collectible, the Company will charge‑off the receivable. This is determined based on several factors including the age of the accounts receivable and the credit worthiness of the customer. This has the effect of reducing both the gross receivable and the allowance for doubtful accounts.

 

Deferred Compensation—Deferred compensation costs represent arrangements with certain employees whereby cash payments are subject to a required period of service subsequent to payment by the Company. These amounts are charged to expenses over the period that the employee is required to provide services in order to vest in the payment.

Financial Instruments at Fair Value—Fair value is generally based on quoted prices, however if quoted market prices are not available, fair value is determined based on other relevant factors, including dealer price quotations, price activity for equivalent instruments and valuation pricing models. The Company established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is affected by a number of factors, including the type of instrument, the characteristics specific to the instrument and the state of the marketplace (including the existence and transparency of transactions between market participants). Financial instruments with readily‑available actively quoted prices or for which fair value can be measured from actively‑quoted prices in an orderly market will generally have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:

Level 1—Quoted prices (unadjusted) are available in active markets for identical instruments that the Company has the ability to access as of the reporting date. The Company, to the extent that it holds such instruments, does

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not adjust the quoted price for these instruments, even in situations in which the Company holds a large position and a sale could reasonably affect the quoted price.

Level 2—Pricing inputs are observable for the instruments, either directly or indirectly, as of the reporting date, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.

Level 3—Pricing inputs are unobservable for the instruments and include situations where there is little, if any, market activity for the investments. The inputs into the determination of fair value require significant judgment or estimation by the Company’s management.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the instrument.

For level 3 investments in which pricing inputs are unobservable and limited market activity exists, management’s determination of fair value is based on the best information available, may incorporate management’s own assumptions and involves a significant degree of judgment.

Effective January 1, 2018, the Company adopted ASU 2016-01 using the modified retrospective approach. As a result, a cumulative adjustment was recorded which decreased retained earnings and increased accumulated other comprehensive income by $317. The adjustment is related to the accumulated unrealized losses in fair value of an equity investment as of December 31, 2017. No prior periods were adjusted as a result of this change in accounting policy. The adoption of ASU 2016-01 requires that changes in fair value of equity investments measured at fair value be recognized in net income prospectively. For each period where a consolidated statement of operations is presented, the Company will disclose the portion of realized and/or unrealized gains and losses related to equity investments held at the reporting date or sold during the period.

 

Equity Method Investments—The Company accounts for its equity method investments under the equity method of accounting as the Company does not control these entities but has the ability to exercise significant influence. The amounts recorded on the condensed consolidated financial statements of financial condition reflect the Company’s share of contributions made to, distributions received from, and the equity earnings and losses of, the investments. The Company reflects its share of gains and losses of the investment in income (loss) from equity method investments in the condensed consolidated statements of operations. Certain adjustments have been made to account for the Company’s equity method investment in Moelis Australia under US GAAP as Moelis Australia Limited follows local accounting principles under Australian Accounting Standards.

Equipment and Leasehold Improvements—Office equipment and furniture and fixtures are stated at cost less accumulated depreciation, which is determined using the straight‑line method over the estimated useful lives of the assets, ranging from three to seven years, respectively. Leasehold improvements are stated at cost less accumulated amortization, which is determined using the straight‑line method over the lesser of the term of the lease or the estimated useful life of the asset.

Major renewals and improvements are capitalized and minor replacements, maintenance and repairs are charged to expenses as incurred. Upon retirement or disposal of assets, the cost and related accumulated depreciation or amortization are removed from the condensed consolidated statements of financial condition and any gain or loss is reflected in the condensed consolidated statements of operations.

 

Deferred Tax Asset and Amount Due Pursuant to Tax Receivable Agreement—In conjunction with the IPO, the Company was treated for U.S. federal income tax purposes as having directly purchased Class A partnership units in

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Group LP from the existing unitholders. Additional Group LP Class A partnership units may be exchanged for shares of Class A common stock in the Company. The initial purchase and future exchanges are expected to result in an increase in the tax basis of Group LP’s assets attributable to the Company’s interest in Group LP. These increases in the tax basis of Group LP’s assets attributable to the Company’s interest in Group LP would not have been available but for the initial purchase and future exchanges. Such increases in tax basis are likely to increase (for tax purposes) depreciation and amortization deductions and therefore reduce the amount of income tax the Company would otherwise be required to pay in the future. As a result, the Company records a deferred tax asset for such increase in tax basis.

The Company has entered into a tax receivable agreement with its eligible Managing Directors that will provide for the payment by the Company to its eligible Managing Directors of 85% of the amount of cash savings, if any, in U.S. federal, state, and local income tax or franchise tax that the Company actually realizes as a result of (a) the increases in tax basis attributable to exchanges by its eligible Managing Directors and (b) tax benefits related to imputed interest deemed to be paid by the Company as a result of this tax receivable agreement. The Company expects to benefit from the remaining 15% of cash savings, if any, in income tax that it realizes and record any such estimated tax benefits as an increase to additional paid-in-capital. For purposes of the tax receivable agreement, cash savings in income tax will be computed by comparing the Company’s actual income tax liability to the amount of such taxes that it would have been required to pay had there been no increase to the tax basis of the tangible and intangible assets of Group LP as a result of the exchanges and had it not entered into the tax receivable agreement. The term of the tax receivable agreement commenced upon consummation of the IPO and 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 an agreed value of payments remaining to be made under the agreement. The Company has recorded the estimated tax benefits related to the increase in tax basis and imputed interest as a result of the initial purchase and subsequent exchanges described above as a deferred tax asset in the condensed consolidated statements of financial condition. The amount due to its eligible Managing Directors related to the tax receivable agreement as a result of the initial purchase and subsequent exchanges described above is recorded as amount due pursuant to tax receivable agreement in the condensed consolidated statements of financial condition. The amounts recorded for the deferred tax asset and the liability for our obligations under the tax receivable agreement are estimates. Any adjustments to our estimates subsequent to their initial establishment will be included in net income (loss). Future exchanges of Class A partnership units in Group LP for Class A common shares in the Company will be accounted for in a similar manner.

Revenue and Expense Recognition

 

Initial Adoption—Effective January 1, 2018, the Company adopted ASU 2014-09 and all related amendments (“Topic 606”) using the modified retrospective method for all contracts. The adoption of the new standard requires the Company to present reimbursable expenses gross in revenues and expenses and to use new revenue recognition patterns as discussed below in the policy. As a result, a cumulative adjustment was recorded which increased the opening balance of other receivables and retained earnings by $3,722 for outstanding reimbursable expenses at December 31, 2017, which would have been recognized as revenues under the new standard. The tax effect of this adjustment decreased retained earnings by $567, resulting in a net increase to the opening balance of retained earnings of $3,155. No prior periods were adjusted as a result of this change in accounting policy.

 

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Impact of Adoption on Year-to-date Results—See below for the impact to our condensed consolidated financial statements from the adoption of Topic 606, as of and for the three months ended March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

    

As

 

Excluding adoption

 

 

 

 

reported

 

of Topic 606

 

Change

Statement of Financial Condition

 

 

 

 

 

 

 

 

 

Other receivables

 

$

15,856

 

$

12,374

 

$

3,482

Accounts payable and accrued expenses

 

 

16,457

 

 

15,934

 

 

523

Retained earnings (accumulated deficit)

 

 

(194,386)

 

 

(197,345)

 

 

2,959

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended March 31, 2018

 

 

As

 

Excluding adoption

 

 

 

 

reported

 

of Topic 606

 

Change

Statement of Operations

 

 

 

 

 

 

 

 

 

Revenues

 

$

219,418

 

$

216,230

 

$

3,188

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

Professional fees

 

 

5,684

 

 

4,890

 

 

794

Communication, technology and information services

 

 

7,133

 

 

6,827

 

 

306

Travel and related expenses

 

 

11,560

 

 

9,571

 

 

1,989

Other expenses

 

 

7,157

 

 

6,818

 

 

339

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

56,544

 

 

56,784

 

 

(240)

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

2,563

 

 

2,607

 

 

(44)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

53,981

 

$

54,177

 

$

(196)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share attributable to holders of shares of Class A common stock

 

 

 

 

 

 

 

 

 

Basic

 

$

0.92

 

$

0.92

 

$

 —

Diluted

 

$

0.75

 

$

0.75

 

$

 —

 

The adoption of Topic 606 is not anticipated to have a material impact to our condensed consolidated financial statements as the vast majority of our revenues are from variable transaction fees which are constrained for recognition until it is probable that a significant revenue reversal will not occur, which is similar to our accounting under the old standard where revenues were primarily recognized upon the completion of our engagements.

 

The Company recognizes revenues from providing advisory services when or as our obligations are fulfilled and collection is reasonably assured. The vast majority of our advisory revenues, which include reimbursements for certain out-of-pocket expenses, are recognized over time; however, a small number of transactions may be recognized at a point in time. We provide our advisory service on an ongoing basis which, for example, may include evaluating and selecting one of multiple strategies. During such engagements, our clients are continuously benefitting from our counsel and the over time recognition matches the transfer of such benefits. However, the recognition of transaction fees is constrained until substantially all services have been provided, specified conditions have been met and the transaction is effectively complete. Upfront fees and retainers specified in our engagement letters that meet the over time criteria will be recognized on a systematic basis over the estimated period where the related services are performed. Revenues may be recognized at a point in time if the engagement represents a singular objective that does not transfer any notable value

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until formally completed, such as when issuing a fairness opinion. In these instances, the point in time recognition appropriately matches the transfer and consumption of our services.

 

Incremental costs of obtaining a contract are expensed as incurred since such costs are generally not recoverable and the typical duration of our advisory contracts is less than one year (as allowed per ASC 340-40-25-1). Costs to fulfill contracts consist of out-of-pocket expenses that are part of performing our advisory services and are typically expensed as incurred, except where the transfer and consumption of our services occurs at a point in time. For engagements recognized at a point in time, out-of-pocket expenses are capitalized and subsequently expensed in the condensed consolidated statement of operations upon completion of the engagement. The Company records deferred revenues when it receives fees from clients that have not yet been earned (e.g. an upfront fee) or when the Company has an unconditional right to consideration before all performance obligations are complete (e.g. upon satisfying conditions to earn an announcement fee, but before the transaction is consummated).

 

Equity‑based Compensation—The Company recognizes the cost of employee services received in exchange for an equity instrument award. The cost is based on its grant-date fair value based on quoted market prices at the time of grant amortized over the service period required by the award’s vesting terms. The Company records as treasury stock shares repurchased from its employees for the purpose of settling tax liabilities incurred upon the vesting of restricted stock units (“RSUs”). The Company records dividends in kind, net of forfeitures, on outstanding RSUs as a dividend payment and a charge to equity. Dividends in kind on RSUs are subject to the same vesting conditions as the underlying RSUs on which they were accrued. Dividends in kind will be forfeited if the award does not vest.

Effective January 1, 2017, the Company adopted a change in accounting policy in accordance with Accounting Standards Update 2016-09, “Compensation—Stock Compensation (Topic 718)” (“ASU 2016-09”) to account for forfeitures as they occur. The change was applied on a modified retrospective basis with a cumulative decrease to retained earnings and an increase in additional paid-in capital (“APIC”) of $4,855 as of January 1, 2017. The tax effect of this adjustment increased deferred tax assets and retained earnings by $658. No prior periods were adjusted as a result of this change in accounting policy.

The Company has a retirement plan whereby a retiring employee generally will not forfeit certain qualifying incentive RSUs granted during employment if at retirement the employee meets certain requirements. For qualifying awards issued prior to December 1, 2016, the employee must (i) be at least 54 years old and (ii) have provided at least 8 consecutive years of service to the Company. For qualifying awards issued on or after December 1, 2016, (i) the employee must be at least 56 years old, (ii) the employee must have provided at least 5 consecutive years of service to the Company and (iii) the total of (i) and (ii) must be equal to at least 65 years. Any such RSUs will continue to vest on their applicable vesting schedule, subject to noncompetition and other terms. Over time a greater number of employees may become retirement eligible and the related requisite service period over which we will expense these awards will be shorter than the stated vesting period. Any unvested RSUs prior to meeting the stated requisite service period or retirement eligibility date are eligible to receive dividends in kind; however, the right to dividends in kind will be forfeited if the underlying award does not vest.

 

Income Taxes—The Company accounts for income taxes in accordance with ASC 740, “Accounting for Income Taxes” (“ASC 740”), which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its assets and liabilities by applying the enacted tax rates in effect for the year in which the differences are expected to reverse. Such net tax effects on temporary differences are reflected on the Company’s condensed consolidated statements of financial condition as deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when the Company believes that it is more‑likely‑than‑not that some portion or all of the deferred tax assets will not be realized.

ASC 740‑10 prescribes a two‑step approach for the recognition and measurement of tax benefits associated with the positions taken or expected to be taken in a tax return that affect amounts reported in the financial statements. The Company has reviewed and will continue to review the conclusions reached regarding uncertain tax positions, which may be subject to review and adjustment at a later date based on ongoing analyses of tax laws, regulations and

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interpretations thereof. For the three months ended March 31, 2018 and 2017, no unrecognized tax benefit was recorded. To the extent that the Company’s assessment of the conclusions reached regarding uncertain tax positions changes as a result of the evaluation of new information, such change in estimate will be recorded in the period in which such determination is made. The Company reports income tax‑related interest and penalties relating to uncertain tax positions, if applicable, as a component of income tax expense. For the three months ended March 31, 2018 and 2017, no such amounts were recorded.

Prior to January 1, 2017, all excess tax benefits resulting from exercise or settlement of share-based payment transactions were recognized in APIC and any tax deficiencies were either offset against APIC, or were recognized in the income statement under certain conditions. Under ASU 2016-09, all excess tax benefits and deficiencies are recognized as income tax benefits or expenses in the condensed consolidated statement of operations prospectively.

Under ASU 2016-09, the Company is now required to present excess tax benefits and detriments as an operating activity in the same manner as other cash flows related to income taxes rather than as a financing activity. The Company adopted these changes retrospectively, and prior year excess tax benefits are now reflected in changes in prepaid expenses and other assets within the condensed consolidated statement of cash flows.

Foreign Currency Translation—Assets and liabilities held in non‑U.S. dollar denominated currencies are translated into U.S. dollars at exchange rates in effect at the end of the reporting period. Revenues and expenses are translated at average exchange rates during the reporting period. A charge or credit is recorded to other comprehensive income to reflect the translation of these amounts to the extent the non‑U.S. currency is designated the functional currency of the subsidiary. Non‑functional currency related transaction gains and losses are immediately recorded in the condensed consolidated statements of operations.

 

3. RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”). ASU 2016-02 increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments will retain lease classifications, distinguishing finance leases from operating leases, using criteria that is substantially similar for distinguishing capital leases from operating leases in previous guidance. Lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. Upon initial evaluation, the Company has determined it will record right-to-use assets and liabilities measured at the present value of reasonably certain lease payments on our consolidated statements of financial condition. We do not anticipate any material changes to our condensed and consolidated statements of operations.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU 2018-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. Upon initial evaluation, we do not anticipate any material changes to our condensed consolidated financial statements.

4. EQUITY METHOD INVESTMENTS

Moelis Australia

On April 1, 2010, the Company entered into a 50‑50 joint venture in Moelis Australia Holdings PTY Limited, investing a combination of cash and certain net assets in exchange for its interests. The remaining 50% was owned by an Australian trust established by and for the benefit of Moelis Australia senior executives.

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On April 10, 2017, Moelis Australia Holdings PTY Limited consummated their initial public offering and became listed on the Australian Securities Exchange as Moelis Australia Limited (ASX: MOE). As a result of the offering, the Company’s ownership interest in Moelis Australia was diluted to less than 50% and the Company recognized a gain of approximately $15,170 during the second quarter of 2017, recorded in other income and expenses on the condensed consolidated statement of operations. Contemporaneous with the offering, Moelis Australia agreed to terminate an asset management related revenue sharing agreement resulting in a payment to a third party, of which the Company recognized a charge of approximately $2,400 in income (loss) from equity method investments during the second quarter of 2017. In connection with Moelis Australia’s initial public offering, the Company and Moelis Australia entered into a Strategic Alliance Agreement for Moelis Australia to continue to conduct its investment banking advisory business in Australia and New Zealand as an integrated part of the global advisory business of the Company consistent with the manner in which Moelis Australia and the Company have partnered together since 2010. Also, in connection with the offering and new shareholders agreement, the Company and Moelis Australia terminated a put option enabling the key senior Australian executive to sell his shares held in Moelis Australia back to the Company, and a call option held by the Company to purchase additional shares in Moelis Australia. On March 20, 2017, Moelis Australia declared a dividend, of which the Company received $11,672 on April 18, 2017. The Company accounted for the dividend as a return on investment and reduced the carrying value of the investment in Moelis Australia by $11,672 on April 18, 2017.

On September 13, 2017 and October 30, 2017, Moelis Australia completed offerings of 11,940,000 and 10,060,000 shares of common stock, respectively, to raise additional capital. The issuance of shares further reduced Moelis & Company’s ownership interest in Moelis Australia. These shares were issued at a fair value greater than the carrying value of the ownership interest disposed, resulting in gains of approximately $14,429 and $9,680, during the third and fourth quarter of 2017, respectively, recorded in other income on the condensed and consolidated statement of operations.

Moelis Australia issued additional shares during 2017 related to acquisitions, which further reduced Moelis & Company’s ownership interest in Moelis Australia. The shares were issued at a fair value greater than the carrying value of the ownership interest disposed, resulting in gains of approximately $2,280 and $92, during the second and third quarter of 2017, respectively, recorded in other income and expenses on the condensed and consolidated statement of operations.

On February 20, 2018, Moelis Australia declared a dividend, of which the Company received $2,737 on March 7, 2018. The Company accounted for the dividend as a return on investment and reduced the carrying value of the investment in Moelis Australia by $2,737.

For the three months ended March 31, 2018 and 2017, income from this equity method investment was $888 and $3,112, respectively.

5. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Equipment and leasehold improvements, net consists of the following:

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2018

 

2017

 

Office equipment

 

$

9,694

 

$

9,639

 

Furniture and fixtures

 

 

3,429

 

 

3,424

 

Leasehold improvements

 

 

12,215

 

 

11,324

 

Total

 

 

25,338

 

 

24,387

 

Less accumulated depreciation and amortization

 

 

(14,859)

 

 

(13,929)

 

Equipment and leasehold improvements, net

 

$

10,479

 

$

10,458

 

Depreciation and amortization expenses for fixed assets totaled $1,055 and $857 for the three months ended March 31, 2018 and 2017, respectively.

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6. FAIR VALUE MEASUREMENTS

The Company established a fair value hierarchy which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories (from highest to lowest) based on inputs:

Level 1—Quoted prices (unadjusted) are available in active markets for identical instruments that the Company has the ability to access as of the reporting date. The Company, to the extent that it holds such instruments, does not adjust the quoted price for these instruments, even in situations in which the Company holds a large position and a sale could reasonably affect the quoted price.

Level 2—Pricing inputs are observable for the instruments, either directly or indirectly, as of the reporting date, but are not the same as those used in level 1. Fair value is determined through the use of models or other valuation methodologies.

Level 3—Pricing inputs are unobservable for the instruments and include situations in which there is little, if any, market activity for the investments. The inputs into the determination of fair value require significant judgment or estimation by the Company’s management.

The estimated fair values of government securities money markets, U.S. Treasury instruments, and government debt securities as of March 31, 2018 and December 31, 2017 are based on quoted prices for recent trading activity in identical or similar instruments. The Company generally invests in U.S. Treasury instruments with maturities of less than twelve months. See Note 2 for further information on the Company’s fair value hierarchy.

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Table of Contents

 

The following table summarizes the levels of the fair value hierarchy into which the Company’s financial assets fall as of March 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Total

    

Level 1

    

Level 2

    

Level 3