SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___

Commission File No. 001-37387

ASSOCIATED CAPITAL GROUP, INC.
(Exact name of Registrant as specified in its charter)

Delaware
 
47-3965991
(State of other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
191 Mason Street, Greenwich, CT
 
06830
 
 
 
(Address of principle executive offices)
 
(Zip Code)

(203) 629-9595
(Registrant’s telephone number, including area code)

 Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.001 per share
AC
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes    No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
 
Accelerated filer 
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section13(a) of the Exchange Act.

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

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practical date.
Class
 
Outstanding at July 31, 2020
Class A Common Stock, .001 par value
 
3,398,829
Class B Common Stock, .001 par value
 
18,962,918



ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

INDEX

PART I.
FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Unaudited Condensed Consolidated Financial Statements
1
 
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
24
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
32
 
 
 
Item 4.
Controls and Procedures
32
 
 
 
PART II.
OTHER INFORMATION *
 
 
 
 
Item 1.
Legal Proceedings
33
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
34
 
 
 
Item 6.
Exhibits
34
 
 
 
 
Signature
34

* Items other than those listed above have been omitted because they are not applicable.



Index
ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
UNAUDITED
(Dollars in thousands, except per share data)

 
June 30,
2020
   
December 31,
2019
 
ASSETS
           
Cash and cash equivalents (a)
 
$
74,405
   
$
348,588
 
Investments in debt securities (a)
   
319,376
     
29,037
 
Investments in equity securities (Including GBL stock with a value of $39.0 million and $57.2 million, respectively) (a)
   
198,325
     
271,320
 
Investments in affiliated registered investment companies
   
140,146
     
159,311
 
Investments in partnerships (a)
   
139,362
     
145,372
 
Receivable from brokers (a)
   
18,399
     
24,150
 
Investment advisory fees receivable
   
1,167
     
9,582
 
Receivable from affiliates
   
622
     
4,369
 
Deferred tax assets (including taxes receivable of $309 in 2020)
   
11,017
     
2,004
 
Goodwill
   
3,519
     
3,519
 
Other assets (a)
   
20,286
     
13,654
 
Total assets
 
$
926,624
   
$
1,010,906
 
 
               
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
               
Payable to brokers
 
$
7,299
   
$
14,889
 
Income taxes payable
   
-
     
3,676
 
Compensation payable
   
6,462
     
20,246
 
Securities sold, not yet purchased (a)
   
9,833
     
16,419
 
Payable to affiliates
   
388
     
483
 
Accrued expenses and other liabilities (a)
   
2,777
     
7,373
 
Total liabilities
   
26,759
     
63,086
 
 
               
Redeemable noncontrolling interests (a)
   
47,178
     
50,385
 
 
               
Equity:
               
Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding
   
-
     
-
 
Class A Common Stock, $0.001 par value; 100,000,000 shares authorized; 6,629,254 and 6,569,254 shares issued, respectively; 3,399,633 and 3,452,381 shares outstanding, respectively
   
6
     
6
 
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 19,196,792 shares issued;
               
18,962,918 and 19,022,918 shares outstanding, respectively
   
19
     
19
 
Additional paid-in capital
   
1,003,450
     
1,003,450
 
Accumulated deficit
   
(41,056
)
   
(701
)
Treasury stock, at cost (3,229,621 and 3,116,873 shares outstanding, respectively)
   
(110,635
)
   
(106,342
)
Total Associated Capital Group, Inc. equity
   
851,784
     
896,432
 
Noncontrolling interests
   
903
     
1,003
 
Total equity
   
852,687
     
897,435
 
Total liabilities and equity
 
$
926,624
   
$
1,010,906
 

(a) As of June 30, 2020 and December 31, 2019, cash and cash equivalents, investments in securities, investment in partnerships, receivable from broker, other assets, securities sold, not yet purchased, accrued expenses and other liabilities and redeemable noncontrolling interests include amounts related to consolidated variable interest entities (“VIEs”). See Footnote D.

See accompanying notes.

1

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
UNAUDITED
(Dollars in thousands, except per share data)
 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Revenues
                       
Investment advisory and incentive fees
 
$
1,859
   
$
2,713
   
$
4,559
   
$
5,446
 
Institutional research services
   
1,104
     
2,076
     
2,478
     
3,989
 
Other
   
174
     
32
     
469
     
38
 
Total revenues
   
3,137
     
4,821
     
7,506
     
9,473
 
Expenses
                               
Compensation
   
3,538
     
5,584
     
7,731
     
11,480
 
Stock-based compensation
   
447
     
284
     
(371
)
   
699
 
Other operating expenses
   
3,295
     
2,104
     
5,384
     
8,321
 
Total expenses
   
7,280
     
7,972
     
12,744
     
20,500
 
 
                               
Operating loss
   
(4,143
)
   
(3,151
)
   
(5,238
)
   
(11,027
)
Other income (expense)
                               
Net gain/(loss) from investments
   
51,714
     
(234
)
   
(50,376
)
   
34,745
 
Interest and dividend income
   
1,227
     
3,295
     
3,537
     
7,081
 
Interest expense
   
(65
)
   
(35
)
   
(114
)
   
(79
)
Shareholder-designated contribution
   
2
     
-
     
(225
)
   
-
 
Total other income (expense), net
   
52,878
     
3,026
     
(47,178
)
   
41,747
 
Income/(loss) before income taxes
   
48,735
     
(125
)
   
(52,416
)
   
30,720
 
Income tax expense/(benefit)
   
11,110
     
(277
)
   
(12,689
)
   
5,914
 
Net income/(loss)
   
37,625
     
152
     
(39,727
)
   
24,806
 
Net income/(loss) attributable to noncontrolling interests
   
2,388
     
1,084
     
(1,609
)
   
2,591
 
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders
 
$
35,237
   
$
(932
)
 
$
(38,118
)
 
$
22,215
 
 
                               
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders per share:
                               
Basic
 
$
1.57
   
$
(0.04
)
 
$
(1.70
)
 
$
0.98
 
Diluted
 
$
1.57
   
$
(0.04
)
 
$
(1.70
)
 
$
0.98
 
 
                               
Weighted average shares outstanding:
                               
Basic
   
22,378
     
22,552
     
22,410
     
22,568
 
Diluted
   
22,378
     
22,552
     
22,410
     
22,568
 
 
                               
Dividends declared:
 
$
0.10
   
$
0.10
   
$
0.10
   
$
0.10
 

See accompanying notes.
 
2

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
UNAUDITED
(Dollars in thousands)
 
 
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2020
   
2019
   
2020
   
2019
 
                         
Net income/(loss)
 
$
37,625
   
$
152
   
$
(39,727
)
 
$
24,806
 
Less: Comprehensive income/(loss) attributable to noncontrolling interests
   
2,388
     
1,084
     
(1,609
)
   
2,591
 
 
                               
Comprehensive income/(loss) attributable to Associated Capital Group, Inc.
 
$
35,237
   
$
(932
)
 
$
(38,118
)
 
$
22,215
 

See accompanying notes.

3

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
UNAUDITED
(Dollars in thousands, except per share data)
For the three months ended March 31, 2020 and three months ended June 30, 2020
 
 
Associated Capital Group, Inc. shareholders
       
   
Common
Stock
   
Accumulated
Deficit
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Noncontrolling
Interest
   
Total
   
Redeemable
Noncontrolling
Interests
 
Balance at December 31, 2019
 
$
25
   
$
(701
)
 
$
1,003,450
   
$
(106,342
)
 
$
1,003
   
$
897,435
   
$
50,385
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
(531
)
Net loss
   
-
     
(73,355
)
   
-
     
-
     
(52
)
   
(73,407
)
   
(3,945
)
Purchase of treasury stock
   
-
     
-
     
-
     
(3,225
)
   
-
     
(3,225
)
   
-
 
Balance at March 31, 2020
 
$
25
   
$
(74,056
)
 
$
1,003,450
   
$
(109,567
)
 
$
951
   
$
820,803
   
$
45,909
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Net income/(loss)
   
-
     
35,237
     
-
     
-
     
(48
)
   
35,189
     
(1,167
)
Dividends declared ($0.10 per share)
           
(2,237
)
   
-
             
-
     
(2,237
)
   
2,436
 
Purchase of treasury stock
   
-
     
-
     
-
     
(1,068
)
   
-
     
(1,068
)
   
-
 
Balance at June 30, 2020
 
$
25
   
$
(41,056
)
 
$
1,003,450
   
$
(110,635
)
 
$
903
   
$
852,687
   
$
47,178
 

See accompanying notes.
4

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
UNAUDITED
(Dollars in thousands, except per share data)
For the three months ended March 31, 2019 and three months ended June 30, 2019
 
 
Associated Capital Group, Inc. shareholders
       
   
Common
Stock
   
Accumulated
Deficit
   
Additional
Paid-in
Capital
   
Treasury
Stock
   
Total
   
Redeemable
Noncontrolling
Interests
 
Balance at December 31, 2018
 
$
25
   
$
(39,889
)
 
$
1,008,319
   
$
(102,207
)
 
$
866,248
   
$
49,800
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
(526
)
Net income
   
-
     
23,147
     
-
     
-
     
23,147
     
1,507
 
Purchase of treasury stock
   
-
     
-
     
-
     
(391
)
   
(391
)
   
-
 
Balance at March 31, 2019
 
$
25
   
$
(16,742
)
 
$
1,008,319
   
$
(102,598
)
 
$
889,004
   
$
50,781
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
(2,197
)
Net income
   
-
     
(932
)
   
-
     
-
     
(932
)
   
1,084
 
Dividends declared ($0.10 per share)
                   
(2,254
)
           
(2,254
)
       
Purchase of treasury stock
   
-
     
-
     
-
     
(1,630
)
   
(1,630
)
   
-
 
Balance at June 30, 2019
 
$
25
   
$
(17,674
)
 
$
1,006,065
   
$
(104,228
)
 
$
884,188
   
$
49,668
 

See accompanying notes.
5

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
(Dollars in thousands)
 
 
Six Months Ended
June 30,
 
   
2020
   
2019
 
Operating activities
           
Net income (loss)
 
$
(39,727
)
 
$
24,806
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Equity in net (gains) losses from partnerships
   
928
     
(4,064
)
Deferred income taxes
   
(8,708
)
   
(3,999
)
Depreciation and amortization
   
28
     
12
 
Donated securities
   
441
     
1,758
 
Unrealized (gains) losses on securities
   
39,034
     
(13,901
)
Realized gains (losses) on sales of securities
   
426
     
(218
)
(Increase) decrease in assets:
               
Investments in trading securities
   
(245,733
)
   
(48,802
)
Investments in partnerships:
               
Contributions to partnerships
   
(4,229
)
   
(16,671
)
Distributions from partnerships
   
8,110
     
1,240
 
Receivable from affiliates
   
3,748
     
683
 
Receivable from brokers
   
5,752
     
466
 
Investment advisory fees receivable
   
8,415
     
3,136
 
Income taxes receivable
   
(305
)
   
-
 
Other assets
   
4,424
     
9,689
 
Increase (decrease) in liabilities:
               
Payable to brokers
   
(7,590
)
   
3,836
 
Income taxes payable
   
(3,676
)
   
7,718
 
Payable to affiliates
   
(95
)
   
(34
)
Compensation payable
   
(13,785
)
   
(1,931
)
Accrued expenses and other liabilities
   
(2,425
)
   
196
 
Total adjustments
   
(215,240
)
   
(60,886
)
Net cash used in operating activities
 
$
(254,967
)
 
$
(36,080
)

6

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (continued)
(Dollars in thousands)
 
 
Six Months Ended
June 30,
 
   
2020
   
2019
 
Investing activities
           
Purchases of securities
 
$
(226
)
 
$
(1,024
)
Proceeds from sales of securities
   
429
     
2,686
 
Return of capital on securities
   
865
     
732
 
Purchase of building
   
(11,084
)
   
(6,250
)
Net cash used in investing activities
   
(10,016
)
   
(3,856
)
 
               
Financing activities
               
Redemptions of redeemable noncontrolling interests
   
(421
)
   
(1,590
)
Dividends paid
   
(4,486
)
   
(4,513
)
Purchase of treasury stock
   
(4,293
)
   
(2,021
)
Proceeds from promissory note from Executive Chairman
   
-
     
2,124
 
Repayment of promissory note to Executive Chairman
   
-
     
(2,126
)
Net cash used in financing activities
   
(9,200
)
   
(8,126
)
Net decrease in cash and cash equivalents
   
(274,183
)
   
(48,062
)
Cash and cash equivalents at beginning of period
   
348,588
     
409,564
 
Increase in cash from consolidation
   
-
     
62
 
Cash and cash equivalents at end of period
 
$
74,405
   
$
361,564
 
 
               
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
114
   
$
79
 
Cash paid for taxes
 
$
-
   
$
2,200
 
 
               
Reconciliation to cash, cash equivalents and restricted cash
               
Cash and cash equivalents
 
$
74,405
   
$
361,564
 
Restricted cash included in receivable from brokers
   
200
     
200
 
Cash, cash equivalents and restricted cash
 
$
74,605
   
$
361,764
 

See accompanying notes.

7

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 which was completed on July 8, 2020.  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.

A private company owns 84%of the economics and controls 97% of AC Groups outstanding voting shares.

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 is 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.

 
8

Index

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.
 
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 that was effective on June 10, 2020.

The Board of Directors established the record date of July 30, 2020, and distribution date of August 5, 2020 for the spin-off of Morgan Group to AC’s shareholders.
 
Based on the distribution ratio, on the distribution date, AC stockholders of record as of 5:00 pm, New York City time, on the record date, received approximately 0.022356 shares of Morgan Group common stock for each share of AC common stock they held on the record date.
 
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.
 
The Company separately presented investments in debt securities and investments in equity securities in the condensed consolidated statement of financial condition as of June 30, 2020. A reclassification was made to conform prior period information as of December 31, 2019 to the current period presentation. This change has also been made to the corresponding notes to condensed consolidated financial statements.

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.

 
9

Index

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:
 
 
a.
Asset-based advisory fees – The Company receives a management fee, payable monthly in advance based on value of the net assets of the client. It is generally set at a rate of 1%-1.5% per annum. Asset-based management fee revenue is recognized only as the services are performed over the period.
 
 
b.
Performance-based advisory fees – Certain client contracts call for additional fees and or allocations of income tied to a certain percentage, generally 20%, of the investment performance of the account over a measurement period, typically the calendar year. In addition, the contracts provide that performance-based fees or allocations become fixed in the event of an investor redemption prior to the end of the measurement period. In the event that an account suffers a loss in one period, it must be recovered before incentive fees are earned by the Company; this is commonly referred to as a “high water mark” provision. While the Company’s performance obligation is satisfied over time, the Company does not recognize performance-based fees until the end of the measurement period or the time of the investor redemption when the uncertainty surrounding the amount of the variable consideration is resolved.

10

Index

 
c.
Sub-advisory fees – Pursuant to agreements with other investment advisors, the Company receives a percentage of advisory fees received by such advisors from certain of their investment fund clients. These fees may be either asset- or performance-based. In addition, they may be subject to reduction by certain expenses as set forth in the respective agreements. Sub-advisory fee revenue which is asset-based is recognized ratably as the services are performed over the relevant contractual performance period. Sub-advisory fee revenue which is performance-based is recognized only when it becomes fixed and not subject to adjustment.
 
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:
 
 
a.
Brokerage Commissions – Acting as agent, G.research buys and sells securities on behalf of its customers.  Commissions are charged on the execution of securities transactions made on behalf of client accounts on an agency basis and are based on a rate schedule. G.research recognizes commission revenue when the related securities transactions are executed on trade date.  G.research believes that the performance obligation is satisfied on trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to or from the customer. Commissions earned are typically collected from the clearing brokers utilized by G.research on a daily or weekly basis.
 
 
b.
Hard dollar payments – G.research provides research services to unrelated parties, for which   direct payment is received. G.research may, or may not have contracts for such services. Where a contract for such services is in place, the contractual fee for the period is recognized ratably over the contract period, which is considered the period over which G.research satisfies its performance obligation. For payments where no research contract exists, revenue is not recognized until agreement is reached with the client at which time the performance obligation is considered to have been met and revenue is recognized.
 
 
c.
Selling concessions – G.research participates as a member of the selling group of underwritten equity offerings and receives compensation based on the difference between what its clients pay for the securities sold to its institutional clients and what the issuer receives. The terms of the selling concessions are set forth in contracts between G.research and the underwriter.   Revenue is recognized on the trade date (the date on which the G.research purchases the securities from the issuer) for the portion G.research is contracted to buy.  G.research believes that the trade date is the appropriate point in time to recognize revenue for securities underwriting transactions as there are no significant actions G.research needs to take subsequent to this date, and the issuer obtains the control and benefit of the capital markets offering at this point.  Selling concessions earned are typically collected from the clearing brokers utilized by G.research on a daily or weekly basis.
 
 
d.
Sales manager fees – G.research participates as sales manager of at-the-market offerings of certain affiliated closed-end funds and receives a tiered percentage of proceeds as stipulated in agreements between G.research, the funds and the funds’ investment adviser. G.research recognizes sales manager fees upon sale of the related closed-end funds. Sales manager fees earned are fixed and typically collected from the clearing brokers utilized by G.research on a daily or weekly basis.
 
11

Index

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 six months ended June 30, 2020 and 2019, respectively (in thousands):
 
 
 
 
Three months ended June 30,
   
Six months ended June 30,
 
   
2020
   
2019
   
2020
   
2019
 
Investment advisory and incentive fees
                       
Asset-based advisory fees
 
$
1,304
   
$
1,761
   
$
3,124
   
$
3,485
 
Performance-based advisory fees
   
-
     
13
     
-
     
26
 
Sub-advisory fees
   
555
     
939
     
1,435
     
1,935
 
 
   
1,859
     
2,713
     
4,559
     
5,446
 
 
                               
Institutional research services
                               
Hard dollar payments
   
101
     
463
     
203
     
950
 
Commissions
   
1,003
     
1,416
     
1,940
     
2,842
 
Selling concessions
   
-
     
197
     
335
     
197
 
 
   
1,104
     
2,076
     
2,478
     
3,989
 
 
                               
Other
                               
Underwriting fees
   
-
     
19
     
30
     
19
 
Miscellaneous
   
174
     
13
     
439
     
19
 
 
   
174
     
32
     
469
     
38
 
 
                               
Total
 
$
3,137
   
$
4,821
   
$
7,506
   
$
9,473
 

12

Index

C.  Investment in Securities
 
Investments in debt securities at June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
 
 
June 30, 2020
   
December 31, 2019
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
                         
Debt - Trading Securities
                       
Government obligations
 
$
319,323
   
$
319,376
   
$
28,428
   
$
29,037
 
Total investments in government obligations
 
$
319,323
   
$
319,376
   
$
28,428
   
$
29,037
 

Investments in equity securities at June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
 
 
June 30, 2020
   
December 31, 2019
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
                         
Equity Securities
                       
Common stocks
 
$
232,290
   
$
189,351
   
$
271,627
   
$
262,562
 
Mutual funds
   
597
     
1,015
     
1,207
     
2,196
 
Other investments
   
9,603
     
7,959
     
7,847
     
6,562
 
Total investments in securities
 
$
242,490
   
$
198,325
   
$
280,681
   
$
271,320
 

Securities sold, not yet purchased at June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
 
 
June 30, 2020
   
December 31, 2019
 
   
Proceeds
   
Fair Value
   
Proceeds
   
Fair Value
 
Equity securities
                       
Common stocks
 
$
8,817
   
$
9,349
   
$
13,863
   
$
16,300
 
Other investments
   
194
     
484
     
13
     
119
 
Total securities sold, not yet purchased
 
$
9,011
   
$
9,833
   
$
13,876
   
$
16,419
 

Investments in affiliated registered investment companies at June 30, 2020 and December 31, 2019 consisted of the following (in thousands):
 
 
June 30, 2020
   
December 31, 2019
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Equity securities
                       
Closed-end funds
 
$
75,090
   
$
82,240
   
$
75,646
   
$
99,834
 
Mutual funds
   
48,704
     
57,906
     
48,348
     
59,477
 
Total investments in affiliated registered investment companies
 
$
123,794
   
$
140,146
   
$
123,994
   
$
159,311
 

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 June 30, 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 contract outstanding at June 30, 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.
 
13

Index

The following table identifies the fair values of all derivatives and foreign currency positions held by the Company (in thousands):
 
 
Asset Derivatives
 
Liability Derivatives
 
Statement of
 
Fair Value
 
Statement of
 
Fair Value
 
Financial Condition
 
June 30,
   
December 31,
 
Financial Condition
 
June 30,
   
December 31,
 
Location
 
2020
   
2019
 
Location
 
2020
   
2019
 
Derivatives designated as hedging
 
instruments under FASB ASC 815-20
 
Foreign exchange contracts
Receivable from brokers
 
$
-
   
$
23
 
Payable to brokers
 
$
1,349
   
$
-
 
                                     
                                     
Derivatives not designated as hedging
 
instruments under FASB ASC 815-20
 
Equity contracts
                                   
Investments in securities
 
$
574
   
$
291
 
Securities sold, not yet purchased
 
$
484
   
$
119
 
 
 
               
 
               
Total derivatives
 
 
$
574
   
$
314
 
 
 
$
1,833
   
$
119
 

The following table identifies gains and losses of all derivatives held by the Company (in thousands):
 
Type of Derivative
Income Statement Location
 
Three Months ended June 30,
   
Six Months ended June 30,
 
     
2020
   
2019
   
2020
   
2019
 
                           
Foreign exchange contracts
Net gain/(loss) from investments
 
$
(39
)
 
$
(13
)
 
$
13
   
$
69
 
Equity contracts
Net gain/(loss) from investments
   
257
     
10
     
(510
)
   
(2,012
)
                                   
Total
 
 
$
219
   
$
(3
)
 
$
(497
)
 
$
(1,943
)
 
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 Not Offset in the
Statements of Financial Condition
 
 
Gross
Amounts of
Recognized
Assets
   
Gross Amounts
Offset in the
Statements of
Financial Condition
   
Net Amounts of
Assets Presented
in the Statements
of Financial Condition
   
Financial
Instruments
   
Cash Collateral
Received
   
Net Amount
 
Swaps:
 
(In thousands)
 
June 30, 2020
 
$
574
   
$
-
   
$
574
   
$
(484
)
 
$
-
   
$
90
 
December 31, 2019
   
291
     
-
     
291
     
(119
)
   
-
     
172
 

                 
Gross Amounts Not Offset in the
Statements of Financial Condition
 
 
 
Gross
Amounts of
Recognized
Liabilities
   
Gross Amounts
Offset in the
Statements of
Financial Condition
   
Net Amounts of
Liabilities Presented
in the Statements
of Financial Condition
   
Financial
Instruments
   
Cash Collateral
Pledged
   
Net Amount
 
Swaps:
 
(In thousands)
 
June 30, 2020
 
$
484
   
$
-
   
$
484
   
$
(484
)
 
$
-
   
$
-
 
December 31, 2019
   
119
     
-
     
119
     
(119
)
   
-
     
-
 

14

Index

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 $118.8 million and $124.8 million at June 30, 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 $20.6 million and $20.5 million at June 30, 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.

 
15

Index

The following table includes the net impact by line item on the condensed consolidated statements of financial condition for the consolidated entities (in thousands):
 
 
June 30, 2020
 
   
Prior to
Consolidation
   
Consolidated
Entities
   
As Reported
 
Assets
                 
Cash and cash equivalents
 
$
52,396
   
$
22,009
   
$
74,405
 
Investments in debt securities
   
299,880
     
19,496
     
319,376
 
Investments in equity securities (including GBL stock)
   
132,395
     
65,930
     
198,325
 
Investments in affiliated investment companies
   
179,602
     
(39,456
)
   
140,146
 
Investments in partnerships
   
159,905
     
(20,543
)
   
139,362
 
Receivable from brokers
   
7,205
     
11,194
     
18,399
 
Investment advisory fees receivable