Notes to Consolidated Financial Statements (unaudited)
Note 1
Business and Organization
Diamond Hill Investment Group, Inc. (the "Company"), an Ohio corporation, derives its consolidated revenues and net income from investment advisory and fund administration services.
Diamond Hill Capital Management, Inc. ("DHCM"), an Ohio corporation, is a wholly owned subsidiary of the Company and a registered investment adviser. DHCM is the investment adviser to the Diamond Hill Funds (the "Funds"), a series of open-end mutual funds, private investment funds, and other institutional accounts. DHCM is also administrator for the Funds.
Note 2
Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as of
June 30, 2019
and
December 31, 2018
, and for the
three- and six-
month periods ended
June 30, 2019
and
2018
, for Diamond Hill Investment Group, Inc. and its subsidiaries (referred to in these notes to the condensed consolidated financial statements as "the Company," "management," "we," "us," and "our") have been prepared in accordance with United States generally accepted accounting principles ("GAAP") and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (the "SEC") Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair statement of the financial condition and results of operations at the dates and for the interim periods presented have been included. The results of operations for any interim period are not necessarily indicative of the results of operations to be expected for any full fiscal year. These unaudited condensed consolidated financial statements and footnotes should be read in conjunction with the audited consolidated financial statements of the Company included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2018
(the "
2018
Annual Report") as filed with the SEC.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions related to the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.
Reclassification
Certain prior period amounts and disclosures may have been reclassified to conform to the current period's financial presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the operations of the Company and its controlled subsidiaries. All inter-company transactions and balances have been eliminated in consolidation.
The Company holds certain investments in the Funds, and previously held investment in an exchange traded fund (the "ETF") advised by the Company, for general corporate investment purposes, to provide seed capital for newly formed strategies or to add capital to existing strategies. The Funds are organized in a series fund structure in which there are multiple mutual funds within one Trust. The Trust is an open-end investment company registered under the Investment Company Act of 1940, as amended (the"1940 Act"). The ETF was an individual series of ETF Series Solutions which was also an open-end investment company registered under the 1940 Act. The ETF liquidated and its assets were distributed to its shareholders on April 5, 2019. Each of the individual mutual funds and the ETF represents a separate share class of a legal entity organized under the Trust. The Company performs its analysis at the individual mutual fund and ETF level and has concluded the mutual funds are, and the ETF was, voting rights entities ("VREs") because the structure of the investment product is such that the shareholders are deemed to have the power through voting rights to direct the activities that most significantly impact the entity's economic performance. To the extent material, these investment products are consolidated if Company ownership, directly or indirectly, represents a majority interest (greater than 50%). The Company records redeemable noncontrolling interests in consolidated investments for which the Company's ownership is less than 100%. The Company has consolidated the Diamond Hill Core
Bond Fund and the Diamond Hill Global Fund (collectively the "Consolidated Funds") as of
June 30, 2019
. The Company deconsolidated the ETF and the Diamond Hill High Yield Fund during the six months ended June 30, 2019, as the Company's ownership declined to less than 50%.
DHCM is the managing member of Diamond Hill General Partner, LLC (the “General Partner”), which is the general partner of Diamond Hill Investment Partners, L.P. (“DHIP”) whose underlying assets consist primarily of marketable securities.
DHCM is wholly owned by the Company and is consolidated by us. Further, DHCM, through its control of the General Partner, has the power to direct DHIP's economic activities and the right to receive investment advisory fees that may be significant to DHIP.
The Company concluded it did not have a variable interest in DHIP as the fees paid to the General Partner are considered to contain customary terms and conditions as found in the market for similar products and the Company has no equity ownership in DHIP.
Redeemable Noncontrolling Interest
Redeemable noncontrolling interest represents third-party interests in the Consolidated Funds. This interest is redeemable at the option of the investors and therefore is not treated as permanent equity. Redeemable noncontrolling interest is recorded at redemption value, which approximates the fair value each reporting period.
Segment Information
Management has determined that the Company operates in
one
business segment, providing investment management and administration services to mutual funds, institutional accounts, and private investment funds. Therefore, no disclosures relating to operating segments are presented in the Company's annual or interim financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits and money market mutual funds held by DHCM.
Accounts Receivable
Accounts receivable are recorded when they are due and are presented on the balance sheet net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical losses, existing conditions in the industry, and the financial stability of the individual or entity that owes the receivable. No allowance for doubtful accounts was deemed necessary at
June 30, 2019
or
December 31, 2018
. Accounts receivable from the Funds were
$9.6 million
as of
June 30, 2019
and
$9.4 million
as of
December 31, 2018
.
Investments
Management determines the appropriate classification of its investments at the time of purchase and re-evaluates its determination at each reporting period.
Investments in the Funds we advise where the Company has neither control nor the ability to exercise significant influence, as well as securities held in the Consolidated Funds, are measured at fair value based on quoted market prices. Unrealized gains and losses are recorded as investment income (loss) in the Company's consolidated statements of income.
Investments classified as equity method investments represent investments in which the Company owns between 20-50% of the outstanding voting interests in the entity or when it is determined that the Company is able to exercise significant influence but not control over the investments. When using the equity method, the Company recognizes its respective share of the investee's net income or loss for the period, which is recorded as investment income in the Company's consolidated statements of income.
Property and Equipment
Property and equipment, consisting of leasehold improvements, right-of use lease assets, computer equipment, furniture, and fixtures, are carried at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated lives of the assets.
Revenue Recognition – General
Revenue is recognized when performance obligations under the terms of a contract with a client are satisfied. The Company earns substantially all of its revenue from investment advisory and fund administration contracts. Investment advisory and administration fees, generally calculated as a percentage of assets under management ("AUM"), are recorded as revenue as services are performed. In addition to fixed fees based on a percentage of AUM, certain client accounts also provide periodic variable rate fees.
Revenue earned during the
three months ended June 30, 2019
and
2018
under contracts with clients include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
Investment advisory
|
|
Mutual fund
administration, net
|
|
Total revenue
|
|
Proprietary funds
|
$
|
24,335,369
|
|
|
$
|
2,034,344
|
|
|
$
|
26,369,713
|
|
|
Sub-advised funds and institutional accounts
|
7,175,303
|
|
|
—
|
|
|
7,175,303
|
|
|
|
$
|
31,510,672
|
|
|
$
|
2,034,344
|
|
|
$
|
33,545,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
Investment advisory
|
|
Mutual fund
administration, net
|
|
Total revenue
|
|
Proprietary funds
|
$
|
26,294,908
|
|
|
$
|
2,401,442
|
|
|
$
|
28,696,350
|
|
|
Sub-advised funds and institutional accounts
|
7,231,365
|
|
|
|
|
7,231,365
|
|
|
|
$
|
33,526,273
|
|
|
$
|
2,401,442
|
|
|
$
|
35,927,715
|
|
Revenue earned during the
six months ended June 30, 2019
and
2018
under contracts with clients include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
Investment advisory
|
|
Mutual fund
administration, net
|
|
Total revenue
|
|
Proprietary funds
|
$
|
47,915,246
|
|
|
$
|
4,101,000
|
|
|
$
|
52,016,246
|
|
|
Sub-advised funds and institutional accounts
|
14,108,143
|
|
|
—
|
|
|
14,108,143
|
|
|
|
$
|
62,023,389
|
|
|
$
|
4,101,000
|
|
|
$
|
66,124,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
Investment advisory
|
|
Mutual fund
administration, net
|
|
Total revenue
|
|
Proprietary funds
|
$
|
53,600,106
|
|
|
$
|
5,552,154
|
|
|
$
|
59,152,260
|
|
|
Sub-advised funds and institutional accounts
|
14,557,457
|
|
|
—
|
|
|
14,557,457
|
|
|
|
$
|
68,157,563
|
|
|
$
|
5,552,154
|
|
|
$
|
73,709,717
|
|
Revenue Recognition – Investment Advisory Fees
The Company's investment advisory contracts have a single performance obligation (the investment advisory services provided to the client) as the promised services are not separately identifiable from other promises in the contracts and, therefore, are not distinct. All performance obligations to provide advisory services are satisfied over time and the Company recognizes revenue as time passes.
The fees we receive for our services under our investment advisory contracts are based on our AUM, which changes based on the value of securities held under each advisory contract. These fees are thereby constrained and represent variable consideration, and are excluded from revenue until the AUM on which our client is billed is no longer subject to market fluctuations.
Revenue Recognition – Variable Rate Fees
The Company manages certain client accounts that provide for variable rate fees. These fees are calculated based on client investment results over rolling
5
-year periods. The Company records variable rate fees at the end of the contract measurement period because the variable fees earned are constrained based on movements in the financial markets. During the
three and six
months ended
June 30, 2019
and
2018
, the Company recorded
no
variable rate fees. The table below shows AUM subject to variable rate fees and the amount of variable rate fees that would be recognized based upon investment results as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2019
|
|
|
AUM subject to variable rate fees
|
|
Unearned variable rate fees
|
|
Contractual Period Ending:
|
|
|
|
|
Quarter Ending September 30, 2019
|
$
|
38,196,943
|
|
|
$
|
869,315
|
|
|
Quarter Ending December 31, 2019
|
63,035,149
|
|
|
578,365
|
|
|
Quarter Ending March 31, 2020
|
13,196,879
|
|
|
—
|
|
|
Quarter Ending September 30, 2021
|
281,012,898
|
|
|
5,759,671
|
|
|
Total
|
$
|
395,441,869
|
|
|
$
|
7,207,351
|
|
The contractual end dates highlight the time remaining until the variable rate fees are scheduled to be earned. The amount of variable rate fees that would be recognized based upon investment results as of
June 30, 2019
, will increase or decrease based on future client investment results through the contractual period end. There can be no assurance that the unearned amounts will ultimately be earned.
Revenue Recognition – Mutual Fund Administration
DHCM has an administrative and transfer agency services agreement with the Funds under which DHCM performs certain services for each Fund. These services include performance obligations, such as mutual fund administration, fund accounting, transfer agency, and other related functions. These services are performed concurrently under our agreement with the Funds, and all performance obligations to provide these administrative services are satisfied over time, and the Company recognizes revenue as time passes. For performing these services each Fund pays DHCM a fee, which is calculated using an annual rate times the average daily net assets of each respective share class. These fees are thereby constrained and represent variable consideration, and are excluded from revenue until the AUM on which we bill the Funds is no longer subject to market fluctuations.
The Funds have selected and contractually engaged certain vendors to fulfill various services to benefit the Funds’ shareholders or to satisfy regulatory requirements of the Funds. These services include, among others, required shareholder mailings, federal and state registrations, and legal and audit services. DHCM, in fulfilling a portion of its role under the administration agreement with the Funds, acts as agent to pay these obligations of the Funds. Each vendor is independently responsible for fulfillment of the services it has been engaged to provide and negotiates fees and terms with the management and board of trustees of the Funds. The fee that each Fund pays to DHCM is reviewed annually by the Funds’ board of trustees and specifically takes into account the contractual expenses that DHCM pays on behalf of the Funds. As a result, DHCM is not involved in the delivery or pricing of these services and bears no risk related to these services. Revenue has been recorded net of these Fund related expenses. In addition, DHCM advances the upfront commissions that are paid to brokers who sell Class C shares of the Funds. These advances are capitalized and amortized over
12 months
to correspond with the repayments DHCM receives from the principal underwriter to recoup this commission advancement.
Mutual fund administration gross and net revenue are summarized below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Mutual fund administration:
|
|
|
|
|
|
|
|
|
Administration revenue, gross
|
$
|
5,519,437
|
|
|
$
|
5,993,719
|
|
|
$
|
10,922,165
|
|
|
$
|
12,601,056
|
|
|
Fund related expense
|
(3,491,604
|
)
|
|
(3,595,555
|
)
|
|
(6,841,145
|
)
|
|
(7,063,880
|
)
|
|
Revenue, net of related expenses
|
2,027,833
|
|
|
2,398,164
|
|
|
4,081,020
|
|
|
5,537,176
|
|
|
DHCM C-Share financing:
|
|
|
|
|
|
|
|
|
Broker commission advance repayments
|
53,782
|
|
|
83,380
|
|
|
118,994
|
|
|
179,858
|
|
|
Broker commission amortization
|
(47,271
|
)
|
|
(80,102
|
)
|
|
(99,014
|
)
|
|
(164,880
|
)
|
|
Financing activity, net
|
6,511
|
|
|
3,278
|
|
|
19,980
|
|
|
14,978
|
|
|
Mutual fund administration revenue, net
|
$
|
2,034,344
|
|
|
$
|
2,401,442
|
|
|
$
|
4,101,000
|
|
|
$
|
5,552,154
|
|
Income Taxes
The Company accounts for current and deferred income taxes through an asset and liability approach. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The Company is subject to examination by federal and applicable state and local jurisdictions for various tax periods. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which it does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws among those jurisdictions, and the inherent uncertainty in estimating the final resolution of complex tax audit matters, the Company’s estimates of income tax liabilities may differ from actual payments or assessments. The Company regularly assesses its position with regard to tax exposures and records liabilities for these uncertain tax positions and related interest and penalties, if any, according to the principles of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740,
Income Taxes
. The Company records interest and penalties within income tax expense on the income statement.
Earnings Per Share
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income by the weighted average number of common shares outstanding for the period, which includes participating securities. Diluted EPS reflects the potential dilution of EPS due to unvested restricted stock units. See
Note 9
.
Newly Issued But Not Yet Adopted Accounting Guidance
In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13, “Fair Value Measurements.” This update makes certain removals from, changes to and additions to existing disclosure requirements for fair value measurement. ASU 2018-13 does not change fair value measurements already required or permitted by existing standards. ASU 2018-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Management does not believe that adoption of ASU 2018-13 will materially impact the Company’s financial statements.
Note 3
Investments
The following table summarizes the carrying value of these investments as of
June 30, 2019
and
December 31, 2018
:
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|
|
|
|
|
|
|
|
|
|
As of
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Fair value investments:
|
|
|
|
|
Securities held in Consolidated Funds
(a)
|
$
|
83,249,245
|
|
|
$
|
153,730,480
|
|
|
Company sponsored investments
|
22,859,833
|
|
|
33,418,088
|
|
|
Company sponsored equity method investments
|
44,663,232
|
|
|
16,339,649
|
|
|
Total Investments
|
$
|
150,772,310
|
|
|
$
|
203,488,217
|
|
(a) Of the securities held in the Consolidated Funds as of
June 30, 2019
,
$50.5 million
were held directly by the Company and
$32.8 million
were held by noncontrolling shareholders. Of the securities held in the Consolidated Funds as of
December 31, 2018
,
$84.7 million
were held directly by the Company and
$69.0 million
were held by noncontrolling shareholders.
The Company deconsolidated the ETF and the Diamond Hill High Yield Fund during the
six months ended June 30, 2019
. As of
June 30, 2019
, the Diamond Hill High Yield Fund was classified as an equity method investment. The ETF liquidated and its assets were distributed to its shareholders on April 5, 2019.
As of
June 30, 2019
, our equity method investments consisted of the Diamond Hill Research Opportunities Fund, the Diamond Hill High Yield Fund and the Diamond Hill International Fund, and our ownership percentage in each of these investments was
22%
,
28%
, and
30%
, respectively. The following table includes the condensed summary financial information from the Company's equity method investments as of and for the period ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
June 30, 2019
|
|
Total assets
|
|
|
$
|
218,298,706
|
|
|
Total liabilities
|
|
|
40,535,465
|
|
|
Net assets
|
|
|
177,763,241
|
|
|
DHCM's portion of net assets
|
|
|
44,663,232
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
June 30, 2019
|
|
June 30, 2019
|
|
Investment income
|
$
|
1,812,727
|
|
|
$
|
3,186,209
|
|
|
Expenses
|
359,106
|
|
|
650,208
|
|
|
Net realized gains
|
3,986,700
|
|
|
4,384,996
|
|
|
Net change in unrealized appreciation
|
1,857,772
|
|
|
10,063,039
|
|
|
Net income
|
7,298,093
|
|
|
16,984,036
|
|
|
DHCM's portion of net income
|
1,988,850
|
|
|
4,984,861
|
|
Note 4
Fair Value Measurements
The Company determines the fair value of our cash equivalents and certain investments using the following broad levels listed below:
Level 1 - Unadjusted quoted prices for identical instruments in active markets.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-driven valuations in which all significant inputs are observable.
Level 3 - Valuations derived from techniques in which significant inputs are unobservable. We do not value any investments using Level 3 inputs.
These levels are not necessarily an indication of the risk or liquidity associated with investments.
The following table summarizes investments that are recognized in our consolidated balance sheet using fair value measurements (excluding investments classified as equity method investments) determined based upon the differing levels as of
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Cash equivalents
|
$
|
108,761,910
|
|
$
|
—
|
|
$
|
—
|
|
$
|
108,761,910
|
|
|
Fair value investments
|
|
|
|
|
|
Securities held in Consolidated Funds
(a)
|
16,344,662
|
|
66,904,583
|
|
—
|
|
$
|
83,249,245
|
|
|
Company sponsored investments
|
22,859,833
|
|
—
|
|
—
|
|
$
|
22,859,833
|
|
(a) Of the securities held in the Consolidated Funds as of
June 30, 2019
,
$50.5 million
were held directly by the Company and
$32.8 million
were held by noncontrolling shareholders.
Level 1 investments are comprised of investments in registered investment companies (mutual funds) or equity securities held in the Consolidated Funds and
$108.8 million
of investments in money market mutual funds owned by DHCM that the Company classifies as cash equivalents.
Level 2 investments are comprised of investments in debt securities held in the Consolidated Funds, which are valued by an independent pricing service using pricing techniques which take into account factors such as trading activity, readily available market quotations, yield, quality, coupon rate, maturity, type of issue, trading characteristics, call features, credit rates and other observable inputs.
The Company determines transfers between fair value hierarchy levels at the end of the reporting period. There were
no
transfers in or out of the levels during the
six months ended June 30, 2019
.
Changes to fair values of the investments are recorded in the Company’s consolidated statements of income as investment income (loss), net.
Note 5
Line of Credit
The Company has a committed Line of Credit Agreement (the "Credit Agreement") with a commercial bank that matures in December of 2019 and permits the Company to borrow up to
$25.0 million
. Borrowings under the Credit Agreement bear interest at a rate equal to LIBOR plus
1.00%
. The Company pays a commitment fee on the unused portion of the facility, accruing at a rate per annum of
0.10%
.
The Company has
no
t borrowed under the Credit Agreement as of and for the period ended
June 30, 2019
.
The proceeds of the Credit Agreement may be used by the Company and its subsidiaries for ongoing working capital needs, to seed new and existing investment strategies and for other general corporate purposes. The Credit Agreement contains representations, warranties and covenants that are customary for agreements of this type.
Note 6
Compensation Plans
Share-Based Payment Transactions
The Company issues restricted stock awards under its 2014 Equity and Cash Incentive Plan (the "2014 Plan"). Restricted stock awards represent common shares issued and outstanding upon grant subject to vesting restrictions. The following table represents a roll-forward of outstanding restricted stock and related activity during the
six
months ended
June 30, 2019
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average
Grant Date Price
per Share
|
|
Outstanding restricted stock as of December 31, 2018
|
214,575
|
|
|
$
|
177.22
|
|
|
Grants issued
|
26,050
|
|
|
154.54
|
|
|
Grants vested
|
(10,500
|
)
|
|
125.14
|
|
|
Grants forfeited
|
(4,500
|
)
|
|
164.10
|
|
|
Total outstanding restricted stock as of June 30, 2019
|
225,625
|
|
|
$
|
177.29
|
|
As of
June 30, 2019
, there were
243,173
common shares available for awards under the 2014 Plan.
Total deferred equity compensation related to unvested restricted stock was
$21.9 million
as of
June 30, 2019
. Compensation expense related to restricted stock is calculated based upon the fair market value of the common shares on grant date. The Company's policy is to adjust compensation expense for forfeitures as they occur. The recognition of compensation expense related to deferred compensation over the remaining vesting periods is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
Remaining In
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
$
|
3,639,099
|
|
|
$
|
6,169,469
|
|
|
$
|
4,888,910
|
|
|
$
|
3,906,761
|
|
|
$
|
1,674,718
|
|
|
$
|
1,640,745
|
|
|
$
|
21,919,702
|
|
Stock Grant Transactions
The following table represents common shares issued as part of our incentive compensation program during the
six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares Issued
|
|
Grant Date Value
|
|
June 30, 2019
|
24,048
|
|
|
$
|
3,655,296
|
|
|
June 30, 2018
|
20,153
|
|
|
4,109,197
|
|
Deferred Compensation Plans
The Company offers two deferred compensation plans, the Diamond Hill Fixed Term Deferred Compensation Plan and the Diamond Hill Variable Term Deferred Compensation Plan (collectively the “Plans”). Under the Plans, participants may elect to voluntarily defer, for a minimum of
five years
, certain incentive compensation, which the Company then contributes into the Plans. Each participant is responsible for designating investment options for assets they contribute, and the distribution paid to each participant reflects any gains or losses on the assets realized while in the Plans. Assets held in the Plans are included in the Company’s investment portfolio, and the associated obligation to participants is included in deferred compensation liability. Deferred compensation liability was
$28.1 million
and
$22.4 million
as of
June 30, 2019
and
December 31, 2018
, respectively.
Note 7
Operating Lease
The Company currently leases office space of approximately
37,829
square feet at
one
location.
In February 2016, the FASB issued ASU 2016-02, "Leases", which, among other things, requires lessees to recognize most leases on-balance sheet. The Company adopted this ASU on its effective date, January 1, 2019, using a modified retrospective approach without restating prior comparative periods. Upon implementation, the Company recorded a right-of use asset of approximately
$2.9 million
, which includes the lease liability amount less deferred rent liabilities and lease incentives received, and a lease liability of approximately
$3.6 million
related to our office lease. As of
June 30, 2019
, the carrying value of the right-of use asset, which is included in property and equipment, net of deferred rent on the consolidated balance sheets, was approximately
$2.7 million
. As of
June 30, 2019
, the carrying value of the lease liability, which is included in accounts payable and accrued expenses on the consolidated balance sheets, was approximately
$3.3 million
The adoption of this ASU had no impact on our consolidated statements of income and cash flows and there was no cumulative-effect adjustment required to opening retained earnings.
The following table summarizes the total lease and operating expenses for the
three and six
months ended
June 30, 2019
and
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2019
|
|
June 30,
2018
|
|
Three Months Ended
|
$
|
239,455
|
|
|
$
|
238,014
|
|
|
Six Months Ended
|
$
|
491,528
|
|
|
$
|
494,304
|
|
The approximate future minimum lease payments under the operating lease are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Minimum Lease Payments
|
|
Six Months
Remaining In
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
$
|
293,175
|
|
|
$
|
614,721
|
|
|
$
|
624,179
|
|
|
$
|
624,179
|
|
|
$
|
624,179
|
|
|
$
|
780,223
|
|
|
$
|
3,560,656
|
|
In addition to the above lease payments, the Company is also responsible for normal operating expenses of the property. These operating expenses were approximately
$0.4 million
in
2018
, and are expected to be approximately the same in
2019
.
Note 8
Income Taxes
The Company has determined its interim tax provision projecting an estimated annual effective tax rate.
For the
six
months ended
June 30, 2019
, the Company recorded income tax expense of
$10.3 million
, yielding an effective tax rate of
23.4%
. The effective tax rate of
23.4%
differed from the federal statutory tax rate of
21%
due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business, including new jurisdictions in which we are filing in 2019. This is partially offset by the benefit attributable to redeemable noncontrolling interests. The provision for income taxes includes a benefit attributable to the fact that the Company's operations include the Consolidated Funds which are not subject to federal income taxes. Accordingly, a portion of the Company's earnings are not subject to corporate tax levels. Absent the benefit attributable to redeemable noncontrolling interests, the effective tax rate ("unconsolidated effective tax rate") would have been
25.5%
.
For the
six
months ended
June 30, 2018
, the Company recorded income tax expense of
$8.7 million
, yielding an effective tax rate of
23.8%
. The effective tax rate of
23.8%
differed from the federal statutory tax rate of
21%
due primarily to the additional income tax expense recorded in the state and city jurisdictions in which we do business.
The net temporary differences incurred to date will reverse in future periods as the Company generates taxable earnings. The Company believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets recorded. The Company records a valuation allowance when it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of
June 30, 2019
and
December 31, 2018
, no valuation allowance was deemed necessary.
FASB ASC 740,
Income
Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company recognizes tax benefits related to positions taken, or expected to be taken, on its tax returns, only if the positions are "more-likely-than-not" sustainable. Once this threshold has been met, the Company’s measurement of its expected tax benefits is recognized in its financial statements.
During the six months ended
June 30, 2019
, the Company completed our open examination for tax years 2014 through 2016 with the New York State Department of Finance and Taxation. During the period the Company also filed a Voluntary Disclosure Agreement with the New York City Department of Finance. The Company remains under audit with the California Franchise Tax Board for the Company's 2015 and 2016 tax years.
The outcome of open examinations is not expected to have a material impact on the Company's financial statements. The Company believes that some of these audits and negotiations will conclude within the next 12 months and that any change in the amount of uncertain tax positions, including interest due to the settlement of audits, would be immaterial.
The amount of uncertain tax positions as of
June 30, 2019
, which would impact the Company’s effective tax rate if recognized and a reconciliation of the beginning and ending amounts of uncertain tax positions is as follows:
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Uncertain tax positions, as of January 1, 2019
|
$
|
2,982,337
|
|
|
Gross addition for tax positions of the current year
|
—
|
|
|
Gross additions for tax positions of prior years
|
—
|
|
|
Reductions of tax positions of prior years for:
|
|
|
Lapses of applicable statutes of limitations
|
—
|
|
|
Settlements during the period
|
(2,331,711
|
)
|
|
Changes in judgment/excess reserve
|
—
|
|
|
Uncertain tax positions, as of June 30, 2019
|
$
|
650,626
|
|
The Company did not recognize additional interest and penalties during the
six months ended June 30, 2019
, related to uncertain tax positions.
Note 9
Earnings Per Share
The Company’s common shares outstanding consist of all shares issued and outstanding, including unvested restricted shares. Basic and diluted EPS are calculated under the two-class method. Restricted stock units are considered dilutive. The following table sets forth the computation for basic and diluted EPS and reconciliation between basic and diluted shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net Income
|
$
|
14,157,569
|
|
|
$
|
14,898,023
|
|
|
$
|
33,713,416
|
|
|
$
|
27,840,151
|
|
|
Less: Net income attributable to redeemable noncontrolling interest
|
(962,417
|
)
|
|
(527,655
|
)
|
|
(3,585,622
|
)
|
|
(480,323
|
)
|
|
Net income attributable to common shareholders
|
$
|
13,195,152
|
|
|
$
|
14,370,368
|
|
|
$
|
30,127,794
|
|
|
$
|
27,359,828
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of outstanding shares - Basic
|
3,478,307
|
|
|
3,518,665
|
|
|
3,486,032
|
|
|
3,503,379
|
|
|
Dilutive impact of restricted stock units
|
—
|
|
|
1,151
|
|
|
472
|
|
|
1,757
|
|
|
Weighted average number of outstanding shares - Diluted
|
3,478,307
|
|
|
3,519,816
|
|
|
3,486,504
|
|
|
3,505,136
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to common shareholders
|
|
|
|
|
|
|
|
|
Basic
|
$
|
3.79
|
|
|
$
|
4.08
|
|
|
$
|
8.64
|
|
|
$
|
7.81
|
|
|
Diluted
|
$
|
3.79
|
|
|
$
|
4.08
|
|
|
$
|
8.64
|
|
|
$
|
7.81
|
|
Note 10
Commitments and Contingencies
The Company indemnifies its directors, officers and certain of its employees for certain liabilities that might arise from their performance of their duties to the Company. From time to time, the Company is involved in legal matters relating to claims arising in the ordinary course of business. There are currently no such matters pending that the Company believes could have a material adverse effect on its consolidated financial statements.
Additionally, in the normal course of business, the Company enters into agreements that contain a variety of representations and warranties and which provide general indemnifications. Certain agreements do not contain any limits on the Company’s liability and could involve future claims that may be made against the Company that have not yet occurred. Therefore, it is not possible to estimate the Company’s potential liability under these indemnities. Further, the Company maintains insurance policies that may provide coverage against certain claims under these indemnities.