NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2019
(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.
The Spin-off and Related Transactions
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.
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”).
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 institutional research and underwriting services through G.research, LLC (“G.research”), an indirect wholly-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”). G.research's revenues are derived primarily from institutional research services.
We may make direct investments in operating businesses using a variety of techniques and structures. For example, in April 2018, the Company sponsored a €110 million initial public offering of its first special purpose
acquisition corporation, the Gabelli Value for Italy S.p.a., an Italian company listed on the London Stock Exchange’s Borsa Italiana AIM segment under the symbol “VALU”. VALU was created to acquire a small- to medium-sized Italian franchise business
with the potential for international expansion, particularly in the United States.
In connection with the Spin-off, GAMCO issued a promissory note (the “GAMCO Note”) to AC Group in the original principal amount of $250 million used to partially capitalize the Company. During the year ended December
31, 2018, AC received principal repayments totaling $50 million on the GAMCO Note which fully satisfied the outstanding principal balance. The GAMCO Note bore interest at 4% per annum and had an original maturity date of November 30, 2020. In
addition, GCIA acquired 4,393,055 shares of GAMCO Class A common stock for $150 million in connection with the Spin-off.
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,
2018.
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 condensed consolidated statement of financial position. The new standard was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company adopted this ASU effective
January 1, 2019 with no material impact on its condensed 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. For public companies, the ASU is effective
for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company is currently evaluating this guidance and the impact it will have on its condensed 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
and is currently evaluating this guidance as it relates to the new disclosure requirements.
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:
The Company reserves the right to waive or reduce asset-based and performance-based fees with respect to certain investors in the investment funds which may include investments by employees and other related parties.
Advisory and incentive fees payable by investment funds are typically approved by third-party administrators and paid directly from the accounts’ assets. Such fees attributable to separate accounts may be subject to review and approval by the client
and may be paid either from the accounts’ assets or directly by the client.
Our advisory fee revenues are influenced by both the amount of assets under management (“AUM”) and the investment performance of our products. An overall decline in the prices of securities may cause our advisory fees
to decline by either causing the value of our AUM to decrease or causing our clients to withdraw funds in favor of investments they perceive to offer greater opportunity or lower risk. Similarly, success in the investment management business is
dependent on investment performance as well as distribution and client servicing. Good performance can stimulate sales of our investment products and tends to keep withdrawals and redemptions low, which generates higher asset-based management fees.
Conversely, poor performance, both in absolute terms and/or relative to peers and industry benchmarks, tends to result in decreased sales, increased withdrawals and redemptions and in the loss of clients, with corresponding decreases in revenues to
us.
Institutional Research Services. The Company, 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. 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 and nine ended September 30, 2019 and 2018, respectively (in thousands):
C. Investment in Securities
Investments in United States Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as investments in securities, and those with maturities of three months or less
at the time of purchase are classified as cash equivalents.
Investments in securities are stated at fair value, with any unrealized gains or losses reported in current period earnings.
Investments in securities, including GBL stock, at September 30, 2019 and December 31, 2018 consisted of the following (in thousands):
Securities sold, not yet purchased at September 30, 2019 and December 31, 2018 consisted of the following (in thousands):
Investments in affiliated registered investment companies at September 30, 2019 and December 31, 2018 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 investments in securities or securities sold, not yet purchased on the condensed
consolidated statements of financial condition. From time to time, the Company and/or the partnerships and offshore funds that the Company consolidates will enter into hedging transactions to manage their exposure to foreign currencies and equity
prices related to their investments.
The following table identifies the fair values of all derivatives held by the Company (in thousands):
The following table identifies gains and losses of all derivatives held by the Company (in thousands):
At September 30, 2019 and December 31, 2018, we held derivative contracts on 2.5 million and 1.0 million equity shares, respectively, that are included in investments in securities or securities sold, not yet purchased
on the condensed consolidated statements of financial condition. Except for the foreign exchange contract 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 condensed consolidated statements of income.
The Company is a party to enforceable master netting arrangements for equity swaps entered into with major U.S. financial institutions as part of the investment strategy of the Company’s proprietary portfolio. 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 condensed consolidated statements of financial condition. The swaps have a firm contract
end date and are closed out and settled when each contract expires.
D. Investment Partnerships and Variable Interest Entities
The Company is general partner or co-general partner of various affiliated entities (“Affiliated Entities”) in which the Company had investments totaling $124.7 million and $100.1 million at September 30, 2019 and
December 31, 2018, respectively, and whose underlying assets consist primarily of marketable securities. We also had investments in unaffiliated partnerships, offshore funds and other entities (“Unaffiliated Entities”) of $19.0 million and $18.6
million at September 30, 2019 and December 31, 2018, respectively. We evaluate each entity to determine its appropriate accounting treatment and disclosure. For any entity where the Company has determined that it holds a variable interest, the
Company performs an assessment to determine whether it qualifies as a variable interest entity (“VIE”). Entities that do not qualify as VIEs are assessed for consolidation as voting interest entities (“VOEs”) under the voting interest model. Certain
of the Affiliated Entities, and none of the Unaffiliated Entities, are consolidated.
The value of entities where consolidation is not deemed appropriate is included in investments in partnerships on condensed 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 condensed consolidated statements of income.
The following table highlights the number of entities that we consolidate as well as the basis under which they are consolidated:
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 the 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 the VIE that is consolidated and included on the condensed consolidated statements of financial condition as well as the Company’s net interest in this VIE (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 September 30, 2019 and December 31, 2018 and indicate the fair
value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Investments in certain entities that calculate net asset value per share and other investments that are not held at fair value are provided as separate
items to permit reconciliation of the fair value of investments included in the fair value hierarchy to the total amounts presented in the condensed consolidated statements of financial condition.
The following tables present assets and liabilities measured at fair value on a recurring basis as of the dates specified (except for Investment Partnerships) (in thousands):
Investments using NAV as fair value shown in the above tables include investments in Affiliated and Unaffiliated Entities. Capital may generally be redeemed from Affiliated Entities on a monthly basis upon adequate
notice as determined in the sole discretion of each entity’s investment manager. Capital invested in Unaffiliated Entities may generally be redeemed at various intervals ranging from monthly to annually upon notice of 30 to 95 days. Certain
Unaffiliated Entities may require a minimum investment period before capital can be voluntarily redeemed (a “Lockup Period”). No investment in an Unaffiliated Entity has an unexpired Lockup Period. The Company has no outstanding capital commitments
to any Affiliated or Unaffiliated Entity.
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 September 30, 2018, the Company transferred an investment with a value of approximately $580,000 from Level 3 to Level 1. The reclassification was due to increased availability of market
price quotations and was based on the value at the beginning of the period in which the transfer occurred.
During the nine months ended September 30, 2019 the Company transferred an investment with a value of approximately $63,000 from Level 1 to Level 3 due to the unavailability of observable inputs. During the nine
months ended September 30, 2018, the Company transferred an investment with a value of approximately $605,000 from Level 3 to Level 1 due to increased availability of market price quotations.
F. Income Taxes
The effective tax rate (“ETR”) for the three months ended September 30, 2019 and September 30, 2018 was 21.7% and 10.6%, respectively. The ETR in the third quarter of 2019 differs from the standard corporate tax rate
of 21% primarily due to state and local taxes (net of federal benefit), the benefit of (a) the donation of appreciated securities and (b) the dividends received deduction. The ETR in the third quarter of 2018 differs from the standard
corporate tax rate of 21% primarily due to state and local taxes (net of federal benefit) and the impact of (a) income attributable to noncontrolling interests, (b) the donation of appreciated securities, and (c) the dividends received deduction.
The ETR for the nine months ended September 30, 2019 and September 30, 2018 was 19.7% and 20.1%, respectively. The 2019 year-to-date ETR differs from the standard corporate tax rate of 21% primarily due to (a) state
and local taxes (net of federal benefit), (b) the donation of appreciated securities, and (c) the dividends received deduction, and (d) income attributable to noncontrolling interests.
G. Earnings Per Share
Basic earnings per share is computed by dividing net income/(loss) per share 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) per share attributable to our shareholders by the weighted average number of shares outstanding during the period, adjusted for the dilutive effect of outstanding RSAs. There were no outstanding AC RSAs during
the nine months ended September 30, 2019 and 2018.
The computations of basic and diluted net income/(loss) per share are as follows:
H. Stockholders’ Equity
Shares outstanding were 22.5 million and 22.6 million at September 30, 2019 and December 31, 2018, respectively.
Dividends
During the nine months ended September 30, 2019 and 2018, the Company declared dividends of $0.10 per share to class A and class B shareholders.
Stock Repurchase Program
For the three months ended September 30, 2019 and 2018, the Company repurchased approximately 36 thousand and 20 thousand shares at an average price of $36.75 per share and $36.27 per share for a total investment of
$1.3 million and $0.7 million, respectively. During nine months ended September 30, 2019 and 2018, the Company repurchased approximately 89 thousand and 668 thousand shares at an average price of $37.81 and $36.37 per share for a total investment of
$3.4 million and $24.3 million, respectively.
Exchange Offers
In February 2018, AC completed an exchange offer with respect to its Class A shares. Tendering shareholders received 1.35 GAMCO Class A shares for each AC Class A share, together with cash in lieu of any fractional
share. Upon completion of the offer, shareholders tendered 493,954 Class A shares in exchange for 666,805 GAMCO Class A shares with a value of $17.7 million.
In October 2018, the Company completed an exchange offer with respect to its Class A shares. Tendering shareholders received 1.9 GAMCO Class A shares for each AC Class A share, together with cash in lieu of any
fractional share. Upon completion of the offer, shareholders tendered 373,581 shares in exchange for 709,749 GAMCO shares with a value of approximately $14.6 million.
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 (a) 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, and (b) holders of each share class are not eligible to vote on matters relating exclusively to the other share class.
Stock Award and Incentive Plan
On November 30, 2015, in connection with the Spin-off, the Company issued 554,100 AC RSA shares to GAMCO employees (including GAMCO employees who became AC employees) who held 554,100 GAMCO RSA shares at that date. The
purpose of the issuance was to ensure that any employee who had GAMCO RSAs were granted an equal number of AC RSAs so that the total value of the RSAs post-spin-off was equivalent to the total value pre-spin-off. In accordance with GAAP, we have
allocated the stock compensation costs of both the AC RSAs and the GAMCO RSAs between GAMCO and AC based upon the allocation of each employee’s responsibilities between the companies. The vesting of the GAMCO RSAs outstanding was accelerated in the
first quarter of 2018. There were no AC RSAs outstanding at September 30, 2019 and 2018 and during the nine month periods then ended.
There were no RSAs issued by AC during the three and nine months ended September 30, 2019 or 2018.
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, 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. Based on the price of the Company’s stock, the total value of the Phantom RSAs was $6.1
million as of the grant dates.
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.
As of September 30, 2019, there were 157,300 Phantom RSAs outstanding. The unrecognized compensation cost related to these was $4.0 million which is expected to be recognized over a weighted-average
period of 2.1 years.
For the nine and three months ended September 30, 2019 the Company recorded approximately $1.0 million and $0.3 million in stock-based compensation expense, respectively. For the nine and three months
ended September 30, 2018 the Company recorded approximately $0.4 million and $0.3 million in stock-based compensation expense, respectively.
I. Goodwill and Identifiable Intangible Assets
At September 30, 2019, 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 September 30, 2019 or September 30, 2018, 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 September 30, 2019.
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 September 30, 2019 and December 31, 2018, 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.
K. Related Party Transactions
On April 23, 2019, the Company issued a promissory note for $2.1 million to our Executive Chairman. The promissory note was re-paid with interest at 1% per annum on May 28, 2019.
L. Subsequent Events
On October 11, 2019, the research service agreements between the Company and two wholly-owned subsidiaries of GBL, GAMCO Asset Management, Inc. and Gabelli Funds, LLC, were agreed to be terminated effective January 1,
2020. Additionally, compensation and other related costs are expected to decrease.
On October 31, 2019, the Company closed on the transaction whereby Morgan Group Holding Co. (“Morgan Group”), an entity under common control of the majority shareholder of AC, acquired G.research in exchange for 50
million shares of its 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, AC has an 83.3% ownership interest
in Morgan Group and will consolidate the entity, which now includes G.research. As the transaction is among entities under common control, all assets, liabilities and noncontrolling interest will be accounted for at historical cost. As Morgan Group
is a shell company with minimal assets and income and G.research will continue to be consolidated both before and after the transaction, ACs consolidated statement of financial condition and statement of operations will not be materially different.
During the period from October 1, 2019 to November 8, 2019, the Company repurchased 7,110 shares at an average price of $36.39 per share.
On November 8, 2019, the Company declared a semi-annual dividend of $0.10 per share payable January 9, 2020 to shareholders of record on December 26, 2019.