Investments, Carried at Cost

12 Months Ended

Dec. 31, 2018

9. Investments, Carried at Cost

The following table sets forth the Company’s investments, carried at cost:

	December 31, 2018		December 31, 2017
AdvisorEngine — Preferred stock	$	25,000	$	25,000
AdvisorEngine — Option		—		3,278
Thesys.		3,080		6,909
Total	$	28,080	$	35,187

AdvisorEngine

Preferred Stock

On November 18, 2016, the Company made a $20,000 strategic investment in AdvisorEngine. The Company and AdvisorEngine also entered into an agreement whereby the Company’s asset allocation models are made available through AdvisorEngine’s open architecture platform and the Company actively introduces the platform to its distribution network. In consideration of its investment, the Company received 11,811,856 shares of Series A convertible preferred

stock

(“Series A Preferred”).

The Series A Preferred is convertible into common stock at the option of the Company and contains various rights and protections including a non-cumulative 6.0% dividend, payable if and when declared by the board of directors, and a liquidation preference that is senior to all other holders of capital stock of AdvisorEngine.

On April 27, 2017, the Company invested an additional $5,000 in AdvisorEngine to help facilitate AdvisorEngine’s acquisition of Kredible Technologies, Inc., a technology enabled, research-driven practice management firm designed to help advisors acquire new clients, and to continue to fuel AdvisorEngine’s growth, leadership and innovation in the advisor solutions space. The Company received 2,646,062 shares of Series A-1 convertible preferred stock which has substantially the same terms as the Series A Preferred.

The Company’s aggregate equity ownership interest in AdvisorEngine is approximately 47% (or 41% on a fully-diluted basis).

The investment is accounted for under the cost method of accounting as it is not considered to be in-substance common stock. No impairment existed at December

2018

or December

2017

based upon quantitative assessments and there were no observable price changes during the year ended December

2018

The table below presents the ranges and weighted averages of significant unobservable inputs used in the quantitative assessments at December

2018

and December

2017


	Range (Weighted Average)
	December 31, 2018		December 29, 2017
Market Approach
Revenue multiple		4.7x – 5.4x (5.0x)		n/a
Income Approach
Weighted average cost of capital (“WACC”)		26.0%		27.0%

An increase in the revenue multiple would result in a higher enterprise value, whereas an increase in the WACC would reduce fair value.

Option

On December 29, 2017, the Company secured an option to purchase the remaining equity interests in AdvisorEngine in connection with its commitment to provide up to $30,000 of additional working capital (See Note 8). The fair value of the option was determined to be $3,278 on December 29, 2017, using a Monte Carlo simulation which was predominantly based on unobservable inputs and was therefore classified as Level 3. The enterprise value was derived from unobservable inputs including a WACC of 27% and an option volatility of

%. An increase in the WACC would reduce AdvisorEngine’s enterprise value which would reduce the fair value of the option, whereas an increase in the option volatility would increase the fair value of the option.

The Company recognized an impairment of $

3,278

upon expiration of the option.

Thesys

On June 20, 2017, the Company was issued 7,797,533 newly authorized shares of Series Y preferred stock (“Series Y Preferred”) of Thesys in connection with the resolution of a dispute related to the Company’s ownership stake in Thesys. The Series Y Preferred represents current ownership of 18.9% of Thesys on a fully diluted basis (excluding certain reserved shares). In addition, the Company was issued a warrant to purchase 3,898,766 shares of Series Y Preferred.

The Series Y Preferred ranks

pari passu

in priority with Thesys’s current preferred stockholders, has a liquidation preference of $0.231 per share, contains various rights and protections and is convertible into common stock at the option of the Company. The warrant is exercisable for five years after closing, at varying exercise prices that increase over time and set at multiples of a pre-determined Thesys valuation (or new valuation if Thesys completes a qualified financing, as defined, within two years). If a claim is brought against Thesys or the Company relating to the settlement, the warrant will be exercisable for 100% of the number of shares of Series Y Preferred issued to the Company at closing.

The Company recorded the Series Y Preferred at its fair value of $6,909 during the second quarter of 2017 (reflected as settlement gain on the Consolidated Statements of Operations). The Series Y Preferred is not considered to be in-substance common stock and is therefore accounted for under the cost method of accounting. At December 31, 2018, the Company recognized an impairment of $3,829

as Thesys has underperformed financially when assessed against prior expectations. The enterprise value of Thesys was determined using an income approach (discounted cash flow analyses) applied to its business lines. These approaches are predominantly based on unobservable inputs and therefore the valuation is classified as Level 3.

The table below presents the ranges and weighted averages of significant unobservable inputs used in these approaches to determine the enterprise value of Thesys at December 31, 2018 and June 20, 2017:

	Range (Weighted Average)
	December 31, 2018		June 20, 2017
Market Approach (1)
Revenue multiple		n/a		0.9x
Income Approach (1)
Weighted average cost of capital (“WACC”)		3.8% – 15.5% (14.1%)		11.5% – 14.5% (12.6%)

(1)	The approach and inputs selected varied, based upon the Thesys business line being valued.

An increase in the revenue multiple would result in a higher enterprise value, whereas an increase in the WACC would reduce fair value.

The carrying value of the Company’s Series Y Preferred investment in Thesys was $3,080 and $6,909 at December 31, 2018 and December 31, 2017, respectively. The fair value of the warrant was determined to be insignificant. The warrant is not accounted for as a derivative as it cannot be net settled and is not readily convertible to cash.