Associated Capital Group(AC) - 2019 Q4 - Annual Report

Part I Item 1: Business AC provides alternative investment management, institutional research, and manages a proprietary investment portfolio, operating under extensive U.S. and European regulation Business Overview AC operates in three core areas: managing proprietary capital, providing alternative investment management, and offering institutional research, with $1.7 billion in AUM as of 2019 - The company's business is structured around three pillars: Proprietary Capital for direct investments (including SPACs), Alternative Investment Management, and Institutional Research services via its subsidiary G.research[13] Assets Under Management (AUM) as of Dec 31 (in millions) | Strategy | 2019 | 2018 | | :--- | :--- | :--- | | Event Merger Arbitrage | $1,525 | $1,342 | | Event-Driven Value | $132 | $118 | | Other | $59 | $60 | | Total | $1,716 | $1,520 | - On October 31, 2019, Morgan Group Holding Co. acquired G.research, resulting in AC holding an 83.3% ownership interest and consolidating the entity[19] - G.research's institutional research services revenues were $8.9 million in 2019 and $8.3 million in 2018, with a significant portion from GAMCO and its affiliates[22][23][25] Business Strategy The company's strategy focuses on global growth by leveraging core competencies in asset management, pursuing acquisitions, and expanding distribution through international partnerships - The core investment philosophy is the 'Private Market Value (PMV) with a Catalyst™' approach, based on principles from Graham & Dodd[28] - Strategic pillars include growing the Investment Partnerships business, pursuing acquisitions and direct investments like SPACs, and forming partnerships to expand distribution, particularly in Asia and Europe[29][30][32] Regulation AC's business is extensively regulated in the U.S. by the SEC and FINRA, and in Europe by directives like AIFMD, UCITS, and MiFID II, with Brexit's impact still evolving - In the U.S., the company and its subsidiaries are primarily regulated by the SEC and FINRA under the Advisers Act and the Exchange Act, with G.research subject to minimum net capital requirements[39][40] - The company is subject to ERISA as a fiduciary for certain clients and must comply with anti-money laundering laws like the USA Patriot Act and tax regulations such as FATCA and CRS[42][43][46] - European activities are regulated by the EU's AIFMD, UCITS, and MiFID II directives, which impose rules on marketing, remuneration, capital requirements, and the use of 'soft dollars' for research[50][51][53] - Following the UK's exit from the EU on January 31, 2020, the company's UK entity (GSIL UK) will continue to comply with MiFID II during a transition period ending December 31, 2020, after which the regulatory landscape may change[55][56] Item 1A: Risk Factors As a smaller reporting company, Associated Capital Group, Inc. is not required to provide the information for this item - The company is not required to provide Risk Factors as it qualifies as a smaller reporting company[64] Item 2: Properties The company acquired its headquarters building at 191 Mason Street, Greenwich, CT on May 31, 2019 - AC acquired its headquarters building at 191 Mason Street, Greenwich, CT on May 31, 2019[65] Item 3: Legal Proceedings The company is not currently subject to any material legal proceedings where the claim for damages exceeds 10% of its consolidated assets - The company is not subject to any legal proceedings with claims exceeding 10% of its consolidated assets[66] 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 'AC', with an active stock repurchase program and shares available for future equity compensation issuance Class A Stock Repurchases (Q4 2019) | Period | Shares Repurchased | Avg. Price Paid | Shares Remaining in Program | | :--- | :--- | :--- | :--- | | Oct 2019 | 7,110 | $36.39 | 1,108,220 | | Nov 2019 | 4,365 | $36.01 | 1,103,855 | | Dec 2019 | 9,499 | $37.50 | 1,094,356 | | Total | 20,974 | $36.80 | 1,094,356 | - The company has the 2015 Stock Award and Incentive Plan, under which 1,289,100 shares remain available for future issuance as of year-end 2019[72][73] Item 7: Management's Discussion And Analysis Of Financial Condition And Results Of Operations AC's 2019 financial performance saw a significant turnaround to $39.2 million net income from a prior year loss, driven by strong investment gains and AUM growth to $1.72 billion, while maintaining robust liquidity Assets Under Management Highlights Total AUM increased by 13.4% to $1.72 billion in 2019, driven by $102 million in net inflows and $94 million in positive investment returns, primarily in Event Merger Arbitrage AUM by Strategy (in millions) | Strategy | Dec 31, 2019 | Dec 31, 2018 | % Change | | :--- | :--- | :--- | :--- | | Event Merger Arbitrage | $1,525 | $1,342 | 14.2% | | Event-Driven Value | $132 | $118 | 11.6% | | Other | $59 | $60 | (1.7)% | | Total | $1,716 | $1,520 | 13.4% | Change in AUM during 2019 (in millions) | Strategy | Beginning AUM | Inflows | Outflows | Investment Return | Ending AUM | | :--- | :--- | :--- | :--- | :--- | :--- | | Event Merger Arbitrage | $1,342 | $368 | $(262) | $77 | $1,525 | | Event-Driven Value | $118 | $8 | $(4) | $10 | $132 | | Other | $60 | $0 | $(8) | $7 | $59 | | Total | $1,520 | $376 | $(274) | $94 | $1,716 | Operating Results (2019 vs 2018) The company reported a net income of $39.2 million in 2019, a significant improvement from a net loss of $58.1 million in 2018, primarily due to a $60.8 million net gain from investments Revenues by Type (in thousands) | Revenue Type | 2019 | 2018 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Investment advisory and incentive fees | $22,148 | $14,409 | $7,739 | 53.7% | | Institutional research services | $8,947 | $8,284 | $663 | 8.0% | | Other revenues | $170 | $86 | $84 | 97.7% | | Total revenues | $31,265 | $22,779 | $8,486 | 37.3% | - Incentive fees increased by $7.0 million to $11.2 million in 2019 due to higher investment performance[93] - Compensation expense rose by $5.6 million to $32.2 million, primarily from a $7.5 million increase in variable payouts tied to investment performance[96] - A management fee of $5.7 million was recorded in 2019, based on 10% of adjusted pre-tax profits, which was not incurred in 2018 due to pre-tax losses[98] - Net gain from investments was $60.8 million in 2019, a stark contrast to the net loss of $65.2 million in 2018, mainly due to mark-to-market changes in the value of GAMCO stock and other investments[100] Liquidity and Capital Resources The company maintained a strong liquidity position with $348.6 million in cash and $588.6 million in net investments, despite net cash used in operating activities of $44.3 million in 2019 - As of December 31, 2019, the company had cash and cash equivalents of $348.6 million and net investments of $588.6 million[107][108] Summary Cash Flow Data (in thousands) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Cash from Operating Activities | $(44,334) | $76,980 | | Cash from Investing Activities | $(5,058) | $4,736 | | Cash from Financing Activities | $(11,584) | $34,689 | | Net Change in Cash | $(60,976) | $116,405 | - The broker-dealer subsidiary, G.research, had net capital of $4.6 million as of December 31, 2019, exceeding its minimum requirement of $250,000 by $4.3 million[112] Critical Accounting Policies Key accounting policies involve significant judgment in revenue recognition for advisory and incentive fees, fair value valuation of investments, and consolidation of Variable Interest Entities - Revenue from investment advisory fees is recognized over time, while incentive fees are generally recognized at the end of an annual measurement period when uncertainty is resolved[116][117] - Investments in securities are recorded at fair value, with gains and losses recorded on a trade date basis and included in net gain/(loss) from investments[121] - The company consolidates Variable Interest Entities (VIEs) where it is deemed the primary beneficiary, meaning it has both the power to direct significant activities and significant exposure to the VIE's economics[127] - For investments in partnerships and affiliates where control is not present, the company uses the equity method of accounting, with its share of the investee's net income recorded as net gain/(loss) from investments[132] Item 8: Financial Statements And Supplementary Data This section presents the audited consolidated financial statements for 2019 and 2018, reflecting a net income of $39.2 million for 2019 and total assets of $1.01 billion Consolidated Financial Statements The consolidated financial statements show total revenues of $31.3 million and a net income of $39.2 million for 2019, a significant improvement from the prior year's net loss Consolidated Statements of Income Highlights (in thousands) | Line Item | 2019 | 2018 | | :--- | :--- | :--- | | Total Revenues | $31,265 | $22,779 | | Total Expenses | $47,023 | $36,259 | | Net Gain/(Loss) from Investments | $60,757 | $(65,203) | | Net Income/(Loss) Attributable to AC | $39,188 | $(58,099) | Consolidated Statements of Financial Condition Highlights (in thousands) | Line Item | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $348,588 | $409,564 | | Total Investments | $605,040 | $490,824 | | Total Assets | $1,010,906 | $954,433 | | Total Liabilities | $63,086 | $38,385 | | Total Equity | $897,435 | $866,248 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, the G.research merger, investment composition, related party transactions, and the subsequent spin-off of Morgan Group - Note A: On October 31, 2019, Morgan Group Holding Co. acquired G.research, with AC now holding an 83.3% interest and consolidating the entity, accounted for as a common control transaction[171] - Note C: Total revenues were $31.3 million in 2019, up from $22.8 million in 2018, driven by performance-based advisory fees and sub-advisory fees, which rose to $7.5 million and $7.6 million, respectively[236] - Note D: Total investments in securities, including affiliated funds, were valued at $459.7 million at year-end 2019, up from $372.1 million in 2018[237][239] - Note I: The company has significant related party transactions, including earning $4.9 million in commission revenue from Gabelli Funds and GAMCO Asset in 2019 and paying a $5.7 million management fee to the Executive Chairman[278][280] - Note O: Subsequent to year-end, on March 14, 2020, the Board approved the spin-off of Morgan Group to AC shareholders[304] Item 9A: Controls And Procedures Management concluded that disclosure controls were ineffective as of December 31, 2019, due to a material weakness from insufficient technical accounting personnel and lack of segregation of duties, with a remediation plan underway - Management identified a material weakness in internal control over financial reporting as of December 31, 2019[304] - The material weakness was caused by insufficient personnel with technical accounting skills, resulting in a lack of segregation of duties between financial statement preparation and senior management review[310] - A remediation plan is underway, which includes appointing additional qualified personnel, assigning new review responsibilities, and engaging an accounting consultant[312] Part III Items 10-14 Information for Items 10 through 14 is incorporated by reference from the company's definitive proxy statement for the 2020 Annual Meeting of Stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Company's Proxy Statement for the 2020 Annual Meeting of Stockholders[315][318][319] Part IV Item 15: Exhibits, Financial Statement Schedules This section lists the consolidated financial statements and all exhibits filed with the Form 10-K, including key agreements and certifications - This item lists the consolidated financial statements and all exhibits filed with the Form 10-K, such as the Separation and Distribution Agreement, Employment Agreement with the Executive Chairman, and various certifications[319][322][323]