Associated Capital Group(AC) - 2018 Q4 - Annual Report

Part I Item 1: Business Associated Capital Group, Inc. (AC) operates primarily in alternative investment management and institutional research services, following its 2015 spin-off from GAMCO Investors, Inc. (GBL) - The company operates two main business segments: Alternative Investment Management through GCIA and Institutional Research Services through G.research[14][16][17] - AC was spun-off from GAMCO Investors, Inc. (GBL) on November 30, 2015, with a $250 million note from GAMCO fully repaid by year-end 2018[15][18] Assets Under Management (AUM) as of December 31 (in millions) | Strategy | 2018 | 2017 | | :--- | :--- | :--- | | Event Merger Arbitrage | $1,342 | $1,384 | | Event-Driven Value | $118 | $91 | | Other | $60 | $66 | | Total | $1,520 | $1,541 | - The institutional research services business, G.research, derives a significant portion of its revenue from GAMCO and its affiliates, with the Board exploring strategic options for this unit in 2018[32][33] - The company's business strategy includes leveraging its proprietary investment portfolio for seed capital, geographic expansion, and strategic acquisitions, such as the creation of a Special Purpose Acquisition Vehicle (SPAC) in Italy[34][38] - The company is subject to extensive regulation by various bodies including the SEC and FINRA in the U.S., and is impacted by European directives such as AIFMD and MiFID II[46][47][60] Item 1A: Risk Factors As a smaller reporting company, Associated Capital Group, Inc. is not required to provide the information for this item - Smaller reporting companies are not required to provide the information required by this item[74] Item 1B: Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - The company has no unresolved staff comments[74] Item 2: Properties The company does not own any properties and subleases office space from its former parent company, GAMCO, in Rye, NY - AC owns no properties and pays rent to GAMCO for office space based on a sublease agreement[75] Item 3: Legal Proceedings The company is not currently subject to any material legal proceedings that would exceed 10% of its consolidated assets - The company is not currently subject to any legal proceedings where the claim for damages exceeds 10% of its consolidated assets[76] Item 4: Mine Safety Disclosures This item is not applicable to the company - Not applicable[77] Part II Item 5: Market For The Registrant's Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities The company's Class A Stock trades on the NYSE under the symbol 'AC' and has an active stock repurchase program - The company's Class A Stock is traded on the New York Stock Exchange under the symbol AC[77] - The Board of Directors has authorized a stock repurchase program, with 1,204,213 shares remaining available for repurchase as of December 31, 2018[79][81] - In 2018, the company completed two exchange offers, repurchasing 867,535 Class A shares in exchange for 1,376,554 shares of GBL[81] - Under the 2015 Equity Compensation Plan, the company awarded 172,800 Phantom Restricted Stock Awards (RSAs) in 2018, with 1,289,100 shares remaining available for future issuance[82][83] Item 6: Selected Financial Data As a smaller reporting company, Associated Capital Group, Inc. is not required to provide the information for this item - Smaller reporting companies are not required to provide the information required by this item[84] Item 7: Management's Discussion And Analysis Of Financial Condition And Results Of Operations For fiscal year 2018, Associated Capital Group reported a net loss of $58.1 million, primarily driven by a $65.2 million net loss from investments, with total revenues decreasing by 15.4% to $22.8 million Operating Results (2018 vs. 2017) In 2018, total revenues fell to $22.8 million from $26.9 million in 2017, a 15.4% decrease, primarily due to a 32.1% drop in institutional research services revenue Revenues by Type (in thousands) | Revenue Type | 2018 | 2017 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Investment advisory and incentive fees | $14,409 | $14,551 | $(142) | (1.0)% | | Institutional research services | $8,284 | $12,199 | $(3,915) | (32.1)% | | Other revenues | $86 | $165 | $(79) | (47.9)% | | Total revenues | $22,779 | $26,915 | $(4,136) | (15.4)% | - Compensation expense decreased by $4.7 million to $25.9 million in 2018, primarily due to lower fixed compensation and a $5.2 million decrease in stock-based compensation expense[106][107] - The company reported a net loss from investments of $65.2 million in 2018, a stark contrast to the $20.6 million net gain in 2017, mainly due to mark-to-market changes in the value of GAMCO stock and other investments[110] - Net loss for 2018 was $58.1 million, compared to a net income of $8.8 million in 2017, with the change primarily driven by mark-to-market losses on the investment portfolio[115] Liquidity and Capital Resources The company ended 2018 with a strong liquidity position, holding $409.6 million in cash and cash equivalents and $481.3 million in net investments, with net cash provided by operations at $77.0 million Summary Cash Flow Data (in thousands) | Activity | 2018 | 2017 | | :--- | :--- | :--- | | Operating activities | $76,980 | $(67,620) | | Investing activities | $4,736 | $(18,734) | | Financing activities | $34,689 | $65,373 | | Net increase (decrease) in cash | $116,405 | $(20,981) | - At year-end 2018, the company had cash and cash equivalents of $409.6 million and net investments of $481.3 million[117] - Net cash from financing activities in 2018 was driven by the final $50.0 million principal payment on the GAMCO Note, partially offset by $7.0 million in treasury stock purchases and $4.7 million in dividend payments[123] - The broker-dealer subsidiary, G.research, had net capital of $9.1 million as of December 31, 2018, exceeding the minimum regulatory requirement of $250,000[124] Critical Accounting Policies The company's critical accounting policies involve significant management judgment and estimates, covering revenue recognition, investments, VIE consolidation, income taxes, and stock-based compensation - Investment advisory fees are based on AUM, while incentive fees (typically 20% of profits) are recognized at the end of an annual measurement period or upon investor redemption[128][130] - Beginning in 2018, due to new accounting standards, all realized and unrealized gains or losses on equity securities are reported in current period earnings[133] - The company consolidates Variable Interest Entities (VIEs) where it is determined to be the primary beneficiary, meaning it has both the power to direct significant activities and significant exposure to the VIE's economics[140] - In 2018, the company began issuing Phantom Restricted Stock Awards (Phantom RSAs), which are cash-settled and accounted for as a liability, with the fair value remeasured at each reporting date[151][152] Item 7A: Quantitative And Qualitative Disclosures About Market Risk As a smaller reporting company, Associated Capital Group, Inc. is not required to provide the information for this item - Smaller reporting companies are not required to provide the information required by this item[157] Item 8: Financial Statements And Supplementary Data This section contains the company's consolidated financial statements for the years ended December 31, 2018 and 2017, audited by Deloitte & Touche LLP, including key figures for revenues, net loss, and total assets Consolidated Statements of Income For the year ended December 31, 2018, the company reported a total net loss of $57.4 million, with a net loss attributable to shareholders of $58.1 million, or ($2.52) per share Consolidated Statements of Income Highlights (in thousands) | Line Item | 2018 | 2017 | | :--- | :--- | :--- | | Total revenues | $22,779 | $26,915 | | Total expenses | $36,259 | $47,301 | | Operating loss | $(13,480) | $(20,386) | | Net gain/(loss) from investments | $(65,203) | $20,598 | | Income/(loss) before income taxes | $(68,861) | $6,264 | | Net income/(loss) | $(57,383) | $8,684 | | Net income/(loss) attributable to ACG shareholders | $(58,099) | $8,837 | Earnings Per Share (EPS) | EPS Type | 2018 | 2017 | | :--- | :--- | :--- | | Basic | $(2.52) | $0.37 | | Diluted | $(2.52) | $0.37 | Consolidated Statements of Financial Condition As of December 31, 2018, total assets were $954.4 million, a decrease from $1,006.9 million in 2017, primarily due to a reduction in the value of investments in securities Consolidated Balance Sheet Highlights (in thousands) | Line Item | Dec 31, 2018 | Dec 31, 2017 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $409,564 | $293,112 | | Investments in securities | $229,960 | $352,637 | | Total assets | $954,433 | $1,006,915 | | Liabilities & Equity | | | | Total liabilities | $38,385 | $42,538 | | Total Associated Capital Group, Inc. equity | $866,248 | $918,147 | | Total liabilities and equity | $954,433 | $1,006,915 | Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial results, including its spin-off, new accounting standards, investment breakdowns, and related-party transactions - (Note A) The company was formed via a spin-off from GAMCO Investors, Inc. (GBL) on November 30, 2015, with a $250 million promissory note from GAMCO fully repaid in 2018[186][189] - (Note B) Effective January 1, 2018, the company adopted new accounting standards (ASU 2014-09 for revenue and ASU 2016-01 for financial instruments), which resulted in changes to disclosures and reclassifications but had no material impact on the financial statements[243][244] - (Note D) The company's investment in GAMCO (GBL) common stock had a fair value of $50.9 million at year-end 2018, down from $130.3 million at year-end 2017[172] - (Note I) The company has significant related-party transactions, including earning institutional research commissions and research service fees from GAMCO affiliates, and subleasing office space from GAMCO[316][317][322] - (Note J) In 2018, the company completed two exchange offers, exchanging 1,376,554 of its GBL shares for 867,535 of its own Class A shares, and also granted 172,800 Phantom RSAs[328][331][332] Item 9: Changes In And Disagreements With Accountants On Accounting And Financial Disclosure The company reports no disagreements with its accountants on accounting and financial disclosure - None[345] Item 9A: Controls And Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2018 - The Company's principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective as of the end of the period[346] - Management concluded that as of December 31, 2018, the Company maintained effective internal control over financial reporting based on the COSO framework[347][348] - No material changes were made to the internal control over financial reporting during the fourth quarter of 2018[349] Item 9B: Other Information The company reports no other information for this item - None[349] Part III Item 10: Directors, Executive Officers and Corporate Governance Information required for this item, including details on directors, executive officers, and corporate governance, is incorporated by reference from the company's 2019 Proxy Statement - Information regarding Directors and Executive Officers is incorporated by reference from the Company's 2019 Proxy Statement[350] Item 11: Executive Compensation Information regarding executive compensation is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders - Information required by this item is included in the Proxy Statement and is incorporated by reference[354] Item 12: Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders - Information required by this item is included in the Proxy Statement and is incorporated by reference[354] Item 13: Certain Relationships And Related Transactions, and Director Independence Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders - Information required by this item is included in the Proxy Statement and is incorporated by reference[354] Item 14: Principal Accountant Fees And Services Information regarding principal accountant fees and services is incorporated by reference from the company's Proxy Statement for the 2019 Annual Meeting of Stockholders - Information required by this item is included in the Proxy Statement and is incorporated by reference[355] Part IV Item 15: Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including consolidated financial statements and a list of exhibits - This item lists the consolidated financial statements and exhibits filed with the report, with financial statement schedules omitted[355] - Exhibits include the Separation and Distribution Agreement with GAMCO, governance documents, the 2015 Stock Award Incentive Plan, and various certifications[358] Item 16: Form 10-K Summary The company did not provide a summary for this item - None[360]