ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2020
(Unaudited)
A. Basis of Presentation and Significant Accounting Policies
Unless we have indicated otherwise, or the context otherwise requires, references in this report to “Associated Capital Group, Inc.,” “AC Group,” “the Company,” “AC,” “we,” “us” and “our” or similar terms are to
Associated Capital Group, Inc., its predecessors and its subsidiaries.
Organization
We are a Delaware corporation that provides alternative investment management, institutional research and underwriting services. In addition, we derive investment income/(loss) from proprietary trading of cash and
other assets awaiting deployment in our operating business.
We conduct our investment management activities through our wholly-owned subsidiary Gabelli & Company Investment Advisers, Inc. (“GCIA” f/k/a Gabelli Securities, Inc.). GCIA and its wholly-owned subsidiary,
Gabelli & Partners, LLC (“Gabelli & Partners”), collectively serve as general partners or investment managers to investment funds including limited partnerships and offshore companies (collectively, “Investment Partnerships”), and
separate accounts. We primarily manage assets in equity event-driven value strategies, across a range of risk and event arbitrage portfolios. The business earns management and incentive fees from its advisory activities. Management fees are
largely based on a percentage of assets under management. Incentive fees are based on the percentage of the investment returns of certain clients’ portfolios. GCIA is an investment adviser registered with the Securities and Exchange Commission
under the Investment Advisers Act of 1940, as amended.
We provide our underwriting and institutional research services through G.research, LLC (“G.research”), an indirect majority-owned subsidiary of the Company. G.research is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is regulated by the Financial Industry Regulatory Authority (“FINRA”).
We may make direct investments in operating businesses using a variety of techniques and structures. We added Gabelli Special Purpose Acquisition Vehicles (“SPAC”) in 2018. Gabelli Value for Italy (VALU), our
initial vehicle launched and listed on the Italian Borsa, approached its second anniversary at the apex of the pandemic in Italy. In light of this challenge, the board voted to commence liquidation. The VALU effort successfully canvassed
private company opportunities in Italy, with deal flow expanding throughout Europe. We believe the platform is in place to further expand our direct investment efforts across the European continent.
Associated Capital Group, Inc, Spin-Off
On November 30, 2015, GAMCO Investors, Inc. (“GAMCO” or “GBL”) distributed all the outstanding shares of each class of AC common stock on a pro rata one-for-one basis to the holders of each class of GAMCO’s
common stock (the “Spin-off”).
Morgan Group Holding Co. Merger and Spin-Off
On October 31, 2019, the Company closed on a transaction whereby Morgan Group Holding Co., (“Morgan Group”) a company that trades in the over the counter market under the symbol “MGHL” and under common control of
AC’s majority shareholder, acquired all of the Company’s interest in G.research for 50,000,000 shares of Morgan Group common stock. In addition, immediately prior to the closing, 5.15 million Morgan Group shares were issued under a private
placement for $515,000. Subsequent to the transaction and private placement, the Company has an 83.3% ownership interest in Morgan Group and consolidates the entity, which includes G.research. The transaction has been accounted for pursuant to
ASC 805-50, Transactions Between Entities Under Common Control. A common-control transaction is similar to a business combination, however, does not meet the definition of a business combination, because there is no change in control over the
entity by the parent. Therefore, the accounting and reporting for a transaction between entities under common control is outside the scope of the business combinations guidance in ASC 805-10, ASC 805-20, and ASC 805-30 and is addressed in ASC
805-50. For transactions between entities under common control, there is no change in basis in the net assets received and therefore they are recorded at their historical cost
On March 16, 2020, the Company announced that its Board of Directors has approved the spin-off of Morgan Group to AC’s shareholders. AC will distribute to its shareholders on a pro rata basis the 50,000,000 shares
of Morgan Group that it owns upon close of the spin-off. As of March 31, 2020 the book value of Morgan Group is $5.8 million in the aggregate and $0.10 per share.
On May 5, 2020, the Morgan Group board approved a reverse stock split of the issued and outstanding shares of their common stock, par value $0.01 per share, in a ratio of 1‑for‑100.
Basis of Presentation
The unaudited interim condensed consolidated financial statements of AC Group included herein have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP in the United States for complete financial statements.
In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and
cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year’s results.
The interim condensed consolidated financial statements include the accounts of AC Group and its subsidiaries. All material intercompany transactions and balances have been eliminated.
These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31,
2019.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on the condensed consolidated
financial statements and accompanying notes. Actual results could differ from those estimates.
Recent Accounting Developments
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the guidance in GAAP for the accounting for leases. ASU 2016-02 requires a lessee to
recognize assets and liabilities arising from most operating leases in the consolidated statement of financial position. The Company adopted this ASU effective January 1, 2019 with no material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Accounting for Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), which requires an organization
to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Currently, U.S. GAAP requires an “incurred loss” methodology that
delays recognition until it is probable a loss has been incurred. Under ASU 2016-13, the allowance for credit losses must be deducted from the amortized cost of the financial asset to present the net amount expected to be collected. The Statement
of Income will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. In November 2019, the FASB issued ASU
2019-10, which deferred the effective date of this guidance for smaller reporting companies for three years. This guidance is effective for the Company on January 1, 2023 and requires a modified retrospective transition method, which will result
in a cumulative-effect adjustment in retained earnings upon adoption. Early adoption is permitted. The Company is currently assessing the potential impact of this new guidance on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, to simplify the process used to test for impairment of goodwill. Under the new standard, an
impairment loss must be recognized in an amount equal to the excess of the carrying amount of a reporting unit over its fair value, limited to the total amount of goodwill allocated to that reporting unit. As a smaller reporting company pursuant
to ASU 2019-10, the ASU is effective for the Company on January 1, 2023. This guidance will be effective for the Company on January 1, 2023 using a prospective transition method and early adoption is permitted. The Company is currently
evaluating the potential effect of this new guidance on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.
This ASU adds certain disclosure requirements and modifies or eliminates requirements under current GAAP. This ASU is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company has early adopted the
eliminated and modified disclosure requirements effective January 1, 2019.
B. Revenue
The Company’s revenue is accounted for as contracts with customers, and the timing of revenue recognition is based on the Company’s analysis of the provisions of each respective contract. Depending upon the
specific terms, revenue may be recognized over time or at a point in time. Modifications to contracts may affect the timing of the satisfaction of performance obligations, the determination of the transaction price, and the allocation of the
price to performance obligations, any of which may impact the timing of the recognition of the related revenue.
The Company’s major revenue sources are as follows:
Investment advisory and incentive fees. The Company and its subsidiaries act as general partner, investment manager or sub-advisor to investment funds and/or
separately managed accounts of institutional investors (e.g., corporate pension plans). The fees that are paid to the Company are set forth in the offering documents for the investment fund or the separately managed account agreement. Investment
advisory and incentive fee revenue consists of:
Institutional Research Services. Morgan Group, through G.research, generates institutional research services revenues via hard dollar payments or through commissions
on securities transactions executed on an agency basis on behalf of clients. Clients include institutional investors (e.g., hedge funds and asset managers) as well as affiliated mutual funds and managed accounts. A significant portion of
G.research institutional research services have been provided to GAMCO and its affiliates.
These revenues consist of:
Institutional research revenues are impacted by the perceived value of the research product provided to clients, the volume of securities transactions and the acquisition or loss of new client relationships.
Other. Other revenues include (a) underwriting fees representing gains, losses, and fees, net of syndicate expenses, arising from public equity and debt offerings in
which G.research acts as underwriter or agent and are accrued as earned, and (b) other miscellaneous revenues.
Total revenues by type were as follows for the three month periods ended March 31, 2020 and 2019, respectively (in thousands):
C. Investment in Securities
Investments in securities at March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
Securities sold, not yet purchased at March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
Investments in affiliated registered investment companies at March 31, 2020 and December 31, 2019 consisted of the following (in thousands):
The Company recognizes all equity derivatives as either assets or liabilities measured at fair value and includes them in either investment in securities or securities sold, not yet purchased on the consolidated
statements of financial condition. From time to time, the Company and/or consolidated funds will enter into hedging transactions to manage their exposure to foreign currencies and equity prices related to their proprietary investments. At March
31, 2020 and December 31, 2019 we held derivative contracts on 0.5 million and 3.4 million equity shares, respectively, that are included in investments in securities or securities sold, not yet purchased on the consolidated statements of
financial condition as shown in the table below. We had one foreign exchange contracts outstanding at March 31, 2020 and two at December 31, 2019. Except for the foreign exchange contracts entered into by the Company, these transactions are not
designated as hedges for accounting purposes, and changes in fair values of these derivatives are included in net gain/(loss) from investments on the consolidated statements of income and included in investments in securities, securities sold,
not yet purchased, or receivable from or payable to brokers on the consolidated statements of financial condition.
The following table identifies the fair values of all derivatives and foreign currency positions held by the Company (in thousands):
The following table identifies gains and losses of all derivatives held by the Company (in thousands):
The Company is a party to enforceable master netting arrangements for swaps entered into with major U.S. financial institutions as part of its investment strategy. They are typically not used as hedging
instruments. These swaps, while settled on a net basis with the counterparties, are shown gross in assets and liabilities on the consolidated statements of financial condition. The swaps have a firm contract end date and are closed out and
settled when each contract expires.
|
|
Gross
Amounts of
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|
|
Gross Amounts
Offset in the
|
|
|
Net Amounts of
Liabilities Presented
|
|
|
Gross Amounts Not Offset in the
Statements of Financial Condition
|
|
|
|
Recognized
Liabilities
|
|
|
Statements of
Financial Condition
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|
|
in the Statements
of Financial Condition
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|
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Financial
Instruments
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Cash Collateral
Pledged
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|
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Net Amount
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|
Swaps:
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|
(In thousands)
|
|
March 31, 2020
|
|
$
|
766
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|
|
$
|
-
|
|
|
$
|
766
|
|
|
$
|
(76
|
)
|
|
$
|
-
|
|
|
$
|
690
|
|
December 31, 2019
|
|
|
119
|
|
|
|
-
|
|
|
|
119
|
|
|
|
(119
|
)
|
|
|
-
|
|
|
|
-
|
|
D. Investment Partnerships and Variable Interest Entities
The Company is general partner or co-general partner of various affiliated entities in which the Company had investments totaling $117.9 million and $124.8 million at March 31, 2020 and December 31, 2019,
respectively, and whose underlying assets consist primarily of marketable securities (“Affiliated Entities). We also had investments in unaffiliated partnerships, offshore funds and other entities of $19.1 million and $20.5 million at March 31,
2020 and December 31, 2019, respectively (“Unaffiliated Entities”). We evaluate each entity to determine its appropriate accounting treatment and disclosure. Certain of the Affiliated Entities, and none of the Unaffiliated Entities, are
consolidated.
The value of entities where consolidation is not deemed appropriate consist of equity method investments which are included in investments in partnerships on consolidated statements of financial condition. This
caption includes investments in Affiliated Entities and Unaffiliated Entities which the Company accounts for under the equity method of accounting. The Company reflects the equity in earnings of these Affiliated Entities and Unaffiliated Entities
as net gain/(loss) from investments on the consolidated statements of income.
The following table includes the net impact by line item on the condensed consolidated statements of financial condition for the consolidated entities (in thousands):
The following table includes the net impact by line item on the condensed consolidated statements of income for the consolidated entities (in thousands):
Variable Interest Entities
With respect to each consolidated VIE, its assets may only be used to satisfy its obligations. The investors and creditors of any consolidated VIE have no recourse to the Company’s general assets. In addition, the
Company neither benefits from such VIE’s assets nor bears the related risk beyond its beneficial interest in the VIE.
The following table presents the balances related to VIEs that are consolidated and included on the condensed consolidated statements of financial condition as well as the Company’s net interest in these VIEs (in
thousands):
E. Fair Value
The following tables present information about the Company’s assets and liabilities by major category measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 and indicate the fair
value hierarchy of the valuation techniques utilized by the Company to determine such fair value.
The following tables present assets and liabilities measured at fair value on a recurring basis as of the dates specified (in thousands):
The following table presents additional information about assets by major category measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:
Total realized and unrealized gains and losses for level 3 assets are reported in net gain/(loss) from investments in the condensed consolidated statements of income.
During the three months ended March 31, 2020, the Company transferred investments with values of approximately 109,000 from level 3 to level 1 due to the availability of observable inputs.
During the three months ended March 31, 2019, the Company transferred investments with values of approximately $63,000 from level 1 to level 3 due to the unavailability of observable inputs.
F. Income Taxes
The effective tax rate (“ETR”) for the three months ended March 31, 2020 and March 31, 2019 was 23.5% and 20.1%, respectively. The ETR in the first quarter of 2020 differs from the standard corporate tax rate of
21% primarily due to state and local taxes (net of federal benefit) and the rate differential on the carryback of a net operating loss. The ETR in the first quarter of 2019 differs from the standard corporate tax rate of 21% primarily due to
state and local taxes (net of federal benefit) and the benefit of (a) the donation of appreciated securities and (b) the dividends received deduction.
G. Earnings Per Share
Basic earnings per share is computed by dividing net income/(loss) attributable to our shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by
dividing net income/(loss) attributable to our shareholders by the weighted average number of shares outstanding during the period because there are no dilutive securities outstanding
during the periods presented.
The computations of basic and diluted net income/(loss) per share are as follows (in thousands, except per share data):
H. Stockholders’ Equity
Shares outstanding were 22.4 million and 22.5 million at March 31, 2020 and December 31, 2019, respectively.
Dividends
There were no dividends declared during each of the three months ended March 31, 2020 and 2019.
Stock Repurchase Program
For the three months ended March 31, 2020 and 2019, the Company repurchased approximately 82 thousand and 10 thousand shares at an average price of $39.43 per share and $40.03 per share for a total investment of
$3.2 million and $0.4 million, respectively.
Voting Rights
The holders of Class A Common stock (“Class A Stock”) and Class B Common stock (“Class B Stock”) have identical rights except that holders of Class A Stock are entitled to one vote per share, while holders of Class
B Stock are entitled to ten votes per share on all matters to be voted on by shareholders in general. Holders of each share class, however, are not eligible to vote on matters relating exclusively to the other share class.
Stock Award and Incentive Plan
The Company maintains one stock award and incentive plan (the “Plan”) approved by the shareholders on May 3, 2016, which is designed to provide incentives to attract and retain individuals key to the success of AC
through direct or indirect ownership of our common stock. Benefits under the Plan may be granted in any one or a combination of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents
and other stock or cash-based awards. A maximum of 2 million shares of Class A Stock have been reserved for issuance under the Plan by the Compensation Committee of the Board of Directors (the “Compensation Committee”) which is responsible for
administering the Plan. Under the Plan, the Compensation Committee may grant RSAs and either incentive or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price that it may determine. Through
March 31, 2020, approximately 700,000 shares have been awarded under the Plan leaving approximately 1.3 million shares for future grants.
In August and December 2018, the Company’s Board of Directors approved the grant of 172,800 shares of Phantom Restricted Stock awards (“Phantom RSAs”). Under the terms of the grants, which were
effective August 8 and December 31 of 2018, the Phantom RSAs vest 30% and 70% after three and five years, respectively. The Phantom RSAs will be settled by a cash payment, net of applicable withholding tax, on the vesting dates. In addition, an
amount equivalent to the cumulative dividends declared on shares of the Company’s Class A common stock during the vesting period will be paid to participants on vesting.
Pursuant to ASC 718, the Phantom RSAs will be treated as a liability because cash settlement is required and compensation will be recognized over the vesting period. In determining the compensation
expense to be recognized each period, the Company will re-measure the fair value of the liability at each reporting date taking into account the remaining vesting period attributable to each award and the current market value of the Company’s
Class A stock. In making these determinations, the Company will consider the impact of Phantom RSAs that have been forfeited prior to vesting (e.g., due to an employee termination). The Company has elected to consider forfeitures as they occur.
Based on the closing price of the Company’s Class A Common Stock on March 31, 2020 and December 31, 2019, the total liability recorded by the Company in compensation payable as of March 31, 2020 and December 31, 2019, with respect to the Phantom
RSAs was $1.2 million and $2.0 million, respectively.
For the three month periods ended March 31, 2020 and 2019, the Company recorded approximately $(0.8) million and $0.4 million in stock-based compensation expense, respectively. This expense is
included in compensation expense in the consolidated statements of income.
As of March 31, 2020, there were 96,650 Phantom RSAs outstanding. The unrecognized compensation cost related to these was $1.2 million which is expected to be recognized over a
weighted-average period of 2.1 years. On February 4, 2020, 23,000 Phantom RSA’s were forfeited by teammates who transferred to Morgan Group.
As of December 31, 2019, 119,650 awarded but unvested Phantom RSAs were outstanding.
I. Goodwill and Identifiable Intangible Assets
At March 31, 2020, goodwill and intangible assets on the condensed consolidated statements of financial condition includes $3.4 million of goodwill related to GCIA. The Company assesses the recoverability of
goodwill at least annually, or more often should events warrant, using a qualitative assessment of whether it is more likely than not that an impairment has occurred to determine if a quantitative analysis is required. There were no indicators of
impairment for the three months ended March 31, 2020 or March 31, 2019, and as such there was no impairment analysis performed or charge recorded.
J. Commitments and Contingencies
From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. We are also subject
to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the condensed consolidated
financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether losses exist which may be reasonably possible and will, if material, make the
necessary disclosures. Management believes, however, that such amounts, both those that are probable and those that are reasonably possible, are not material to the Company’s financial condition, results of operations or cash flows at March 31,
2020.
G.research has agreed to indemnify clearing brokers for losses they may sustain from customer accounts introduced by G.research that trade on margin. At each of March 31, 2020 and December 31, 2019, the total
amount of customer balances subject to indemnification (i.e., unsecured margin debits) was immaterial.
The Company has also entered into arrangements with various other third parties, many of which provide for indemnification of the third parties against losses, costs, claims and liabilities arising from the
performance of obligations under the agreements. The Company has had no claims or payments pursuant to these or prior agreements and believes the likelihood of a claim being made is remote, and, therefore, no accrual has been made on the
condensed consolidated financial statements.
L. Subsequent Events
During the period from April 1, 2020 to May 11, 2020, the Company repurchased 16,749 shares at an average price of $35.08 per share.
On May 5, 2020, the Company declared a semi-annual dividend of $0.10 per share payable June 30, 2020 to shareholders of record on June 16, 2020.