10-K 1 form10k.htm 10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019
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 number 001-37387

Associated Capital Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware
 
47-3965991
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

191 Mason, Greenwich, CT
 
06830
     
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code (203) 629-9595
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Trading Symbol
 
 Name of each exchange on which registered
Class A Common Stock,  par value $0.001 per share
 
AC
 
 New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes ☐ No ☒.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes ☐ No ☒.

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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.

 
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 Section 13(a) of the Exchange Act. ☒

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

The aggregate market value of the class A common stock held by non-affiliates of the registrant as of June 28, 2019 (the last business day of the registrant’s most recently completed second fiscal quarter) was $120,948,122.

As of February 28, 2020, 3,421,000 shares of class A common stock and 19, 002,918 shares of class B common stock were outstanding. GGCP, Inc., a private company controlled by the Company’s Executive Chairman, held 66,000 shares of class A common stock and indirectly held 18,423,741 shares of class B common stock. Other executive officers and directors of GGCP, Inc. held 46,946 and 462,580 shares of class A and class B common stock, respectively.

DOCUMENTS INCORPORATED BY REFERENCE:  Portions of the registrant’s definitive proxy statement relating to the 2020 Annual Meeting of Shareholders are incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.

2

Associated Capital Group, Inc.

Annual Report on Form 10-K for the Fiscal Year Ended December 31, 2019
 
Part I
     
 
Item 1
4
   
7
   
8
   
8
   
9
   
12
 
Item 1A
13
 
Item 1B
13
 
Item 2
13
 
Item 3
13
 
Item 4
13
Part II
     
 
Item 5
13
 
Item 6
14
 
Item 7
14
 
Item 7A
22
 
Item 8
22
 
Item 9
55
 
Item 9A
55
 
Item 9B
56
Part III
     
 
Item 10
56
 
Item 11
56
 
Item 12
56
 
Item 13
56
 
Item 14
56
Part IV
     
 
Item 15
56
 
Item 16
58
       
   
59
    60
     
       
 
Certifications
 
     
     
     

3

PART I
 
Forward-Looking Statements
 
Our disclosure and analysis in this report and in documents that are incorporated by reference contain some forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. You should not place undue reliance on these statements. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results.
 
Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation: the adverse effect from a decline in the securities markets; a decline in the performance of our products; a general downturn in the economy; changes in government policy or regulation; changes in our ability to attract or retain key employees; and unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations. We also direct your attention to any more specific discussions of risk contained in our other public filings or in documents incorporated by reference here or in prior filings or reports.
 
We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements.
 
ITEM 1:
BUSINESS
 
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.
 
Our offices are located at 191 Mason Street, Greenwich, CT 06830. Our website address is www.associated-capital-group.com. Information on our website is not incorporated by reference herein and is not part of this report. We provide a link on our website to the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission (“Commission” or “SEC”): our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All such filings on our website are available free of charge. In addition, these reports and the other documents we file with the SEC are available at www.sec.gov.
 
We are a Delaware corporation, incorporated in 2015, that provides alternative investment management services and we derive investment income/(loss) from proprietary investment of cash and other assets awaiting deployment in our operating business.  In addition, our controlled subsidiary, G.research, LLC (“G.research”) provides institutional research and underwriting services.

4

Proprietary Capital
 
The proprietary capital is earmarked for our direct investment business that invests in new and existing businesses, using a variety of techniques and structures.  The direct investment business is developing along three core pillars; Gabelli Private Equity Partners, LLC (“GPEP”), formed in August 2017 with $150 million of authorized capital as a “fund-less” sponsor; the SPAC business (Gabelli special purpose acquisition vehicles), launched in April 2018 when 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.  Finally, Gabelli Principal Strategies Group, LLC (“GPS”) was created to pursue strategic operating initiatives.
 
A portion of our proprietary capital is in the form of GAMCO Class A common stock.  On November 30, 2015, AC received 4,393,055 shares of GAMCO Class A common stock for $150 million as part of the spin-off transaction from GAMCO.   As of December 31, 2019, the Company held 2,935,401shares of GAMCO Class A common stock.
 
Alternative Investment Management
 
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”). GCIA is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended (the “Advisers Act”).  GCIA and Gabelli & Partners together 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 and 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 (“AUM”). Incentive fees are based on the percentage of the investment returns of certain client portfolios.
 
We manage assets on a discretionary basis and invest in a variety of U.S. and foreign securities. We primarily employ absolute return strategies with the objective of generating positive returns regardless of market performance. We serve a wide variety of investors including private wealth management accounts, corporations, corporate pension and profit-sharing plans, foundations and endowments, as well as serving as sub-advisor to certain third-party investment funds.

In event merger arbitrage, the goal is to earn absolute positive. We introduced our first alternative fund, Gabelli Arbitrage (renamed Gabelli Associates), in February 1985. Our typical investment process involves buying shares of the target at a discount, earning the spread to the deal price when the deal closes, and reinvesting the profits in new deals in a similar manner. By owning a diversified portfolio of deals, we mitigate the adverse impact of deal-specific risks. Since inception in February 1985, we have compounded net annual returns of 7.37%. As a result, a $10 million investment by a tax free vehicle in this fund at its inception would be worth more than $120 million, as of December 31, 2019. In addition, the value of such an investment would have exhibited significantly less volatility than that of broad equity indices.
 
An offshore version of the event merger arbitrage strategy was added in 1989. Building on our strengths in global event-driven value investing, several new investment funds have been added to balance investors’ geographic, strategy and sector needs. Today, we manage Investment Partnerships in multiple categories, including event merger arbitrage, event-driven value and other strategies.
 
5

Assets Under Management
 
As of December 31, 2019, we managed approximately $1.7 billion in assets
 
The following table sets forth AC’s total AUM, including investment funds and separately managed accounts, for the dates shown (in millions):
 
   
December 31,
 
   
2019
   
2018
 
             
Event Merger Arbitrage
 
$
1,525
   
$
1,342
 
Event-Driven Value (a)
   
132
     
118
 
Other (b)
   
59
     
60
 
Total (c)
 
$
1,716
   
$
1,520
 

(a)
Excluding event merger arbitrage.

(b)
Includes investment vehicles focused on private equity, merchant banking, non-investment-grade credit and capital structure arbitrage.

(c)
Includes $259 and $214 of proprietary capital, respectively.
 
G.research Merger with Morgan Group Holding Co.
 
On October 31, 2019, the Company closed a transaction whereby Morgan Group Holding Co. (“Morgan Group”), a company under common control with us that trades in the over the counter market under the symbol “MGHL”, 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.  After giving effect to these transactions, the Company has an 83.3% ownership interest in Morgan Group and consolidates the entity, which includes G.research.  The Company continues to explore strategic options for its ownership of Morgan Group, including the potential spin-off of its ownership to AC shareholders. The Company can provide no assurances that any further transactions will result.
 
Institutional Research Services
 
G.research is a broker-dealer registered under the Exchange Act and is regulated by the Financial Industry Regulatory Authority (“FINRA”).  G.research’s revenues are derived primarily from institutional research services, underwriting fees (primarily for affiliates of the Company) and selling concessions. Our research analysts are industry-focused, following sectors based on our core competencies. Analysts publish their insights in the form of research reports and daily notes. In addition, G.research markets conferences which bring together industry leaders and institutional investors. The objective of institutional research services is to provide superior investment ideas to investment decision makers.
 
Analysts are generally assigned to industry sectors.  Our research focus includes Basic Materials – Specialty Chemicals; Business Services; Financials – Community Banks; Healthcare – Animal Health, Biotech & Pharma; Biotech; Industrials – Diversified Industrials, Transports & Metals; Industrials & Internet; Media – Entertainment; and, Media.
 
G.research generates revenues via direct fees and 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. Institutional research services revenues totaled $8.9 million and $8.3 million for the years ended December 31, 2019 and 2018, respectively.
 
A significant portion of G.research institutional research services are provided to GAMCO and its affiliates.  For the years ending December 31, 2019 and December 31, 2018, GAMCO Asset Management Inc. (“GAMCO Asset”) paid $0.8 million and $1.0 million and Gabelli Funds, LLC paid $0.7 million and $1.0 million to G.research pursuant to a research service agreements.  These agreements were terminated on January 1, 2020 and compensation from Gabelli Funds and GAMCO Asset and costs related to servicing these arrangements are expected to decrease.
 
6

For the years ended December 31, 2019 and 2018, respectively, G.research earned $4.9 million and $3.8 million, or approximately 76% and 62%, of its commission revenue from transactions executed on behalf of funds advised by Gabelli Funds and clients advised by GAMCO Asset.  Gabelli Funds and GAMCO Asset are wholly-owned subsidiaries of GAMCO.  We can provide no assurance that GAMCO and its affiliates will continue to use G.research’s institutional research and brokerage services to the same extent in the future. G.research continues to pursue expansion of third party and affiliated activities.
 
Use of Proprietary Resources
 
We have a substantial portfolio of cash and investments. We expect to use this proprietary investment portfolio to provide seed capital for new products, expand our geographic presence, develop new markets and pursue strategic acquisitions and alliances, as well as for shareholder compensation in the form of share repurchases and dividends. Our proprietary portfolios are largely invested in products our affiliates or that are managed by GAMCO affiliates. In addition, we expect to make private equity acquisitions including through the use of special purpose acquisition vehicles (“SPACs”).
 
Business Strategy
 
Our business strategy targets global growth of the business through continued leveraging of our proven asset management strengths including the long-term performance record of our alternative investment funds, diverse product offerings and experienced investment, research and client relationship professionals. In order to achieve performance and growth in AUM and profitability, we are pursuing a strategy which includes the following key elements:
 
Continuing an Active Fundamental Investment Approach
 
Since 1985, our results demonstrate our core competence in event driven investing through market cycles. Our “Private Market Value (PMV) with a Catalyst™” investing approach remains the principal management philosophy guiding our investment operations. This method is based on investing principles articulated by Graham & Dodd, and further refined by our Executive Chairman, Mario J. Gabelli.
 
Growing our Investment Partnerships Advisory Business
 
We intend to grow our Investment Partnerships advisory operations by gaining share with existing products and introducing new products within our core competencies, such as event and merger arbitrage. In addition, we intend to grow internationally.
 
Capitalizing on Acquisitions and Alliances - Direct Investments
 
We intend to leverage our research and investment capabilities by pursuing acquisitions and alliances that will broaden our product offerings and add new sources of distribution. In addition, we may make direct investments in operating businesses using a variety of techniques and structures. For example, in April 2018, the Company completed 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.
 
7

Pursuing Partnerships and Joint Ventures
 
We plan to pursue partnerships and joint ventures with firms that fit with AC’s product quality and that can provide Asian/European distribution capabilities that would complement our U.S. equity product expertise. We expect to target opportunities for investors interested in non-market correlated returns.
 
Competition
 
The alternative asset management industry is intensely competitive. We face competition in all aspects of our business from other managers in the United States and around the globe. We compete with alternative investment management firms, insurance companies, banks, brokerage firms and financial institutions that offer products that have similar features and investment objectives. Many of these investment management firms are subsidiaries of large diversified financial companies and may have access to greater resources than us. Many are larger in terms of AUM and revenues and, accordingly, have larger investment and sales organizations and related budgets. Historically, we have competed primarily on the basis of the long-term investment performance of our investment products. We have recently taken steps to increase our distribution channels, brand awareness and marketing efforts.
 
The market for providing investment management services to institutional and private wealth management clients is also highly competitive. Selection of investment advisors by U.S. institutional investors is often subject to a screening process and to favorable recommendations by investment industry consultants. Many of these investors require their investment advisors to have a successful and sustained performance record, often five years or longer, and focus on one-year and three-year performance records. Currently, we believe that our investment performance record would be attractive to potential new institutional and private wealth management clients. While we have significantly increased our AUM from institutional investors since our entry into the institutional asset management business, no assurance can be given that our efforts to obtain new business will be successful.
 
Intellectual Property
 
Service marks and brand name recognition are important to our business. We have rights to the service marks under which our products are offered. We have rights to use the “Gabelli” name, and the “GAMCO” brand, pursuant to a non-exclusive, royalty-free license agreement we have entered into with GAMCO (the “Service Mark and Name License Agreement”). We can use these names with respect to our funds, collective investment vehicles, Investment Partnerships and other investment products pursuant to the Service Mark and Name License Agreement. The Service Mark and Name License Agreement has a perpetual term, subject to termination only in the event we are not in compliance with its quality control provisions. Pursuant to an assignment agreement signed in 1999, Mario J. Gabelli had assigned to GAMCO all of his rights, title and interests in and to the “Gabelli” name for use in connection with investment management services and institutional research services. In addition, the funds managed by Mario J. Gabelli outside GAMCO and AC have entered into a license agreement with GAMCO permitting them to continue limited use of the “Gabelli” name under specified circumstances.
 
Commitment to Community
 
AC seeks to be a good corporate citizen in our community through the way we conduct our business activities as well as by other measures such as serving our community, sponsoring local organizations and developing our teammates.
 
Since our spin-off in 2015, AC has supported over 160 qualified charities that address a broad range of local, national and international concerns. The recipients were identified by our shareholders through AC’s Shareholder-Designated Contribution Program. The 2019 program, approved by our Board in November 2019, allows each shareholder of record at November 30, 2019 to designate a qualified charity to receive a $0.20 per share donation from AC. We expect that the Company’s total contributions for the 2019 program will be approximately $4.5 million bringing cumulative donations to approximately $20 million.

8

Regulation
 
Virtually all aspects of our businesses are subject to federal, state and foreign laws and regulations. These laws and regulations are primarily intended to protect investment advisory clients and investors, the financial markets and the customers of broker-dealers. Under such laws and regulations, agencies that regulate investment advisors and broker-dealers have broad powers, including the power to limit, restrict or prohibit such an advisor or broker-dealer from carrying on its business in the event that it fails to comply with such laws and regulations. In such an event, the possible sanctions that may be imposed include civil and criminal liability, the suspension of individual employees, injunctions, limitations on engaging in certain lines of business for specified periods of time, revocation of the investment advisor and other registrations, censures and fines.
 
Existing U.S. Regulation Overview
 
AC and certain of its U.S. subsidiaries are currently subject to extensive regulation, primarily at the federal level, by the SEC, the Department of Labor, FINRA and other regulatory bodies. Certain of our U.S. subsidiaries are also subject to anti-terrorist financing, privacy, and anti-money laundering regulations as well as economic sanctions laws and regulations established by these agencies.
 
The Advisers Act
 
GCIA is registered with the SEC under the Advisers Act and is regulated by and subject to examination by the SEC. The Advisers Act imposes numerous obligations on registered investment advisors including fiduciary duties, disclosure obligations and record keeping, operational and marketing requirements. The SEC is authorized to institute proceedings and impose sanctions for violations of the Advisers Act, ranging from censure to termination of an investment advisor’s registration. The failure of GCIA to comply with the requirements of the SEC could have a material adverse effect on us.
 
We derive a majority of our revenues from investment advisory services from investment management agreements. Under the Advisers Act, our investment management agreements may not be assigned without the client’s consent.
 
Broker-Dealer and Trading and Investment Regulation
 
G.research is a registered as broker-dealer with the SEC and is subject to regulation by FINRA and various states’ regulatory authorities. In its capacity as a broker-dealer, G.research is required to maintain certain minimum net capital amounts. These requirements also provide that equity capital may not be withdrawn, advances to affiliates may not be made or cash dividends paid if certain minimum net capital requirements are not met. G.research’s net capital, as defined, met or exceeded all minimum requirements as of December 31, 2019. As a registered broker-dealer, G.research is also subject to periodic examination by FINRA, the SEC and the state regulatory authorities.
 
Our trading and investment activities for client accounts are regulated under the Exchange Act, as well as the rules of various U.S. and non-U.S. securities exchanges and self-regulatory organizations. These laws and regulations govern such items as trading on inside information, market manipulation, technical requirements (e.g., short sale limits, volume limitations and reporting obligations), and market regulation policies in the United States and globally. Violation of any of these laws and regulations could result in restrictions on our activities and damage our reputation.
 
Employee Retirement Income Security Act of 1974 (“ERISA”)
 
Subsidiaries of AC are subject to ERISA and to regulations promulgated thereunder, insofar as they are “fiduciaries” under ERISA with respect to certain of their clients. ERISA and applicable provisions of the Internal Revenue Code of 1986, as amended, impose certain duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving ERISA plan clients. Our failure to comply with these requirements could have a material adverse effect on us.
 
9

Anti-Tax Evasion Legislation
 
Our global business may be impacted by the Foreign Account Tax Compliance Act (“FATCA”) which was enacted in 2010 and introduced expansive new investor onboarding, withholding and reporting rules aimed at ensuring U.S. persons with financial assets outside of the United States pay appropriate taxes. In many instances, however, the precise nature of what needs to be implemented will be governed by bilateral Intergovernmental Agreements (“IGAs”) between the United States and the countries in which we do business or have accounts. While many of these IGAs have been put into place, others have yet to be concluded.
 
The Organization for Economic Cooperation and Development (“OECD”) has developed the Common Reporting Standard (“CRS”) to address the issue of offshore tax evasion on a global basis. Aimed at maximizing efficiency and reducing cost for financial institutions, the CRS provides a common standard for due diligence, reporting and exchange of information regarding financial accounts. Pursuant to the CRS, participating jurisdictions will obtain from reporting financial institutions, and automatically exchange with partner jurisdictions on an annual basis, financial information with respect to all reportable accounts identified by financial institutions on the basis of common due diligence and reporting procedures. As a result, the Investment Partnerships will be required to report information on the investors of the Partnerships to comply with the CRS due diligence and reporting requirements, as adopted by the countries in which the Investment Partnerships are organized.
 
The FATCA and CRS rules will impact both U.S. and non-U.S. Investment Partnerships and separately managed accounts and subject us to extensive additional administrative burdens. Our business could also be impacted to the extent there are other changes to tax laws such as the recent tax reform legislation. Such changes could adversely affect our financial results.
 
The Patriot Act
 
The USA Patriot Act of 2001 contains anti-money laundering and financial transparency laws and mandates the implementation of various new regulations applicable to broker-dealers and other financial services companies, including standards for verifying client identification at account opening, and obligations to monitor client transactions and report suspicious activities. Anti-money laundering laws outside of the United States contain some similar provisions. Our failure to comply with these requirements could have a material adverse effect on us.
 
Laws and Other Issues Relating to Taking Significant Equity Stakes in Companies
 
Investments by AC, its affiliates, and those made on behalf of their respective advisory clients and Investment Partnerships often represent a significant equity ownership position in an issuer’s equity. This may be due to the fact that AC is deemed to be a member of a “group” that includes GAMCO and, therefore, may be deemed to beneficially own the securities owned by other members of the group under applicable securities regulations. As of December 31, 2019, by virtue of being a member of the group, AC was deemed to hold five percent or more beneficial ownership with respect to 98 equity securities. This activity raises frequent regulatory, legal and disclosure issues regarding our aggregate beneficial ownership level with respect to portfolio securities, including issues relating to issuers’ stockholder rights plans or “poison pills;” various federal and state regulatory limitations, including (i) state gaming laws and regulations, (ii) federal communications laws and regulations; (iii) federal and state public utility laws and regulations, as well as federal proxy rules governing stockholder communications; and (iv) federal laws and regulations regarding the reporting of beneficial ownership positions. Our failure to comply with these requirements could have a material adverse effect on us.
 
Potential Legislation Relating to Private Pools of Capital
 
We manage a variety of private pools of capital, including hedge funds. Congress, regulators, tax authorities and others continue to explore increased regulation related to private pools of capital, including changes with respect to: investor eligibility; trading activities, record-keeping and reporting; the scope of anti-fraud protections; safekeeping of client assets; tax treatment; and a variety of other matters. AC may be materially and adversely affected by new legislation, rule-making or changes in the interpretation or enforcement of existing rules and regulations imposed by various regulators.
 
10

Existing European Regulation Overview
 
Alternative Investment Fund Managers Directive
 
Our European activities are impacted by the European Union’s (“EU”) Alternative Investment Fund Managers Directive (“AIFMD”). AIFMD regulates managers of, and service providers to, a broad range of alternative investment funds (“AIFs”) domiciled within and, potentially, outside the EU. AIFMD also regulates the marketing of all AIFs inside the European Economic Area. AIFMD’s requirements restrict AIF marketing and impose additional compliance and disclosure obligations on AC regarding items such as remuneration, capital requirements, leverage, valuation, stakes in EU companies, depositaries, domicile of custodians and liquidity management. These compliance and disclosure obligations and the associated risk management and reporting requirements will subject us to additional expenses.
 
Undertakings for Collective Investment in Transferable Securities
 
The EU has also adopted directives on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS”) impacting depositary functions, remuneration policies and sanctions. The latest initiative in this area, UCITS V, seeks to align the depositary regime, remuneration rules and sanctioning powers of regulators under the UCITS Directive with the requirements of AIFMD.
 
Similarly, the European Securities and Markets Authority recently revised its guidelines for exchange-traded and other UCITS funds. These guidelines introduced new collateral management requirements for UCITS funds concerning collateral received in the context of derivatives using Efficient Portfolio Management (“EPM”) techniques (including securities lending) and over-the-counter derivative transactions. These rules required us to make changes to our collateral management arrangements applicable to the EPM of the UCITS funds for which GCIA acts as a sub-advisor. Compliance with the UCITS directives will cause us to incur additional expenses associated with new risk management and reporting requirements.
 
Markets in Financial Instruments Directive
 
The EU’s revised Markets in Financial Instruments Directive (“MiFID II”), which was fully implemented in 2018, created specific new rules regarding the use of “soft dollars” to pay for research. A MiFID licensed investment firm that provides portfolio management services or independent investment advisory services to clients may not pay for third-party research with soft dollars generated through client trading activity. Research must be paid for either (i) by the investment firm out of its own resources or (ii) through a separate research payment account for each client to pay for the research. While currently neither GCIA nor G.research is directly subject to MiFID II: (a) GCIA may be invoiced separately by any EU brokers from whom it purchases research in the future; (b) clients may begin to require that GCIA “unbundle” research payments from commission trading; and (c) EU-based clients of G.research may also demand that G. research separately invoice them for trading and research.
 
The Financial Conduct Authority (“FCA”) currently regulates Gabelli Securities International (UK) Limited (“GSIL UK”), our MiFID licensed entity in the United Kingdom. Authorization by the FCA is required to conduct certain financial services-related business in the United Kingdom under the Financial Services and Markets Act 2000. The FCA’s rules adopted under that Act provide requirements dealing with a firm’s capital resources, senior management arrangements, conduct of business, interaction with clients and systems and controls. The FCA supervises GSIL UK through a combination of proactive engagement, event-driven and reactive supervision and thematic-based reviews in order to monitor our compliance with regulatory requirements. Breaches of the FCA’s rules may result in a wide range of disciplinary actions against GSIL and/or its employees.
 
Our EU-regulated entities are additionally subject to EU regulations on OTC derivatives which require (i) the central clearing of standardized OTC derivatives, (ii) the application of risk-mitigation techniques to non-centrally cleared OTC derivatives and (iii) the reporting of all derivative contracts.
 
11

Brexit Impact
 
Until January 31, 2020, the date the United Kingdom terminated its membership in the European Union, GSIL UK was required to comply with MiFID II, which sets out detailed requirements governing the organization and conduct of business of investment firms and regulated markets. MiFID II also includes pre- and post-trade transparency requirements for equity markets and extensive transaction reporting requirements. In addition, relevant entities must comply with revised obligations on capital resources for banks and certain investment firms set out in the Capital Requirements Directive. This directive includes requirements not only on capital, but also governance and remuneration as well. The obligations introduced through these directives have a direct effect on some of our European operations.
 
For the time being, under the transition agreement negotiated between the EU and the UK, GSIL UK will continue to comply with MiFID II to the same extent that all FCA regulated firms are required to comply.  The transition period under the transition agreement expires on December 31, 2020.  The Company cannot assure you the extent to which the substance of MiFID II or other EU regulations will continue to apply to GSIL UK after the end of the transition period.
 
Regulatory Matters Generally
 
The investment management industry is likely to continue to face a high level of regulatory scrutiny and to become subject to additional rules designed to increase disclosure, tighten controls and reduce potential conflicts of interest. In addition, the SEC has substantially increased its use of focused inquiries which request information from investment advisors regarding particular practices or provisions of the securities laws. We participate in some of these inquiries in the normal course of our business. Changes in laws, regulations and administrative practices by regulatory authorities, and the associated compliance costs, have increased our cost structure and could in the future have a material adverse impact. Although we have installed procedures and utilize the services of experienced administrators, accountants and lawyers to assist us in adhering to regulatory guidelines and satisfying these requirements, and maintain insurance to protect ourselves in the case of client losses, there can be no assurance that the precautions and procedures that we have instituted and installed, or the insurance that we maintain to protect ourselves in case of client losses, will protect us from all potential liabilities.
 
Employees
 
On March 1, 2020, we had a full-time staff of 39 teammates, of whom 18 served in the portfolio management, research and trading areas, 14 served in the marketing and shareholder servicing areas and 7 served in the finance, legal, operations and administrative areas. We also avail ourselves of services provided by GAMCO in accordance with a transitional services agreement that was entered into with GAMCO as part of the Spin-off.
 
Status as a Smaller Reporting Company and an Emerging Growth Company
 
We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act and in Item 10(f)(1) of Regulation S-K. As a result, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “smaller reporting companies.” We will, in general, remain a smaller reporting company unless the market value of AC common stock that is held by non-affiliates exceeds $250 million as of the last business day of our most recently completed second fiscal quarter.
 
In addition, we are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”). As a result, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
 
12

We will, in general, remain as an emerging growth company for up to five full fiscal years following the Spin-off. We would cease to be an emerging growth company and, therefore, become ineligible to rely on the above exemptions, if (1) we have more than $1 billion in annual revenue in a fiscal year; (2) we issue more than $1 billion of non-convertible debt during the preceding three-year period; or (3) the market value of AC common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter.
 
We may take advantage of some or all of the reduced regulatory and reporting requirements that will be available to us as long as we qualify as a smaller reporting company or an emerging growth company, except that we have irrevocably elected not to take advantage of the extension of time to comply with new or revised financial accounting standards available under Section 107(b) of the JOBS Act.
 
ITEM 1A:
RISK FACTORS
 
Smaller reporting companies are not required to provide the information required by this item.
 
ITEM 1B:
UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2:
PROPERTIES
 
On May 31,2019, AC acquired a building at 191 Mason Street, Greenwich, CT which serves as our headquarters.  AC paid rent to GAMCO pursuant to a sublease based on the percentage of square footage occupied by its employees (including pro rata allocation of common space) at GAMCO’s offices at One Corporate Center, in Rye, NY prior to the relocation to the new headquarters.
 
ITEM 3:
LEGAL PROCEEDINGS
 
Currently, we are not subject to any legal proceedings that individually or in the aggregate involved a claim for damages in excess of 10% of our consolidated assets. From time to time, we 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. Examinations or investigations can result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the consolidated financial statements include the necessary provisions for losses that we believe are probable and estimable. Furthermore, we evaluate whether there exist losses which may be reasonably possible and, if material, make the necessary disclosures.
 
ITEM 4:
MINE SAFETY DISCLOSURES
 
Not applicable.
 
PART II
 
ITEM 5:
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market for our Stock, Dividends and Stock Repurchase Program
 
Our shares of Class A Stock are traded on the New York Stock Exchange under the symbol AC.
 
As of February 1, 2020, there were 121 and 21 holders of record of the Company’s Class A and Class B common stock, respectively. These figures do not include approximately 2,184 beneficial holders of Class A shares held in “street” name at various brokerage firms.
 
13

In December 2015, the Board of Directors established a stock repurchase program authorizing the Company to repurchase up to 500,000 shares. On February 7, 2017, the Board of Directors reset the available number of shares to be purchased under the stock repurchase program to 500,000 shares. On August 3, 2017 and May 8, 2018, the Board of Directors authorized the repurchase of an additional 1 million and 500,000 shares, respectively. Our stock repurchase program is not subject to an expiration date.
 
The following table provides information with respect to the shares of our Class A Stock we repurchased during the quarter ended December 31, 2019:
 
 
 
 
 
Period
 
Total
Number of
Shares
Repurchased
   
Average
Price Paid Per
Share, net of
Commissions
   
Total Number of
Shares Repurchased as
Part of Publicly
Announced Plans
or Programs
   
Maximum
Number of Shares
That May Yet Be
Purchased Under
the Plans or Programs
 
10/01/19 - 10/31/19
   
7,110
   
$
36.39
     
7,110
     
1,108,220
 
11/01/19 - 11/30/19
   
4,365
     
36.01
     
4,365
     
1,103,855
 
12/01/19 - 12/31/19
   
9,499
     
37.50
     
9,499
     
1,094,356
 
Totals
   
20,974
   
$
36.80
     
20,974
         

In addition to our on-going stock repurchase program, in March and October 2018, the Company completed exchange offers with respect to its Class A shares which resulted in the repurchase of 493,954 and 373,581 Class A shares in exchange for 666,805 and 709,749 shares of GBL valued at approximately $17.7 million and $14.6 million, respectively.
 
We have adopted the 2015 Stock Award and Incentive Plan (the “Equity Compensation Plan”). A maximum of 2.0 million shares of Class A Stock have been reserved for issuance as approved by the Company’s stockholders at the annual meeting of stockholders held on May 3, 2016. The Company withdrew the registration statement covering the issuance of those shares as of December 29, 2017.
 
During 2018, the Company awarded 172,800 Phantom Restricted Stock Awards (“Phantom RSAs”) under the Equity Compensation Plan. As of December 31, 2019, 119,650 awarded but unvested Phantom RSAs are outstanding. On February 4, 2020, an additional 23,000 Phantom RSA’s were forfeited by teammates who transferred to Morgan Group Holdings Co., resulting in 96,650 Phantom RSA’s remaining outstanding.
 
The number of shares remaining available for future issuance under equity compensation plans is 1,289,100.
 
ITEM 6:
SELECTED FINANCIAL DATA
 
Smaller reporting companies are not required to provide the information required by this item.
 
ITEM 7:
MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Introduction
 
This MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the notes thereto included in Item 8 to this report. Unless the context otherwise requires, all references to “we,” “us,” “our,” “AC Group” or the “Company” refer collectively to Associated Capital Group, Inc. and its subsidiaries through which our operations are actually conducted.
 
Factors Affecting Financial Condition and Results of Operations
 
The Company, through its subsidiaries, provides alternative investment management services and institutional research services, as well as management of the Company’s proprietary investment portfolio.
 
14

In its alternative asset management operations, subsidiaries of the Company serve as general partner or investment manager to investment funds including limited partnerships, offshore companies and separate accounts. The Company primarily manages assets in equity event-driven value strategies, across a range of risk and event arbitrage portfolios, earning management and incentive fees from its advisory activities. The institutional research operations offer domain knowledge-driven research and a sales and execution platform for institutional investors, earning fees from its institutional clients via trading commissions or direct payment.
 
Overview
 
Consolidated Statements of Income
 
Investment advisory and incentive fees, which are based on the amount and composition of AUM in our funds and accounts, represent our largest source of revenues. Growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and facilitates the ability to attract additional investors while maintaining current fee levels. Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service. In light of the dynamics created by COVID-19 and its impact on the global supply chain and banks, oil, travel and leisure, we could experience higher volatility in short term returns of our funds.
 
Incentive fees generally consist of an incentive allocation on the absolute gain in a portfolio or a fee of 20% of the economic profit, as defined in the agreements governing the investment vehicle or account. We recognize such revenue only when the measurement period has been completed or at the time of an investor redemption.
 
Institutional research services revenues consist of brokerage commissions derived from securities transactions executed on an agency basis or direct payments from institutional clients. Commission revenues vary directly with the perceived value of the research provided, as well as account execution activity and new account generation.
 
Compensation includes variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research and all other professional staff. Variable compensation paid to sales personnel and portfolio management and may represent up to 55% of revenues.
 
Management fee expense is incentive-based and entirely variable compensation in the amount of 10% of adjusted aggregate pre-tax profits which is paid to the Executive Chairman or his designees for his services as Executive Chairman pursuant to an employment agreement.
 
Other operating expenses include general and administrative operating costs and clearing charges and fees incurred by our brokerage operations.
 
Other income and expense includes net gains and losses from investments (which include both realized and unrealized gains and losses from securities and equity in earnings of investments in partnerships), interest and dividend income, and interest expense. Net gains and losses from investments are derived from our proprietary investment portfolio consisting of various public and private investments and from consolidated investment funds.
 
Net income/(loss) attributable to noncontrolling interests represents the share of net income attributable to third-party limited partners of certain partnerships and offshore funds we consolidate. Please refer to Notes A and E in our consolidated financial statements included elsewhere in this report.
 
Consolidated Statements of Financial Condition
 
We ended 2019 with approximately $938 million in cash and investments, net of securities sold, not yet purchased of $16 million. This includes $349 million of cash and cash equivalents; $29 million of short-term U.S. Treasury obligations; $255 million of securities, net of securities sold, not yet purchased, including shares of GAMCO and VALU with market values of $57 million and $9 million, respectively; and $305 million invested in affiliated and third-party funds and partnerships, including investments in affiliated closed end funds which have a value of $100 million and more limited liquidity. Our financial resources provide flexibility to pursue strategic objectives that may include acquisitions, lift-outs, seeding new investment strategies, and co-investing, as well as shareholder compensation in the form of share repurchases and dividends.
 
15

Total shareholders’ equity was $897 million or $39.93 per share as of December 31, 2019, compared to $866 million or $38.36 per share as of the prior year-end. These shareholders’ equity per share calculations are a non-GAAP measurement calculated by dividing the total equity by the number of common shares outstanding. The increase in equity from the end of 2018 was largely attributable to investment income for the year.
 
Our primary goal is to use our liquid resources to opportunistically and strategically grow book value and net income. While this goal is a priority, if opportunities are not present with what we consider a margin of safety, we will consider alternatives to return capital to our shareholders, including stock repurchases and dividends.
 
Assets Under Management Highlights
 
We reported assets under management as follows (dollars in millions):
 
   
Year Ended December 31,
       
   
2019
   
2018
   
% Change
 
                   
Event Merger Arbitrage
 
$
1,525
   
$
1,342
     
14.2
 
Event-Driven Value
   
132
     
118
     
11.6
 
Other
   
59
     
60
     
(1.7
)
Total (a)
 
$
1,716
   
$
1,520
     
13.4
 

(a) Includes $259 million and $214 million of proprietary capital, respectively.
 
Changes in our AUM during 2019 were as follows (dollars in millions):
 
   
Beginning
   
Inflows
   
Outflows
   
Investment
Return
   
Ending
 
                               
Event Merger Arbitrage
 
$
1,342
   
$
368
   
$
(262
)
 
$
77
   
$
1,525
 
Event-Driven Value
   
118
     
8
     
(4
)
   
10
     
132
 
Other
   
60
     
-
     
(8
)
   
7
     
59
 
Total AUM
 
$
1,520
   
$
376
   
$
(274
)
 
$
94
   
$
1,716
 
 
The majority of our AUM has calendar year-end measurement periods, and our incentive fees are primarily recognized in the fourth quarter.
 
Operating Results for the Year Ended December 31, 2019 as Compared to the Year Ended December 31, 2018
 
Revenues
 
Total revenues were $31.3 million for the year ended December 31, 2019, $8.5 million higher than total revenues of $22.8 million for the year ended December 31, 2018. Total revenues by type were as follows (dollars in thousands):
 
   
Year Ended December 31,
   
Change
 
   
2019
   
2018
    $    

%
 
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
 

16

Investment advisory and incentive fees: We earn advisory fees based on our AUM. Investment advisory fees are directly influenced by the amount of average AUM and the fee rates applicable to various accounts.
 
Advisory fees were $10.9 million for 2019 compared to $10.2 million for 2018, an increase of $0.7 million. This increase is a result of the increase in average AUM over the period.
 
Incentive fees are directly related to the gains generated for our clients’ accounts. We earn a percentage, usually 20%, of such gains. Incentive fees were $11.2 million in 2019, up $7.0 million from $4.2 million in 2018, due to higher investment performance.
 
Institutional research services: Institutional research services revenues in 2019 were $8.9 million, a $0.6 million increase from $8.3 million in 2018 primarily resulting from higher brokerage commissions derived from securities transactions executed on an agency basis of $0.6 million and higher selling concessions and sales manager fees of $1.0 million offset by decreased revenue from research services agreements with affiliates of $0.9 million.
 
Other revenues: Other revenues were $0.2 million for 2019 compared to $0.1 million for 2018, an increase of $0.1 million.
 
Expenses
 
Compensation: Compensation, which includes variable compensation, salaries, bonuses and benefits, was $32.2 million for the year ended December 31, 2019, an increase of $5.6 million from $26.6 million for the year ended December 31, 2018. Fixed compensation expense, which includes salaries, bonuses and benefits, decreased to $15.6 million in 2019 from $16.8 million in 2018. The remainder of compensation expense represents variable compensation that fluctuates with management and incentive fee revenues as well as the investment results of certain proprietary accounts. Variable payouts are also impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs. For 2019, these variable payouts (based on the investment performance of the products with incentive fees) were $16.6 million, an increase of $7.5 million from $9.1 million in 2018.
 
Stock-based compensation was $1.4 million in 2019, an increase of $0.7 million from $0.7 million recorded in 2018. The increase was primarily due to the expense attributable to Phantom RSAs awarded in 2018.
 
Management fees: Management fee expense is incentive-based and entirely variable compensation equal to 10% of the aggregate adjusted pre-tax profits, which is paid to the Executive Chairman or his designees pursuant to his employment agreement with AC. In 2019, AC recorded management fee expense of $5.7 million.  No management fee expense was recorded in 2018 due to pre-tax losses incurred.
 
Other operating expenses: Our other operating expenses were $9.1 million in 2019 compared to $9.7 million in 2018, a decrease of $0.6 million due to lower overall costs.
 
Investment and other non-operating income/(expense), net
 
Net gain/(loss) from investments: Net gain/(loss) from investments is directly related to the performance of our proprietary capital. For the year ended December 31, 2019, net gains from investments were $60.8 million compared to a net loss of $65.2 million in the prior year primarily due to mark-to-market changes in the value of the GAMCO stock and other investments.
 
Interest and dividend income: Interest and dividend income remained unchanged at $13.4 million for 2019 and 2018.
 
Interest expense: Interest expense decreased to $0.2 million in 2019 from $0.3 million in 2018.
 
17

Income Taxes
 
In 2019, we recorded an income tax expense of $12.1 million resulting in an effective tax rate (“ETR”) of 21.7%. In 2018, we recorded an income tax benefit of $11.5 million resulting in a negative ETR of -16.7% (i.e., a tax benefit on positive income). The 2019 ETR is above the standard corporate tax rate of 21% primarily due state income taxes and a valuation allowance on carryforward of charitable contributions.  The 2018 ETR is below the standard rate of 21% due to inability of the Company to deduct certain capital losses incurred during the year offset in part by tax benefits from the dividends received deduction. In addition, the Company recorded a valuation allowance of $1.4 million and $0.7 million against deferred tax assets attributable to charitable contribution carryovers as of December 31, 2019 and 2018, respectfully.
 
Noncontrolling Interests
 
Net income attributable to noncontrolling interests was $3.6 million in 2019 compared to income of $0.7 million in 2018. The increase of $2.9 million was driven primarily by increased earnings at Gabelli Merger Plus+ Trust.
 
Net Income/(Loss)
 
Net income for the year ended December 31, 2019 was $39.2 million compared to net loss of $58.1 million for the prior year. The change was driven primarily by mark-to-market increases on our investment portfolio.
 
Liquidity and Capital Resources
 
Our principal assets consist of cash and cash equivalents; short-term treasury securities; marketable securities, primarily equities, including 2.9 million shares of GAMCO stock; and interests in affiliated and third-party funds and partnerships. Although Investment Partnerships may be subject to restrictions as to the timing of distributions, the underlying investments of such Investment Partnerships are generally liquid, and the valuations of these products reflect that underlying liquidity.
 
Summary cash flow data is as follows (in thousands):
 
   
Year Ended December 31,
 
   
2019
   
2018
 
Cash flows provided by (used in):
           
Operating activities
 
$
(44,334
)
 
$
76,980
 
Investing activities
   
(5,058
)
   
4,736
 
Financing activities
   
(11,584
)
   
34,689
 
Net increase (decrease) in cash and cash equivalents
   
(60,976
)
   
116,405
 
Cash and cash equivalents at beginning of year
   
409,564
     
293,112
 
Increase in cash from consolidation
   
     
47
 
Cash and cash equivalents at end of year
 
$
348,588
   
$
409,564
 

We require relatively low levels of capital expenditures and have a highly variable cost structure where costs increase and decrease based on the level of revenues we receive. Our revenues, in turn, are highly correlated to the level of AUM and to its investment performance. We anticipate that our available liquid assets should be sufficient to meet our cash requirements as we build out our operating business. At December 31, 2019, we had cash and cash equivalents of $348.6 million and $588.6 million of investments net of securities sold, not yet purchased of $16.4 million. Of these amounts, $13.1 million and $31.8 million, respectively, were held by consolidated investment funds and may not be readily available for the Company to access.
 
Net cash used by operating activities was $44.3 million in 2019. The net income adjusted for noncash items, primarily unrealized gains on securities, deferred income taxes and exchange offers, was $21.2 million along with a decrease in net receivables/payables of $12.9 million. This was more than offset, however, by increases in investments in securities and net contributions to investment partnerships of $78.4 million.
 
18

Net cash provided by operations was $77.0 million in 2018. The net loss adjusted for noncash items, primarily unrealized losses on securities, deferred income taxes and exchange offers, was $9.0 million. This was more than offset, however, by an increase in net receivables/payables of $8.7 million and reductions in investments in securities and net withdrawals from investment partnerships of $77.3 million.
 
Net cash used in investing activities was $5.1 million in 2019 due to the purchase of a building for $6.5 million and purchases of securities of $5.0 million partially offset by proceeds from sales of securities of $4.9 million, return of capital on securities of $0.9 million and cash received in acquisition of Morgan Group of $0.6 million. Net cash generated from investing activities was $4.7 million in 2018. A short-term note due from GBL (“GBL Short-term Note”) with a principal amount of $15 million was repaid during the year. Offsetting this principal repayment was net purchases of securities in the amount of $10.4 million and $0.1 million from return of capital on securities.
 
Net cash used in financing activities was $11.6 million largely resulting from dividends paid of $4.5 million, share repurchases of $4.1 million and redemptions to consolidated funds of $2.9 million.  Net cash provided by financing activities was $34.7 million for 2018, largely resulting from $50.0 million principal payments on the GAMCO Note partially offset by $7.0 million of treasury stock purchases, dividend payments of $4.7 million, and net redemptions of redeemable noncontrolling interests of $3.6 million
 
G.research is registered with the SEC as a broker-dealer and is regulated by FINRA. As such, G.research is subject to minimum net capital requirements promulgated by the SEC. G.research computes its net capital under the alternative method permitted by the SEC, which requires minimum net capital of $250,000. As of December 31, 2019 and 2018, G.research had net capital, as defined, of approximately $4.6 million and $9.1 million, respectively, exceeding the regulatory requirement by approximately $4.3 million and $8.8 million, respectively. Net capital requirements for G.research may increase in accordance with SEC rules and regulations to the extent it engages in other business activities.
 
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements.
 
Critical Accounting Policies
 
In the ordinary course of business, we make a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). We base our estimates on historical experience, when available, and on other various assumptions that are believed to be reasonable under the circumstances. Actual results could differ significantly from those estimates under different assumptions and conditions.
 
We believe that the following critical accounting policies require management to exercise significant judgment:
 
Major Revenue-Generating Services and Revenue Recognition
 
The Company’s revenues are derived primarily from investment advisory and incentive fees and institutional research services.
 
Investment advisory and incentive fees are directly influenced by the level and mix of AUM as fees are derived from a contractually-determined percentage of the balance of each account as well as a percentage of the investment performance of certain accounts. Management fees from investment partnerships and offshore funds are computed either monthly or quarterly, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. These revenues vary depending upon the level of capital flows, financial market conditions, investment performance and the fee rates applicable to each account.
 
Incentive allocations or fees are generally recognized at the end of an annual measurement period and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition.
 
19

G.research, LLC provides institutional research services and earns brokerage commissions and sales manager fees from securities transactions executed on an agency basis on behalf of institutional clients and mutual funds, private wealth management clients and retail customers of affiliated companies. Commission revenue and related clearing charges are recorded on a trade-date basis and are included in institutional research services and other operating expenses, respectively, on the consolidated statements of income.
 
G.research has also been involved in syndicated underwriting activities that included public equity and debt offerings managed by major investment banks. Underwriting fees include gains, losses, selling concessions and fees, net of syndicate expenses, arising from securities offerings in which G.research acts as underwriter or agent and are accrued as earned.
 
See Note C, Revenue, in the consolidated financial statements for additional information.

Investments in Securities
 
Investments in securities are a recorded at fair value in the statements of financial condition in accordance with U.S. GAAP.  Securities transactions and any related gains and losses are recorded on a trade date basis.  Realized gains and losses from securities transactions are recorded on the specific identified cost basis and are included in gain/(loss) from investments, net on the consolidated statements of income.

Management determines the appropriate classification of securities at the time of purchase. Government debt with maturities of greater than three months at the time of purchase are considered investments in debt securities. Investments in debt securities are accounted for as trading, available for sale (“AFS”), or held-to-maturity securities. The Company does not hold any investments in debt securities accounted for as AFS or held to maturity.

Securities sold, but not yet purchased are recorded on the trade date, and are stated at fair value and represent obligations of AC to purchase the securities at prevailing market prices. Therefore, the future satisfaction of such obligations may be for an amount greater or less than the amounts recorded on the consolidated statements of financial condition. The ultimate gains or losses recognized are dependent upon the prices at which these securities are purchased to settle the obligations under the sales commitments. Unrealized gains and losses and realized gains and losses from covers of securities sold, not yet purchased transactions are included in net gain/(loss) from investments on the consolidated statements of income.
 
Consolidation
 
The Company assesses all entities with which it is involved for consolidation on a case by case basis depending on the specific facts and circumstances surrounding each entity. Pursuant to accounting guidance, the Company first evaluates whether it holds a variable interest in an entity. The Company considers all economic interests, including proportionate interests through related parties, to determine if such interests are to be considered a variable interest.  Fees paid to the Company that are customary and commensurate with the level of services provided from entities in which the Company does not hold other economic interests in the entity are not considered as a variable interest.
 
For any entity where the Company has determined that it does hold a variable interest, the Company performs an assessment to determine whether it qualifies as a variable interest entity (“VIE”).
 
The granting of substantive kick-out rights is a key consideration in determining whether a limited partnership or similar entity is a VIE and whether or not that entity should be consolidated. The Company evaluates consolidation on a case by case basis those VIEs in which substantive kick-out rights have been granted to the unaffiliated investors to either dissolve the fund or remove the general partner.
 
Under the variable interest entity model, the Company consolidates those entities where it is determined that the Company is the primary beneficiary of the entity. The Company is determined to be the primary beneficiary when it has a controlling financial interest in the VIE, which is defined as possessing both (a) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If the Company alone is not considered to have a controlling financial interest in the VIE but the Company and its related parties under common control in the aggregate have a controlling financial interest in the VIE, the Company will be deemed to be the primary beneficiary if it is the party that is most closely associated with the VIE. When the Company and its related parties not under common control in the aggregate have a controlling financial interest in a VIE, the Company would be deemed to be the primary beneficiary if substantially all the activities of the entity are performed on behalf of the Company.
 
20

The Company determines whether it is the primary beneficiary of a VIE at the time it becomes initially involved with the VIE and reconsiders that conclusion as required. Investments and redemptions (either by the Company, related parties of the Company or third parties) or amendments to the governing documents of the respective entity may affect an entity’s status as a VIE or the determination of the primary beneficiary.
 
Entities that do not qualify as VIEs are assessed for consolidation as voting interest entities (“VOEs”) under the voting interest model. The Company evaluates whether the entity should be evaluated under the guidance for partnerships and similar entities, or corporations, and consolidates those entities it controls through a majority voting interest or other means. If the Company is the general partner or managing member it generally will not be required to consolidate a VOE.
 
The Company records noncontrolling interests in consolidated Investment Partnerships for which the Company’s ownership is less than 100%.
 
See Note E, Investment Partnerships and Variable Interest Entities in the consolidated financial statements for additional information.
 
Investments in Partnerships and Affiliates
 
The Company is general partner or co-general partner of various affiliated entities. We also have investments in unaffiliated partnerships, offshore funds and other entities (collectively, “investments in partnerships and affiliates”). The Company accounts for its investments in partnerships and affiliates under the equity method. Substantially all the Company’s equity method investees are entities that record their underlying investments at fair value and included in investments in partnerships. Therefore, under the equity method of accounting, the Company’s share of the investee’s underlying net income predominantly represents fair value adjustments in the investments held by the equity method investees. The Company’s share of the investee’s underlying net income or loss is based upon the most currently available information and is recorded as net gain/(loss) from investments on the consolidated statements of income. Capital contributions are recorded as an increase in investments when paid, and withdrawals and distributions are recorded as reductions of the investments when received. Depending on the terms of the investment, the Company may be restricted as to the timing and amounts of withdrawals.
 
 
Income Taxes
 
For purposes of the preparation of the consolidated financial statements, the provision for income taxes is computed using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method deferred tax assets and liabilities are recorded for temporary differences between the tax basis of assets and liabilities and the reported amounts on the consolidated financial statements using the statutory tax rates in effect for the year when the reported amount of the asset or liability is expected to be recovered or settled, respectively. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the carrying values of deferred tax assets to the amount that is more likely than not to be realized. For each tax position taken or expected to be taken in a tax return, the Company determines whether it is more likely than not that the position will be sustained upon examination based on the technical merits of the position, including resolution of any related appeals or litigation. A tax position that meets the more likely than not recognition threshold is measured to determine the amount of benefit to recognize. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company recognizes the accrual of interest on uncertain tax positions and penalties in the income tax provision on the consolidated statements of income.
 
Recent Accounting Developments
 
See Footnote B, Significant Accounting Policies – Recent Accounting Developments, in the consolidated financial statements.
 
21

Seasonality and Inflation
 
We do not believe that our operations are subject to significant seasonal fluctuations. We do not believe inflation will significantly affect our compensation costs, as they are substantially variable in nature. The rate of inflation may affect certain other expenses, however, such as information technology and occupancy costs. To the extent inflation results in rising interest rates and has other effects upon the securities markets, it may adversely affect our financial position and results of operations by reducing our AUM, revenues or otherwise.
 
ITEM 7A:
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Smaller reporting companies are not required to provide the information required by this item.
 
ITEM 8:
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 
Page
   
Report of Independent Registered Public Accounting Firm
23
   
Consolidated Financial Statements:
 
Consolidated Statements of Income for the years ended December 31, 2019 and 2018
24
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019 and 2018
25
Consolidated Statements of Financial Condition at December 31, 2019 and 2018
26
Consolidated Statements of Equity for the years ended December 31, 2019 and 2018
27
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
29
Notes to Consolidated Financial Statements
31

All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission that are not required under the related instructions or are inapplicable have been omitted.

22


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of Associated Capital Group, Inc.
Greenwich, CT
 
Opinion on the Financial Statements
 
We have audited the accompanying consolidated statements of financial condition of Associated Capital Group, Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income, equity and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
 
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/S/ Deloitte & Touche, LLP
 
Stamford, Connecticut
March 16, 2020
We have served as the Company’s auditor since 2015.
 
23

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

   
Year Ended December 31,
 
   
2019
   
2018
 
Revenues
           
Investment advisory and incentive fees
 
$
22,148
   
$
14,409
 
Institutional research services
   
8,947
     
8,284
 
Other revenues
   
170
     
86
 
Total revenues
   
31,265
     
22,779
 
Expenses
               
Compensation
   
32,184
     
26,607
 
Management fee
   
5,713
     
-
 
Other operating expenses
   
9,126
     
9,652
 
Total expenses
   
47,023
     
36,259
 
Operating loss
   
(15,758
)
   
(13,480
)
Other income/(expense)
               
Net gain/(loss) from investments
   
60,757
     
(65,203
)
Interest and dividend income
   
13,407
     
13,384
 
Interest expense
   
(217
)
   
(262
)
Shareholder-designated contribution
   
(3,281
)
   
(3,300
)
Total other income/(expense), net
   
70,666
     
(55,381
)
Income/(loss) before income taxes
   
54,908
     
(68,861
)
Income tax provision/(benefit)
   
12,126
     
(11,478
)
Net income/(loss)
   
42,782
     
(57,383
)
Net income/(loss) attributable to noncontrolling interests
   
3,594
     
716
 
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders
 
$
39,188
   
$
(58,099
)
                 
Net income/(loss) per share attributable to Associated Capital Group, Inc.’s shareholders:
               
Basic
 
$
1.74
   
$
(2.52
)
Diluted
 
$
1.74
   
$
(2.52
)
                 
Weighted average shares outstanding:
               
Basic
   
22,534
     
23,070
 
Diluted
   
22,534
     
23,070
 
                 
Actual shares outstanding
   
22,475
     
22,585
 

See accompanying notes.

24

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)

   
Year Ended December 31,
 
   
2019
   
2018
 
             
Net income/(loss)
 
$
42,782
   
$
(57,383
)
Less: Comprehensive income/(loss) attributable to noncontrolling interests
   
3,594
     
716
 
                 
Comprehensive income/(loss) attributable to Associated Capital Group, Inc.
 
$
39,188
   
$
(58,099
)

See accompanying notes.

25

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

   
December 31,
2019
   
December 31,
2018
 
ASSETS
           
             
Cash and cash equivalents (a)
 
$
348,588
   
$
409,564
 
Investments in securities (Including GBL stock with a value of $57.2 million and $50.9 million, respectively) (a)
   
300,357
     
229,960
 
Investments in affiliated registered investment companies
   
159,311
     
142,135
 
Investments in partnerships (a)
   
145,372
     
118,729
 
Receivable from brokers (a)
   
24,150
     
24,629
 
Investment advisory fees receivable
   
9,582
     
4,394
 
Receivable from affiliates
   
4,369
     
1,309
 
Deferred tax assets, net
   
2,004
     
9,422
 
Goodwill
   
3,519
     
3,519
 
Other assets (a)
   
13,654
     
10,772
 
Total assets
 
$
1,010,906
   
$
954,433
 
                 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
               
                 
Payable to brokers
 
$
14,889
   
$
5,511
 
Income taxes payable, net
   
3,676
     
3,577
 
Compensation payable
   
20,246
     
11,388
 
Securities sold, not yet purchased
   
16,419
     
9,574
 
Payable to affiliates
   
483
     
515
 
Accrued expenses and other liabilities (a)
   
7,373
     
7,820
 
Total liabilities
   
63,086
     
38,385
 
                 
Redeemable noncontrolling interests (a)
   
50,385
     
49,800
 
                 
Commitments and contingencies (Note L)
               
                 
Equity:
               
Preferred stock, $.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; 6,569,254 and 6,537,768 shares issued, respectively; 3,452,381 and 3,530,752 shares outstanding, respectively
   
6
     
6
 
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 19,196,792 shares issued; 19,022,918 and 19,054,404 shares outstanding, respectively
   
19
     
19
 
Additional paid-in capital
   
1,003,450
     
1,008,319
 
Retained earnings/(Accumulated Deficit)
   
(701
)
   
(39,889
)
Treasury stock, at cost (3,116,873 and 3,007,016 shares, respectively)
   
(106,342
)
   
(102,207
)
Total Associated Capital Group, Inc. equity
   
896,432
     
866,248
 
Noncontrolling interests
   
1,003
     
-
 
Total equity
   
897,435
     
866,248
 
Total liabilities and equity
 
$
1,010,906
   
$
954,433
 

(a) As of December 31, 2019, cash and cash equivalents, investments in securities, investment in partnerships, receivable from broker, other assets, accrued expenses and other liabilities, and redeemable noncontrolling interests include amounts related to consolidated variable interest entities (“VIEs”). See Footnote E.

See accompanying notes.

26

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands, except per share data)
For the three months ended March 31, 2018, June 30, 2018, September 30, 2018 and December 31, 2018

   
Associated Capital Group, Inc. shareholders
       
   
Common
Stock
   
Retained
Earnings
   
Additional
Paid-in
Capital
   
GBL 4%
PIK Note
   
Accumulated
Comprehensive
Income
   
Treasury
Stock
   
Total
   
Redeemable
Noncontrolling
Interests
 
Balance at December 31, 2017
 
$
25
   
$
13,800
   
$
1,010,505
   
$
(50,000
)
 
$
6,712
   
$
(62,895
)
 
$
918,147
   
$
46,230
 
Reclassifications pursuant to adoption of new accounting guidance
           
-
     
6,712
     
-
     
-
     
(6,712
)
   
-
     
-
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,971
)
Consolidation of certain investment funds
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
6,488
 
Net income/(loss)
   
-
     
(22,229
)
   
-
     
-
     
-
     
-
     
(22,229
)
   
(143
)
Stock-based compensation expense
   
-
     
-
     
72
     
-
     
-
     
-
     
72
     
-
 
Proceeds from payment of  GBL 4% PIK Note
   
-
     
-
     
-
     
10,000
     
-
     
-
     
10,000
     
-
 
Exchange of GBL stock for AC stock
   
-
     
-
     
-
     
-
     
-
     
(17,737
)
   
(17,737
)
   
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(459
)
   
(459
)
   
-
 
Balance at March 31, 2018
 
$
25
   
$
(1,717
)
 
$
1,010,577
   
$
(40,000
)
 
$
-
   
$
(81,091
)
 
$
887,794
   
$
50,604
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(336
)
Net income/(loss)
   
-
     
11,824
     
-
     
-
     
-
     
-
     
11,824
     
1,039
 
Proceeds from payment of
                                                               
GBL 4% PIK Note
   
-
     
-
     
-
     
20,000
     
-
     
-
     
20,000
     
-
 
Dividends declared ($0.10 per share)
           
(2,302
)
                                   
(2,302
)
   
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(5,380
)
   
(5,380
)
   
-
 
Balance at June 30, 2018
 
$
25
   
$
7,805
   
$
1,010,577
   
$
(20,000
)
 
$
-
   
$
(86,471
)
 
$
911,936
   
$
51,307
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(345
)
Net income/(loss)
   
-
     
(7,379
)
   
-
     
-
     
-
     
-
     
(7,379
)
   
157
 
Proceeds from payment of GBL 4% PIK Note
   
-
     
-
     
-
     
20,000
     
-
     
-
     
20,000
     
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(732
)
   
(732
)
   
-
 
Balance at September 30, 2018
 
$
25
   
$
426
   
$
1,010,577
   
$
-
   
$
-
   
$
(87,203
)
 
$
923,825
   
$
51,119
 
Redemptions of  noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(982
)
Net income/(loss)
   
-
     
(40,315
)
   
-
     
-
     
-
     
-
     
(40,315
)
   
(337
)
Dividends declared ($0.10 per share)
                   
(2,258
)
                           
(2,258
)
   
-
 
Exchange of GBL stock for AC stock
   
-
     
-
     
-
     
-
     
-
     
(14,564
)
   
(14,564
)
   
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
-
     
-
     
(440
)
   
(440
)
   
-
 
Balance at December 31, 2018
 
$
25
   
$
(39,889
)
 
$
1,008,319
   
$
-
   
$
-
   
$
(102,207
)
 
$
866,248
   
$
49,800
 

See accompanying notes.

27

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Dollars in thousands, except per share data)
For the three months ended March 31, 2019, June 30, 2019, September 30, 2019 and December 31, 2019
 
   
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, 2018
 
$
25
   
$
(39,889
)
 
$
1,008,319
   
$
(102,207
)
 
$
-
   
$
866,248
   
$
49,800
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
(526
)
Net income/(loss)
   
-
     
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/(loss)
   
-
     
(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
 
Contributions to noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
390
 
Net income/(loss)
   
-
     
5,951
     
-
     
-
     
-
     
5,951
     
(359
)
Purchase of treasury stock
   
-
     
-
     
-
     
(1,342
)
   
-
     
(1,342
)
   
-
 
Balance at September 30, 2019
 
$
25
   
$
(11,723
)
 
$
1,006,065
   
$
(105,570
)
 
$
-
   
$
888,797
   
$
49,699
 
Redemptions of noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
(676
)
Net income/(loss)
   
-
     
11,022
     
-
     
-
     
-
     
11,022
     
1,362
 
Morgan merger
   
-
     
-
     
(367
)
   
-
     
1,003
     
636
         
Dividends declared ($0.10 per share)
   
-
     
-
     
(2,248
)
   
-
     
-
     
(2,248
)
   
-
 
Purchase of treasury stock
   
-
     
-
     
-
     
(772
)
   
-
     
(772
)
   
-
 
Balance at December 31, 2019
 
$
25
   
$
(701
)
 
$
1,003,450
   
$
(106,342
)
 
$
1,003
   
$
897,435
   
$
50,385
 

See accompanying notes.

28

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

   
Year Ended December 31,
 
   
2019
   
2018
 
Operating activities
           
Net income/(loss)
 
$
42,782
   
$
(57,383
)
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities:
               
Equity in net gains from partnerships
   
(10,173
)
   
(2,078
)
Depreciation and amortization
   
30
     
21
 
Stock based compensation expense
   
-
     
72
 
Deferred income taxes
   
7,360
     
(12,825
)
Donated securities
   
2,152
     
-
 
Losses on exchange offers
   
-
     
8,706
 
Unrealized (gains)/losses on securities
   
(21,883
)
   
54,397
 
Realized losses on sales of securities
   
56
     
37
 
(Increase)/decrease in assets:
               
Investments in securities
   
(61,923
)
   
53,924
 
Investments in partnerships:
               
Contributions to partnerships
   
(28,071
)
   
(8,577
)
Distributions from partnerships
   
11,603
     
31,948
 
Receivable from affiliates
   
(3,060
)
   
(443
)
Receivable from brokers
   
479
     
13,430
 
Investment advisory fees receivable
   
(5,188
)
   
1,345
 
Goodwill and intangible assets
   
-
     
(97
)
Other assets
   
3,611
     
(757
)
Increase/(decrease) in liabilities:
               
Payable to affiliates
   
(32
)
   
73
 
Payable to brokers
   
9,378
     
(7,770
)
Income taxes payable and deferred tax liabilities, net
   
156
     
1,496
 
Compensation payable
   
8,859
     
(1,397
)
Accrued expenses and other liabilities
   
(470
)
   
2,858
 
Total adjustments
   
(87,116
)
   
134,363
 
Net cash provided by/(used in) operating activities
   
(44,334
)
   
76,980
 
                 
Investing activities
               
Purchases of securities
   
(4,989
)
   
(12,350
)
Proceeds from sales of securities
   
4,928
     
1,958
 
Return of capital on securities
   
932
     
128
 
Purchase of building
   
(6,518
)
   
-
 
Cash received in acquisition of Morgan Group
    589
      -
 
Proceeds from note receivable
   
-
     
15,000
 
Net cash provided by/(used in) investing activities
 
$
(5,058
)
 
$
4,736
 

29

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued) (Dollars in thousands)

   
Year Ended December 31,
 
   
2019
   
2018
 
Financing activities
           
Redemptions of redeemable noncontrolling interests
 
$
(2,934
)
 
$
(3,634
)
Dividends paid
   
(4,513
)
   
(4,666
)
Purchase of treasury stock
   
(4,135
)
   
(7,011
)
Proceeds from payment of GAMCO Note
   
-
     
50,000
 
Proceeds from promissory note from Executive Chairman
   
2,124
     
-
 
Repayment of promissory note to Executive Chairman
   
(2,126
)
   
-
 
Net cash provided by financing activities
   
(11,584
)
   
34,689
 
Net increase/(decrease) in cash and cash equivalents
   
(60,976
)
   
116,405
 
Cash, cash equivalents and restricted cash at beginning of period
   
409,764
     
293,312
 
Increase in cash from consolidation
   
-
     
47
 
Cash, cash equivalents and restricted cash at end of period
 
$
348,788
   
$
409,764
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
 
$
197
   
$
261
 
Cash paid/(received) for taxes
 
$
4,700
   
$
(140
)
                 
Reconciliation to cash, cash equivalents and restricted cash
               
Cash and cash equivalents
   
348,588
     
409,564
 
Restricted cash included in receivable from brokers
   
200
     
200
 
Cash, cash equivalents and restricted cash
 
$
348,788
   
$
409,764
 

Non-cash activity:
-
On January 1, 2018, AC determined it had control over certain investment funds which resulted in their consolidation and an increase of approximately $47 of cash and cash equivalents, $6,441 of net assets and an increase of approximately $6,488 of redeemable noncontrolling interests.
-
During 2018, AC completed two exchange offers with respect to its Class A shares.  The Company exchanged 1,376,554 GBL Class A shares valued at $32,301 for 867,535 Class A shares.
-
On October 31, 2019, the Company closed on a transaction whereby Morgan Group Holding Co., (Morgan Group) 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 connection with the transaction the company received $589,000 in cash held by Morgan Group which has been classified in cash provided by investing activities.

See accompanying notes.

30

A. Organization

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.
 
We are a Delaware corporation that provides alternative investment management, institutional research and we derive investment income/(loss) from proprietary investment of cash and other assets awaiting deployment in our operating business.
 
Our institutional research and underwriting services are provided through G.research, LLC (“G.research”).  G.research is a broker-dealer registered under the Exchange Act of 1934, as amended (the “Exchange Act”).  G.research acts as an underwriter primarily for affiliates of the Company. G.research is regulated by the Financial Industry Regulatory Authority (“FINRA”).
 
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 (the “Advisers Act”).
 
We may make direct investments in operating business 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 of 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.
 
The 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”).
 
As part of the Spin-off, AC received 4,393,055 shares of GAMCO Class A common stock for $150 million. The Company currently holds 2,935,401shares as of December 31, 2019.
 
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.We conduct our investment management activities through Gabelli & Company Investment Advisers, Inc. (“GCIA” f/k/a Gabelli Securities, Inc.).
 
On October 31, 2019, the Company closed on a transaction whereby Morgan Group Holding Co., (“Morgan Group”) a company that trades in the over the counter market under the symbol “MGHL” and under common control of AC’s majority shareholder, acquired all of the Company’s interest in G.research  for 50,000,000 shares of Morgan Group common stock.  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 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.
 
31

Morgan Group is a shell company with minimal assets and income and is consolidated after the transaction. The Company’s consolidated statement of financial condition and statement of operations is not materially different with the consolidation.
 
B. Significant Accounting Policies
 
Consolidated Financial Statements
 
All material intercompany transactions and balances have been eliminated. Subsidiaries are fully consolidated from the date the Company obtains control and continue to be consolidated until the date that such control ceases. The Company’s principal market is in the United States.
 
Use of Estimates
 
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported on the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.
 
Cash and Cash Equivalents
 
Cash equivalents primarily consist of an affiliated money market mutual fund which is highly liquid. U.S. Treasury Bills and Notes with maturities of three months or less at the time of purchase are also considered cash equivalents.
 
Investments in Securities
 
Securities owned are recorded at fair value in the statements of financial condition in accordance with U.S. GAAP. Securities transactions and any related gains and losses are recorded on a trade date basis. Realized gains and losses from securities transactions are recorded on the specific identified cost basis and are included in gain/(loss) from investments, net on the consolidated statements of income.
 
Equity securities, effective January 1, 2018 with the adoption of Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, are stated at fair value with any unrealized gains or losses reported in current period earnings in gain/(loss) from investments, net on the consolidated statements of income.
 
Management determines the appropriate classification of securities at the time of purchase.  Government debt with maturities of greater than three months at the time of purchase are considered investments in debt securities.  Investments in debt securities are accounted for as trading, available for sale (“AFS”), or held-to-maturity securities.  The Company does not hold any investments in debt securities accounted for AFS or held to maturity.
 
Securities sold, but not yet purchased are recorded on the trade date, and are stated at fair value and represent obligations of AC to purchase the securities at prevailing market prices. Therefore, the future satisfaction of such obligations may be for an amount greater or less than the amounts recorded on the consolidated statements of financial condition. The ultimate gains or losses recognized are dependent upon the prices at which these securities are purchased to settle the obligations under the sales commitments. Unrealized gains and losses and realized gains and losses from covers of securities sold, not yet purchased transactions are included in net gain/(loss) from investments on the consolidated statements of income.
 
32

Fair Value of Financial Instruments
 
The Company’s assets and liabilities recorded at fair value have been categorized based upon a fair value hierarchy in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance on fair value measurement. The levels of the fair value hierarchy and their applicability to the Company are described below:
 

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the reporting date. Level 1 assets include cash equivalents, government obligations, open-end mutual funds, closed-end funds and equities.
 

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities that are not active and inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves that are observable at commonly-quoted intervals. Assets included in this category are over-the-counter derivatives that have valuation inputs that can generally be corroborated by observable market data.
 

Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Assets in this category generally include equities that trade infrequently and direct private equity investments.
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy in which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
The availability of observable inputs can vary from instrument to instrument and is affected by a wide variety of factors, including, for example, the type of instrument, whether the instrument is new and not yet established in the marketplace, and other characteristics particular to the instrument. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3.
 
In the absence of a closing price, an average of the bid and ask price is used. Bid prices reflect the highest price that market participants are willing to pay for an asset. Ask prices represent the lowest price that market participants are willing to accept for an asset.
 
Cash equivalents—Cash equivalents primarily consist of an affiliated money market mutual fund which is invested solely in U.S. Treasury securities and valued based on the net asset value of the fund. Other cash equivalents are valued using unadjusted quoted market prices. Accordingly, cash equivalents are categorized in Level 1 of the fair value hierarchy.
 
Investments in securities—Investments in securities and securities sold not yet purchased are generally valued based on quoted prices from an exchange. To the extent these securities are actively traded, valuation adjustments are not applied, and they are categorized in Level 1 of the fair value hierarchy. Securities categorized as Level 2 investments are valued using other observable inputs. Nonpublic and infrequently traded investments are included in Level 3 of the fair value hierarchy because significant inputs to measure fair value are unobservable.
 
Receivables from Affiliates and Payables to Affiliates
 
Receivables from affiliates consist primarily of sub-advisory fees due from Gabelli Funds, LLC. Payables to affiliates primarily consist of expenses paid by affiliates on behalf of the Company pursuant to a transitional services agreement with GAMCO entered into in connection with the Spin-off.
 
33

Receivables from and Payables to Brokers
 
Receivables from and payables to brokers consist of amounts related to purchases and sales of securities as well as cash amounts held in anticipation of investment.
 
Consolidation
 
The Company assesses all entities with which it is involved for consolidation on a case by case basis depending on the specific facts and circumstances surrounding each entity. Pursuant to applicable guidance, the Company first evaluates whether it holds a variable interest in an entity. The Company considers all economic interests including proportionate interests through related parties, to determine if such interests are considered a variable interest. Fees paid to the Company that are customary and commensurate with the level of services provided from entities in which the Company does not hold other more than insignificant economic interests in the entity are not considered as a variable interest.
 
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”). The granting of substantive kick-out or participating rights is a key consideration in determining whether a limited partnership or similar entity is a VIE and whether or not that entity should be consolidated. The Company evaluates for consolidation on a case by case basis those VIEs in which substantive kick-out or participating rights have been granted to the unaffiliated investors to either dissolve the fund or remove the general partner.
 
Under the variable interest entity model, the Company consolidates those entities where it is determined that the Company is the primary beneficiary of the entity. The Company is determined to be the primary beneficiary when it has a controlling financial interest in the VIE, which is defined as possessing both (i) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. When the Company alone is not considered to have a controlling financial interest in the VIE but the Company and its related parties under common control in the aggregate have a controlling financial interest in the VIE, the Company will be deemed the primary beneficiary if it is the party that is most closely associated with the VIE. When the Company and its related parties not under common control in the aggregate have a controlling financial interest in the VIE, the Company would be deemed to be the primary beneficiary if substantially all the activities of the entity are performed on behalf of the Company.
 
The Company determines whether it is the primary beneficiary of a VIE at the time it becomes initially involved with the VIE and reconsiders that conclusion as required. Investments and redemptions (either by the Company, related parties or third parties) or amendments to the governing documents of the respective entity may affect an entity’s status as a VIE or the determination of the primary beneficiary.
 
Entities that do not qualify as VIEs are assessed for consolidation as voting interest entities (“VOEs”) under the voting interest model. The Company evaluates whether the entity should be evaluated under the guidance for partnerships and similar entities, or corporations, and consolidates those entities it controls through a majority voting interest or other means. If the Company is the general partner or managing member it generally will not be required
to consolidate a VOE.
 
The Company records noncontrolling interests in consolidated entities for which the Company’s ownership is less than 100%. Refer to Noncontrolling Interests below for additional information.
 
Investments in Partnerships and Affiliates
 
The Company is general partner or co-general partner of various affiliated entities. We also have investments in unaffiliated partnerships, offshore funds and other entities (collectively, “unaffiliated entities”). Given that we are not a general partner or investment manager in any unaffiliated entity, we neither earn any management or incentive fees nor have a controlling financial interest in such entity. We do not consolidate any unaffiliated entity.
 
The balance sheet caption investments in partnerships includes investments in both affiliated and unaffiliated entities.
 
34

The Company accounts for its investments in partnerships and affiliates under the equity method.  Substantially all of the Company’s equity method investees are entities that record their underlying investments at fair value and included in investments in partnerships.  Therefore, under the equity method of accounting, the Company’s share of the investee’s underlying net income predominantly represents fair value adjustments in the investments held by the equity method investees. The Company’s share of the investee’s underlying net income or loss is based upon the most currently available information and is recorded as net gain/(loss) from investments on the consolidated statements of income. Capital contributions are recorded as an increase in investments when paid, and withdrawals and distributions are recorded as reductions of the investments when received. Depending on the terms of the investment, the Company may be restricted as to the timing and amounts of withdrawals.
 
Derivative Financial Instruments
 
The Company recognizes all derivatives as either assets or liabilities measured at fair value and includes such derivatives in either investment in securities or securities sold, not yet purchased on the consolidated statements of financial condition. From time to time, the Company will enter into hedging transactions to manage its exposure to foreign currencies or equity prices related to its proprietary investments. Except for a 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 consolidated statements of income. See Note D, Investments in Securities, for additional information.
 
Major Revenue-Generating Services and Revenue Recognition
 
The Company’s revenues are derived primarily from investment advisory and incentive fees and institutional research services.
 
Investment advisory and incentive fees are directly influenced by the level and mix of AUM as fees are derived from a contractually-determined percentage of the balance of each account as well as a percentage of the investment performance of certain accounts. Management fees from investment partnerships and offshore funds are computed either monthly or quarterly, and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition. These revenues vary depending upon the level of capital flows, financial market conditions, investment performance and the fee rates applicable to each account.
 
Incentive allocations or fees are generally recognized at the end of an annual measurement period and amounts receivable are included in investment advisory fees receivable on the consolidated statements of financial condition.
 
G.research, LLC provides institutional research services and earns brokerage commissions and sales manager fees from securities transactions executed on an agency basis on behalf of institutional clients and mutual funds, private wealth management clients and retail customers of affiliated companies. Commission revenue and related clearing charges are recorded on a trade-date basis and are included in institutional research services and other operating expenses, respectively, on the consolidated statements of income.
 
It has also been involved in syndicated underwriting activities that included public equity and debt offerings managed by major investment banks. Underwriting fees include gains, losses, selling concessions and fees, net of syndicate expenses, arising from securities offerings in which G.research acts as underwriter or agent and are accrued as earned.
 
See Note C, Revenue, for additional information.
 
Depreciation
 
Fixed assets are recorded at cost and depreciated using the straight-line method over their estimated useful lives of four to thirty-nine years. As of December 31, 2019 and 2018, fixed assets with a net book value of $6.6 million and $84,000, respectively, are included in other assets on the consolidated statements of financial condition.
 
35

Allocated Expenses
 
The Company is charged or incurs certain overhead expenses that are paid by, or paid on our behalf by, other affiliates and are included in other operating expenses on the consolidated statements of income. These overhead expenses primarily relate to centralized functions including finance and accounting, legal, compliance, treasury, tax, internal audit, information technology, human resources and risk management. These overhead expenses are allocated to the Company by other affiliates or allocated by the Company to other affiliates as the expenses are incurred, based upon direct usage when identifiable, or by revenue, headcount, space or other allocation methodologies periodically reviewed by the management of the Company and the affiliates.
 
In addition, GCIA and GAMCO serve as paymasters under compensation payment sharing agreements. The compensation expense and related payroll taxes and benefits of certain dual employees that provide services to both AC and affiliates that are paid for by GCIA or GAMCO are allocated between the companies based upon the relative time each employee devotes to each affiliate. These allocated compensation expenses are included in compensation on the consolidated statements of income.
 
All of the allocations and estimates in the financial statements are based on assumptions that management of AC believes are reasonable. However, these allocations may not be indicative of the actual expenses we would have incurred or may incur in the future.
 
Management Fee
 
Management fee expense in the amount of 10% of the aggregate pre-tax profits, before consideration of this fee and before consideration of the income attributable to consolidated funds and partnerships, is paid to the Executive Chairman or his designees in accordance with his employment agreement.
 
Stock-Based Compensation
 
During 2018, the Company’s Board of Directors approved the grant of Phantom Restricted Stock awards (“Phantom RSAs”). 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.
 
The Phantom RSAs are accounted for 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 remeasure 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.
 
The expense attributable to the Phantom RSAs is allocated solely to AC.
 
Goodwill
 
Goodwill is initially measured as the excess of the cost of an acquired business over the sum of the fair value assigned to assets acquired less the liabilities assumed. Goodwill is tested for impairment at least annually on November 30th and whenever certain triggering events are met. In assessing the recoverability of goodwill as of November 30, 2019 and 2018, we performed a qualitative assessment of whether it was more likely than not that an impairment had occurred and concluded that a quantitative analysis was not required. As such, no impairment was recorded during 2019 or 2018.
 
Income Taxes
 
For purposes of the preparation of the consolidated financial statements, the provision for income taxes is computed using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the consolidated financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income tax expense/benefit in the period that includes the enactment date of the change in tax rate.

36

The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. A valuation allowance would be recorded to reduce the carrying value of deferred tax assets to the amount that is more likely than not to be realized. In making such a determination of whether a valuation allowance is necessary, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event the Company were to determine that the Company would be able to realize the Company’s deferred income tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
 
For uncertain tax positions the Company first determines whether it is more likely than not that the tax positions will be sustained based on the technical merits of the position. For those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50% likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes the accrual of interest on uncertain tax positions and penalties in income tax provision on the consolidated statements of income. Accrued interest and penalties on uncertain tax positions are included within accrued expenses and other liabilities on the consolidated statements of financial condition.
 
Noncontrolling Interests
 
Noncontrolling interests in investment partnerships that are redeemable at the option of the holder are classified as redeemable noncontrolling interests in the mezzanine section of the consolidated statements of financial condition between liabilities and equity.  Noncontrolling interests in other entities that are not redeemable at the option of the holder are classified as such as a separate component of shareholder’s equity.
 
For the years ended December 31, 2019 and 2018, net income/(loss) attributable to noncontrolling interests on the consolidated statements of income represents the share of net income/(loss) attributable to third-party investors in consolidated funds.
 
Concentration of Credit Risk
 
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and receivable from brokers. The Company maintains cash and cash equivalents primarily in the Gabelli U.S. Treasury Money Market Fund, which invests fully in instruments issued by the U.S. government. Receivables from brokers and financial institutions can exceed the federally insured limit. The concentration of credit risk with respect to advisory fees and incentive fees/allocation, which are included in investment advisory fees receivable and receivables from affiliates on the consolidated statements of financial condition, is generally limited due to the short payment terms extended to clients by the Company. All investments in securities are held at third party brokers or custodians.
 
Business Segment
 
The Company operates in one business segment. The Company’s chief operating decision maker reviews the Company’s financial performance at an aggregate level.
 
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.
 
37


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 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.
 
C.
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.
 
38


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.
 
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 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:
 

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 – The Company 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 the Company and the underwriter.   Revenue is recognized on the trade date (the date on which the Company purchases the securities from the issuer) for the portion the Company is contracted to buy.  The Company believes that the trade date is the appropriate point in time to recognize revenue for securities underwriting transactions as there are no significant actions the Company 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 the Company on a daily or weekly basis.
 
39


d)
Sales manager fees – The Company 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 the Company, the funds and the funds’ investment adviser. The Company 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.
 
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 years ended December 31, 2019 and 2018 (in thousands):
 
   
Year Ended December 31,
 
   
2019
   
2018
 
Revenues
           
Investment advisory and incentive fees
           
Asset-based advisory fees
 
$
7,022
   
$
7,384
 
Performance-based advisory fees
   
7,501
     
3,115
 
Sub-advisory fees
   
7,625
     
3,910
 
     
22,148
     
14,409
 
                 
Institutional research services
               
Hard dollar payments
   
1,975
     
2,835
 
Commissions
   
5,904
     
5,349
 
Selling concessions
   
335
     
84
 
Sales manager fees
   
733
     
16
 
     
8,947
     
8,284
 
                 
Other
               
Underwriting fees
   
96
     
19
 
Miscellaneous
   
74
     
67
 
     
170
     
86
 
                 
Total
 
$
31,265
   
$
22,779
 

40

D.
Investments in Securities
 
Investments in securities at December 31, 2019 and 2018 consisted of the following (in thousands):
 
   
2019
   
2018
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Debt - Trading Securities:
                       
Government obligations
 
$
28,428
   
$
29,037
   
$
11,694
   
$
11,707
 
Equity Securities:
                               
Common stocks
   
271,627
      262,562      
244,557
     
213,151
 
Mutual funds
   
1,207
     
2,196
     
761
     
1,161
 
Other investments
   
7,847
     
6,562
     
5,285
     
3,941
 
Total investments in securities
   
309,109
     
300,357
     
262,297
     
229,960
 

Securities sold, not yet purchased at December 31, 2019 and 2018 consisted of the following (in thousands):
 
   
2019
   
2018
 
   
Proceeds
   
Fair Value
   
Proceeds
   
Fair Value
 
Equity securities:
                       
Common stocks
 
$
13,863
   
$
16,300
   
$
10,150
   
$
9,485
 
Other investments
   
13
     
119
     
-
     
89
 
Total securities sold, not yet purchased
 
$
13,876
   
$
16,419
   
$
10,150
   
$
9,574
 

Investments in affiliated registered investment companies at December 31, 2019 and 2018 consisted of the following (in thousands):
 
   
2019
   
2018
 
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
Equity securities:
                       
Closed-end funds
 
$
75,646
   
$
99,834
   
$
73,950
   
$
85,090
 
Mutual funds
   
48,348
     
59,477
     
49,714
     
57,045
 
Total investments in affiliated registered investment companies
 
$
123,994
   
$
159,311
   
$
123,664
   
$
142,135
 

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 December 31, 2019 and December 31, 2018 we held derivative contracts on 3.4 million and 1.0 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 two foreign exchange contracts outstanding at December 31, 2019 and one at December 31, 2018. 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.
 
41

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
Location
 
December 31,
2019
   
December 31,
2018
 
Financial Condition
Location
 
December 31,
2019
   
December 31,
2018
 
 
 
           
 
           
Derivatives designated as hedging instruments under FASB ASC 815-20
         
 
           
 
 
           
 
           
Foreign exchange contracts
Receivable from brokers
 
$
23
   
$
204
 
Payable to brokers
 
$
-
   
$
-
 
 
 
               
 
               
Derivatives not designated as hedging instruments under FASB ASC 815-20
             
 
               
 
 
               
 
               
Equity contracts
Investments in securities
 
$
291
   
$
464
 
Securities sold, not yet purchased
 
$
119
   
$
89
 
 
 
               
 
               
Total
 
 
$
314
   
$
668
 
 
 
$
119
   
$
89
 

The following table identifies gains and losses of all derivatives and foreign currency positions held by the Company (in thousands):
 
   
  
 
Year ended December 31,
 
Type of Derivative
 
Income Statement Location
 
2019
   
2018
 
   
 
           
Foreign exchange contracts
 
Net gain/(loss) from investments
 
$
128
   
$
204
 
Equity contracts
 
Net gain/(loss) from investments
   
(1,951
)
   
4,774
 
   
 
               
Total
 
 
 
$
(1,823
)
 
$
4,978
 

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)
 
December 31, 2019
 
$
291
   
$
-
   
$
291
   
$
(119
)
 
$
-
   
$
172
 
December 31, 2018
 
$
416
   
$
-
   
$
416
   
$
(89
)
 
$
-
   
$
327
 

                     
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)
 
December 31, 2019
 
$
119
   
$
-
   
$
119
   
$
(119
)
 
$
-
   
$
-
 
December 31, 2018
 
$
89
   
$
-
   
$
89
   
$
(89
)
 
$
-
   
$
-
 

42

E.
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 $124.8 million and $100.1 million at December 31, 2019 and 2018, 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 $20.5 million and $18.6 million at December 31, 2019 and 2018, respectively (“Unaffiliated Entities”). We evaluate each entity to determine its appropriate accounting treatment and disclosure. Certain of the Affiliated Entities, and none of the Unaffiliated Entities, are consolidated.
 
The value of entities where consolidation is not deemed appropriate consist of equity method investments which are included in investments in partnerships on consolidated statements of financial condition. This caption includes investments in Affiliated Entities and Unaffiliated Entities which the Company accounts for under the equity method of accounting. The Company reflects the equity in earnings of these Affiliated Entities and Unaffiliated Entities as net gain/(loss) from investments on the consolidated statements of income.
 
The following table reflects the net impact of the consolidated entities on the consolidated statements of financial condition in thousands):
 
43

   
December 31, 2019
 
   
Prior to
Consolidation
   
Consolidated
Entities
   
As Reported
 
Assets
                 
Cash and cash equivalents
 
$
335,421
   
$
13,167
   
$
348,588
 
Investments in securities (including GBL stock)
   
182,673
     
117,684
     
300,357
 
Investments in affiliated investment companies
   
211,024
     
(51,713
)
   
159,311
 
Investments in partnerships
   
167,781
     
(22,409
)
   
145,372
 
Receivable from brokers
   
7,759
     
16,391
     
24,150
 
Investment advisory fees receivable
   
9,604
     
(22
)
   
9,582
 
Other assets
   
23,517
     
29
     
23,546
 
Total assets
 
$
937,779
   
$
73,127
   
$
1,010,906
 
Liabilities and equity
                       
Securities sold, not yet purchased
 
$
4,625
   
$
11,794
   
$
16,419
 
Accrued expenses and other liabilities
   
35,718
     
10,949
     
46,667
 
Redeemable noncontrolling interests
   
1
     
50,384
     
50,385
 
Total equity
   
897,435
     
-
     
897,435
 
Total liabilities and equity
 
$
937,779
   
$
73,127
   
$
1,010,906
 

   
December 31, 2018
 
   
Prior to
Consolidation
   
Consolidated
Entities
   
As Reported
 
Assets
                 
Cash and cash equivalents
 
$
396,074
   
$
13,490
   
$
409,564
 
Investments in securities (including GBL stock)
   
131,764
     
98,196
     
229,960
 
Investments in affiliated investment companies
   
193,006
     
(50,871
)
   
142,135
 
Investments in partnerships
   
138,119
     
(19,390
)
   
118,729
 
Receivable from brokers
   
7,998
     
16,631
     
24,629
 
Investment advisory fees receivable
   
4,427
     
(33
)
   
4,394
 
Other assets
   
24,551
     
471
     
25,022
 
Total assets
 
$
895,939
   
$
58,494
   
$
954,433
 
Liabilities and equity
                       
Securities sold, not yet purchased
 
$
4,631
   
$
4,943
   
$
9,574
 
Accrued expenses and other liabilities
   
25,060
     
3,751
     
28,811
 
Redeemable noncontrolling interests
   
-
     
49,800
     
49,800
 
Total equity
   
866,248
     
-
     
866,248
 
Total liabilities and equity
 
$
895,939
   
$
58,494
   
$
954,433
 

44

The following table reflects the net impact of the consolidated entities on the consolidated statements of income (in thousands):
 
 
 
Year Ended December 31, 2019
 
 
 
 
Prior to
Consolidation
   
Consolidated
Entities
   
As Reported
 
Total revenues
 
$
32,821
   
$
(1,556
)
 
$
31,265
 
Total expenses
   
45,698
     
1,325
     
47,023
 
Operating loss
   
(12,877
)
   
(2,881
)
   
(15,758
)
Total other income/(expense), net
   
64,267
     
6,399