Morgan Group Holding Co 8-K/A, filed Jan 9, 2020
Morgan Group Holding Co (MGHL)
8-K/A
2020-01-09
For: 2019-10-31
View Original
Added on
April 06, 2026
About this 8-K/A
Morgan Group Holding Co filed this 8-K/A on January 9, 2020, reporting on events of October 31, 2019.
Items reported
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 31, 2019
MORGAN GROUP HOLDING CO.
(Exact Name of Registrant as Specified in Charter)
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Delaware
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333-73996
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13-4196940
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(State or Other Jurisdiction of Incorporation)
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(Commission File Number)
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(IRS Employer Identification No.)
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401 Theodore Fremd Avenue, Rye, New York 10580
(Address of Principal Executive Offices)(Zip Code)
914-921-1877
Registrant’s Telephone Number
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
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☐ |
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-2)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934
(§240.12b-2 of this chapter).
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. ☐
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Trading
Symbol(s)
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Name of each exchange
on which registered
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None
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Explanatory Note
On November 6, 2019, Morgan Group Holding Co. (the “Company”) filed a Current Report on Form 8-K (the “Form 8-K”) to report the entry into and the closing of the transaction governed by an agreement and plan of merger,
dated as of October 31, 2019 (the “Merger Agreement”), by and among the Company, G.R. Acquisition, LLC, a wholly owned subsidiary of the Company (“Merger Sub”), G.research, LLC (“G.research”), Institutional Services Holdings, LLC, the sole member of
G.research (“ISH”), and Associated Capital Group, Inc., parent of ISH. Upon the closing of the merger pursuant to the Merger Agreement, Merger Sub merged with and into G.research, resulting in G.research becoming a wholly owned subsidiary of the
Company.
The Company is filing this amendment to the Form 8-K to provide the following:
| • |
Unaudited interim financial statements of G.research as of and for the nine months ended September 30, 2019 and 2018,
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| • |
Related management’s discussion and analysis of financial condition and results of operations,
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| • |
Updated summary historical financial data of G.research,
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| • |
Updated selected historical financial data of G.research, and
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| • |
Revised pro forma financial statements of the Company that reflect certain reclassifications.
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| • | Refiled audited financial statements of G.research as of and for the years ended December 31, 2018 and 2017. |
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Item 9.01
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Financial Statements and Exhibits.
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(a)
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Financial statements of businesses acquired.
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Unaudited Interim Financial Statements
Statements of financial condition of G.research, LLC at September 30, 2019 and December 31, 2018
Statements of operations of G.research, LLC for the nine months ended September 30, 2019 and 2018
Statements of cash flows of G.research, LLC for the nine months ended September 30, 2019 and 2018
Statements of changes in member’s capital of G.research, LLC for the nine months ended September 30, 2019 and September 30, 2018
Notes to financial statements
The forgoing financial statements are included as Exhibit 99.1 to this amendment to the Form 8-K and are incorporated into this Item 9.01 by reference. Management’s discussion and analysis of
financial condition and results of operations with respect to the periods covered by the foregoing financial statements is included as Exhibit 99.2 and is incorporated into this Item 9.01 by reference. Summary historical financial data of G.research
as of and for each of the nine months ended September 30, 2019 and September 30, 2018 and the fiscal years ended December 31, 2018 and December 31, 2017 are included as Exhibit 99.3 and are incorporated into this Item 9.01 by reference. Selected
historical financial data of G.research as of and for each of the nine months ended September 30, 2019 and September 30, 2018 and the fiscal years ended December 31, 2018 and December 31, 2017 are included as Exhibit 99.4 and are incorporated into
this Item 9.01 by reference. Revised unaudited pro forma statement of financial condition as of September 30, 2019 and pro forma statements of operations for the nine months ended September 30, 2019 and 2018 and the year ended December 31, 2018 of
the Company (reflecting reclassifications of line items in the pro forma financial statements previously filed in the Form 8-K) are included as Exhibit 99.5 and are incorporated into this Item 9.01 by reference. Refiled audited financial statements
of G.research as of and for the years ended December 31, 2018 and 2017 are included as Exhibit 99.6 and are incorporated into this Item 9.01 by reference.
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(d)
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Exhibits.
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Exhibit No.
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Description
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Unaudited interim financial statements of G.research, LLC as of and for the nine months ended September 30, 2019 and 2018 and notes to financial statements*
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Management’s discussion and analysis of financial condition and results of operations of G.research, LLC for the nine months ended September 30, 2019 and 2018*
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Summary historical financial data of G.research, LLC as of and for the nine months ended September 30, 2019 and September 30, 2018 and the fiscal years ended December 31, 2018 and December 31, 2017*
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Selected historical financial data of G.research, LLC as of and for each of the nine months ended September 30, 2019 and September 30, 2018 and the fiscal years ended December 31, 2018 and December 31, 2017*
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Revised unaudited pro forma statement of financial condition of Morgan Group Holding Co. as of September 30, 2019 and pro forma statements of operations for the nine months ended September 30, 2019 and 2018*
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| 99.6 |
Audited financial statements of G.research, LLC as of and for the years ended December 31, 2018 and 2017 and notes to financial statements. |
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*Defined terms used within the exhibits shall have the meanings ascribed to such terms in the Morgan Group Holding Co. Information Statement filed as Exhibit 99.1 to the Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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MORGAN GROUP HOLDING CO.
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|||
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By:
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/s/ Joseph L. Fernandez
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Name: Joseph L. Fernandez
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Title: Executive Vice President-Finance
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Dated: January 9, 2020
Exhibit 99.1
G.research, LLC
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Unaudited Financial Statements:
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Statements of Operations for the nine month periods ended September 30, 2019 and 2018
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2
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Statements of Financial Condition at September 30, 2019 and December 31, 2018
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3
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Statement of Changes in Member’s Capital for the nine months ended September 30, 2019
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4
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Statement of Changes in Member’s Capital for the nine months ended September 30, 2018
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5
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Statements of Cash Flows for the nine month periods ended September 30, 2019 and 2018
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6 - 7
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Notes to Unaudited Financial Statements
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8
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G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
UNAUDITED STATEMENTS OF OPERATIONS
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Nine Months Ended
September 30, |
||||||||
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2019
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2018
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|||||||
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Revenues
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||||||||
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Commissions
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$
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4,549,985
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$
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4,432,059
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||||
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Fees earned from affiliated entities pursuant to research services agreements
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1,127,500
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1,649,000
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||||||
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Principal transactions
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(7,623
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)
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(13,576,471
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)
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||||
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Dividends and interest
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158,195
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727,424
|
||||||
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Underwriting fees
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75,000
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18,832
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||||||
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Sales manager fees
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590,761
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99,715
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||||||
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Other revenues
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37,214
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15,447
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||||||
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Total revenues
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6,531,032
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(6,633,994
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)
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|||||
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Expenses
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||||||||
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Compensation and related costs
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6,955,176
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8,769,294
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||||||
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Clearing charges
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933,620
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1,013,867
|
||||||
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General and administrative
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712,338
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800,450
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||||||
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Occupancy and equipment
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666,986
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799,527
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||||||
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Total expenses
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9,268,120
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11,383,138
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||||||
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Loss before income tax benefit
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(2,737,088
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)
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(18,017,132
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)
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||||
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Income tax benefit
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(596,386
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)
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(4,402,697
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)
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||||
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Net loss attributable to G.research, LLC’s member
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$
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(2,140,702
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)
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$
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(13,614,435
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)
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||
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Net loss per share attributable to G.research, LLC’s member
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||||||||
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Basic
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$
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(10,704
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)
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$
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(68,072
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)
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||
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Diluted
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$
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(10,704
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)
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$
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(68,072
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)
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||
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Weighted average shares outstanding:
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||||||||
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Basic
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200
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200
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||||||
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Diluted
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200
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200
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||||||
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Actual shares outstanding
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200
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200
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||||||
See accompanying notes.
2
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
UNAUDITED STATEMENTS OF FINANCIAL CONDITION
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September 30,
2019
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December 31,
2018
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|||||||
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ASSETS
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||||||||
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Cash and cash equivalents
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$
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5,394,380
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$
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11,201,070
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||||
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Investment in securities
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16,725
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–
|
||||||
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Receivables from brokers and clearing organizations
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–
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194,676
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||||||
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Receivables from affiliates
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136,482
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19,199
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||||||
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Commissions receivable
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124,087
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-
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||||||
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Deposits with clearing organizations
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200,000
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200,000
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||||||
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Income taxes receivable (including deferred tax asset of $273,009 in 2018)
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87,406
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352,599
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||||||
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Fixed assets, net of accumulated depreciation of $25,397 and $19,253, respectively
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47,494
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55,839
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||||||
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Other assets
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217,863
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223,728
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||||||
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Total assets
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$
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6,224,437
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$
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12,247,111
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||||
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LIABILITIES AND MEMBER’S CAPITAL
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||||||||
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Compensation payable
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$
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922,447
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$
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1,439,526
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||||
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Deferred tax liability
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6,973
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–
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||||||
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Due to brokers
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279,500
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–
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||||||
| Payable to affiliates |
– | 218,788 | ||||||
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Securities sold, not yet purchased
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562
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–
|
||||||
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Accrued expenses and other liabilities
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274,479
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407,619
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||||||
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Total liabilities
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1,483,961
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2,065,933
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||||||
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Commitments and contingencies (Note K)
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||||||||
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Member’s capital
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||||||||
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Common stock, $.01 par value; 200 shares authorized, issued and outstanding
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2
|
2
|
||||||
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Additional paid-in capital
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46,980,331
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50,280,331
|
||||||
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Accumulated deficit
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(42,239,857
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)
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(40,099,155
|
)
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||||
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Total member’s capital
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4,740,476
|
10,181,178
|
||||||
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Total liabilities and member’s capital
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$
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6,224,437
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$
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12,247,111
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||||
See accompanying notes.
3
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
UNAUDITED STATEMENT OF CHANGES IN MEMBER’S CAPITAL
For the nine months ended September 30, 2019
|
Common
Stock
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Total
|
|||||||||||||
|
Balance at December 31, 2018
|
$
|
2
|
$
|
50,280,331
|
$
|
(40,099,155
|
)
|
$
|
10,181,178
|
|||||||
|
Capital distribution
|
–
|
(3,300,000
|
)
|
–
|
(3,300,000
|
)
|
||||||||||
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Net loss
|
–
|
–
|
(2,140,702
|
)
|
(2,140,702
|
)
|
||||||||||
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Balance at September 30, 2019
|
$
|
2
|
$
|
46,980,331
|
$
|
(42,239,857
|
)
|
$
|
4,740,476
|
|||||||
See accompanying notes.
4
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
UNAUDITED STATEMENT OF CHANGES IN MEMBER’S CAPITAL
For the nine months ended September 30, 2018
|
Common
Stock
|
Additional
Paid-in
Capital
|
Accumulated
Deficit
|
Total
|
|||||||||||||
|
Balance at December 31, 2017
|
$
|
2
|
$
|
135,886,590
|
$
|
(19,861,992
|
)
|
$
|
116,024,600
|
|||||||
|
Net loss
|
–
|
–
|
(13,614,435
|
)
|
(13,614,435
|
)
|
||||||||||
|
Balance at September 30, 2018
|
$
|
2
|
$
|
135,886,590
|
$
|
(33,476,427
|
)
|
$
|
102,410,165
|
|||||||
See accompanying notes.
5
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
UNAUDITED STATEMENTS OF CASH FLOWS
|
Nine Months Ended
September 30, |
||||||||
|
2019
|
2018
|
|||||||
|
Operating activities
|
||||||||
|
Net loss
|
$
|
(2,140,702
|
)
|
$
|
(13,614,435
|
)
|
||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation
|
8,345
|
6,396
|
||||||
|
Deferred income tax, net
|
279,982
|
(3,434,171
|
)
|
|||||
|
(Increase)/decrease in operating assets:
|
||||||||
|
Securities owned, net
|
(16,163
|
)
|
13,216,372
|
|||||
|
Commissions receivable
|
(124,087
|
)
|
(265,487
|
)
|
||||
|
Receivables from brokers and clearing organizations
|
194,676
|
239,663
|
||||||
|
Receivables from affiliates
|
(117,283
|
)
|
13,638
|
|||||
|
Income taxes receivable
|
(7,816
|
)
|
(2,500
|
)
|
||||
|
Other assets
|
5,865
|
149,487
|
||||||
|
Increase/(decrease) in operating liabilities:
|
||||||||
|
Due to brokers and clearing organizations
|
279,500
|
–
|
||||||
|
Payable to affiliates
|
(218,788
|
)
|
(691,566
|
)
|
||||
|
Compensation payable
|
(517,079
|
)
|
1,139,369
|
|||||
|
Accrued expenses and other liabilities
|
(133,140
|
)
|
(86,679
|
)
|
||||
|
Total adjustments
|
(365,988
|
)
|
10,284,522
|
|||||
|
Net cash used in operating activities
|
(2,506,690
|
)
|
(3,329,913
|
)
|
||||
|
Investing activities
|
||||||||
|
Purchases of fixed assets
|
–
|
(60,255
|
)
|
|||||
|
Net cash used in investing activities
|
$
|
–
|
$
|
(60,255
|
)
|
|||
6
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
UNAUDITED STATEMENTS OF CASH FLOWS (continued)
|
Nine Months Ended
September 30, |
||||||||
|
2019
|
2018
|
|||||||
|
Financing activities
|
||||||||
|
Capital distribution
|
$
|
(3,300,000
|
)
|
$
|
–
|
|||
|
Cash used in financing activities
|
(3,300,000
|
)
|
–
|
|||||
|
Net decrease in cash and cash equivalents and restricted cash
|
(5,806,690
|
)
|
(3,390,168
|
)
|
||||
|
Cash, cash equivalents and restricted cash at beginning of period
|
11,401,070
|
11,640,308
|
||||||
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
5,594,380
|
$
|
8,250,140
|
||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Cash paid for Income taxes
|
$
|
(76
|
)
|
$
|
(4,000
|
)
|
||
|
Cash received from Associated Capital Group, Inc. for Income taxes
|
$
|
781,478
|
$
|
687,995
|
||||
|
Reconciliation to cash, cash equivalents and restricted cash:
|
||||||||
|
Cash and cash equivalents
|
$
|
5,394,380
|
$
|
8,050,140
|
||||
|
Restricted cash: deposits from clearing organizations
|
200,000
|
200,000
|
||||||
|
Cash, cash equivalents and restricted cash
|
$
|
5,594,380
|
$
|
8,250,140
|
||||
See accompanying notes.
7
|
A.
|
Organization and Business Description
|
G.research, LLC (the “Company”) is a wholly-owned subsidiary of Institutional Services Holdings, LLC (the “Parent”), which, in turn, is a wholly-owned subsidiary of Associated Capital Group, Inc. (“AC”). Prior to
January 23, 2017, the Company was a wholly-owned subsidiary of Gabelli & Company Investment Advisers, Inc. (“GCIA”), a wholly-owned subsidiary of AC. The Company became a subsidiary of AC effective November 30, 2015, subsequent to a spin-off
transaction from GAMCO Investors, Inc. (“GBL”); it was a majority-owned subsidiary of GBL prior to that date. The Company is a broker-dealer registered with the Securities and Exchange Commission (the “SEC”) and is regulated by the Financial
Industry Regulatory Authority (“FINRA”).
The Company provides institutional investors and investment partnerships with investment research with a particular focus on small-cap and mid-cap companies to certain related parties as more fully described in
Footnote D. The team of sell-side analysts follows industry sectors on a global basis and performs fundamental security analysis using a Private Market Value (“PMV”) framework. PMV investing is a disciplined, research-driven approach based on
security analysis. In this process, the analyst selects stocks whose intrinsic value, based on the analyst’s estimate of current asset value and future growth and earnings power, is significantly different from the public market value as reflected
in the public market. PMV is defined as the price an informed industrial buyer would be likely to pay to acquire the business. The research focuses on company fundamentals, cash flow statistics, and catalysts that will help realize returns.
The Company generates brokerage commission revenues 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. The Company generates revenue from syndicated underwriting activities. It primarily participates in the offerings of certain closed-end funds advised by Gabelli Funds, LLC, a wholly-owned subsidiary of GBL. The Company
also earns investment income generated from its proprietary trading activities.
The Company acts as an introducing broker, and all securities transactions for the Company and its customers are cleared through and carried by three New York Stock Exchange (“NYSE”) member firms on a fully disclosed
basis. The Company has Proprietary Accounts of Introducing Brokers (“PAIB”) agreements with these firms. Accordingly, open customer transactions are not reflected in the accompanying Statements of Financial Condition. The Company is exposed to
credit losses on these open transactions in the event of nonperformance by its customers, pursuant to conditions of its clearing agreements with its clearing brokers. This exposure is mitigated by the clearing brokers’ policy of monitoring the
collateral and credit of the counterparties until the transaction is completed.
The Company’s principal market is in the United States.
|
B.
|
Significant Accounting Policies
|
Cash and Cash Equivalents
The Company’s investment in an affiliated money market mutual fund which is invested solely in U.S. Treasuries.
Securities Owned, at Fair Value
Securities owned, at fair value, including common stocks, closed-end funds and mutual funds, are recorded at fair value with the resulting realized and unrealized gains and losses reflected in principal transactions in
the Statements of Operations. Realized gains and losses from securities transactions are recorded on the identified cost basis. All securities transactions and transaction costs are recorded on a trade date basis. Dividends are recorded on the
ex-dividend date. Interest income and interest expense are accrued as earned or incurred.
8
Fair Value of Financial Instruments
The carrying amounts of all financial instruments in the Statements of Financial Condition approximate their fair values.
The Company’s financial instruments have been categorized based upon a fair value hierarchy. The valuation process and policies reside with the financial reporting and accounting group. The levels of the fair value
hierarchy and their applicability to the Company are described below:
| • |
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets include cash equivalents, common stocks, closed-end funds and mutual funds.
|
| • |
Level 2 inputs utilize 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 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.
|
| • |
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.
|
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 within 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. Investments are transferred into and out of any level at their beginning period values.
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 transaction. 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 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 consist of an affiliated money market mutual fund, which is invested solely in U.S. Treasuries. Cash equivalents are valued using the mutual fund’s net asset value (“NAV”) to
measure fair value. Accordingly, cash equivalents are categorized in Level 1 of the fair value hierarchy.
Securities Owned, at Fair Value – There are no securities owned as of December 31, 2018. During the periods ended September 30, 2019 and 2018 the Company held common stocks, closed-end funds and mutual funds,
which were all valued using quoted prices in active markets for identical assets and were classified in level 1 of the fair value hierarchy. As of and during the nine month period ended September 30, 2019 and year ending December 31, 2018, there
were no Level 2 or Level 3 securities owned.
9
Receivables from Affiliates/Payables to Affiliates
Receivables from affiliates consist of receivables from certain affiliates for expenses paid on their behalf. Payables to affiliates are primarily comprised of estimated taxes due to AC. See Notes D and H.
Revenue from Contracts with Customers
See Note C.
Principal Transactions
The Company generates realized and unrealized gains and losses from its proprietary trading activities. Realized gains and losses from securities transactions are recorded on the identified cost basis. All securities
transactions and transaction costs are recorded on a trade date basis.
Dividends and Interest
Dividends are recorded on the ex-dividend date. Interest income and interest expense are accrued as earned or incurred. These amounts are not related to contracts with customers.
Depreciation
Fixed assets are recorded at cost and depreciated using the straight-line method over their estimated useful lives of four to seven years.
Allocated Expenses
The Company is charged or incurs certain overhead expenses that are paid by or paid on behalf of other affiliates and are included in general and administrative and occupancy and equipment expenses in the Statements of
Operations. These overhead expenses are allocated to the Company by its parent and other affiliates or allocated by the Company to other affiliates as the expenses are incurred, based upon methodologies periodically reviewed by the management of the
Company and the affiliates. In addition, GCIA and GBL serve as paymasters for the Company under compensation payment sharing agreements. This includes compensation expense and related payroll taxes and benefits which are allocated to the Company for
professional staff performing duties related entirely to the Company and those compensation expenses and related payroll taxes and benefits which relate to professional staff who serve more than one entity and whose compensation is therefore
allocated to the Company as well as to its affiliates. These compensation expenses are included in compensation and related costs in the Statements of Operations.
Income Taxes
A single member LLC would generally not record an income tax provision as it is disregarded as an entity for federal income tax purposes. However, the Company is a member of a tax sharing agreement
among members of the AC consolidated tax group and records an income tax provision. The Company generally settles either the benefit or expense with AC monthly, but not less than annually. The Company accounts for income taxes under 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 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. See Note H for detail on impact pertaining to the enactment of Tax Cuts and Jobs Act (the
“Act”).
10
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 more likely than not 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 previously recorded deferred tax asset valuation allowance, which would reduce the provision for income taxes.
The Company records uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) Topic 740 on the basis of a two-step process: (1) the Company determines whether it is more
likely than not that the tax positions will be sustained based on the technical merits of the position; and (2) 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 percent 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 benefit on the Statements of
Operations. Accrued interest and penalties on uncertain tax positions are included within accrued expenses and other liabilities on the Statements of Financial Condition.
Use of Estimates
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during that reporting period. Actual results
could differ from those estimates.
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes
the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance of the ASC. The core principle of ASU 2014-09 requires companies to recognize revenue from the
transfer of goods or services to customers in amounts that reflect the consideration the company expects to receive in exchange for those goods or services. The new standard also requires expanded disclosures about revenue recognition. The new
revenue standard was effective for annual fiscal years and interim periods within those fiscal years beginning after December 15, 2017. The Company has adopted this ASU effective January 1, 2018 with no material impact on its financial statements
other than expanded disclosure.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the
guidance in GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in
equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments The new standard
was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. To adopt the amendments, entities were required to make a cumulative-effect adjustment to beginning retained earnings as of the beginning
of the fiscal year in which the guidance is effective. The Company has adopted this ASU effective January 1, 2018 with no material impact on its financial statements.
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 Statement of Financial Condition. The new standard was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company adopted
this ASU effective January 1, 2019 with no material impact on its financial statements.
11
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which
adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new standard was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017.
The Company adopted this ASU effective January 1, 2018 with no material impact on its financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Equity Transfers of Assets Other Than Inventory, which removes the prohibition in ASC 740 against the immediate recognition
of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The ASU is intended to reduce the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain types of
intra-entity transfers, particularly those involving intellectual property. The ASU is effective for annual periods beginning after December 15, 2017. Early adoption was permitted. The Company has evaluated this guidance and has concluded that it has
no material impact on its financial statements. The Company has adopted this ASU effective January 1, 2018.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which clarifies the classification and presentation of restricted cash in the statement of cash flows. The new
standard was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. The Company adopted this ASU effective January 1, 2018 with no material impact on its 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 this ASU
effective January 1, 2018 with no material impact on its financial statements.
|
C.
|
Revenue from Contracts with Customers
|
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, which provides a five-step approach to be applied to all contracts with
customers and requires expanded disclosures about revenue recognition.
Significant judgments that affect the amounts and timing of revenue recognition:
The Company’s analysis of the timing of revenue recognition of each revenue stream is based on the provisions of each respective contract. Performance obligations could, however, change from time to time if and when
existing contracts are modified or new contracts are entered into. These changes could potentially affect the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the price to
performance obligations. In the case of the revenue streams discussed below, the performance obligation is satisfied either at a point in time or over time. The judgments outlined below, where the determination as to these factors is discussed in
detail, are continually reviewed and monitored by the Company when new contracts or contract modifications occur. Transaction price is in all instances formulaic and not subject to significant (or any) judgment at the current time.
The Company’s assessment of the recognition of these revenues is as follows:
Revenue from contracts with customers includes commissions, fees earned from affiliated entities pursuant to research services agreements, underwriting fees and sales manager fees.
12
Commissions
Brokerage commissions. Acting as agent, the Company buys and sells securities on behalf of its customers. Commissions are charged on the execution of these securities transactions made on behalf of client
accounts and are based on a rate schedule. The Company recognizes commission revenue when the related securities transactions are executed on trade date. The Company believes that the performance obligation is satisfied on the 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/from the customer. Commissions earned are typically collected from the clearing brokers
utilized by the Company on a daily or weekly basis.
Hard dollar payments. The Company provides research services to unrelated parties, for which direct payment is received. The company 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 the Company 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. Additionally, at that time, a value is assigned to those services and an invoice is presented to the client
for payment.
Commission 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.
Fees earned from affiliated entities pursuant to research services agreements
The Company receives direct payments for research services provided to related parties pursuant to contracts. The contractual fee for the period is fixed and recognized ratably over the contract period, typically a
calendar year, which is considered the period over which the Company satisfies its performance obligation. Payments for contracts with affiliated parties are collected monthly.
Underwriting fees
Underwriting fees. The Company acts as underwriter in an agent capacity. Revenues are earned from fees arising from these offerings and the terms are set forth in
contracts between the underwriters and the issuer. The Company’s underwriting revenue is considered to be conditional revenue because it is subject to reduction to zero once the offsetting syndicate expenses have been quantified by the syndicate
manager (i.e., lead underwriter) and allocated to each underwriter in proportion to their participation in the offering. Revenue recognition is therefore delayed until it is probable that a significant reversal in the amount of revenue recognized
will not occur. That is, it is recognized only when uncertainty associated with the syndicate expenses is subsequently resolved and final settlement of syndicate accounts is effected by the syndicate manager. Payment is typically received from the
syndicate manager within ninety days after settlement date.
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.
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 the Company on a daily or weekly
basis.
13
Total revenues by type were as follows for the nine month periods ended September 30, 2019 and 2018:
|
2019
|
2018
|
|||||||
|
Commissions
|
$
|
4,207,202
|
$
|
3,844,242
|
||||
|
Hard dollar payments
|
342,783
|
587,817
|
||||||
|
4,549,985
|
4,432,059
|
|||||||
|
Research services
|
1,127,500
|
1,649,000
|
||||||
|
Underwriting fees
|
75,000
|
18,832
|
||||||
|
Sales manager fees
|
590,761
|
99,715
|
||||||
|
$
|
6,343,246
|
$
|
6,199,606
|
|||||
|
D.
|
Related Party Transactions
|
At September 30, 2019 and December 31, 2018, the Company had an investment of $5,387,261 and $11,147,234, respectively, in The Gabelli U.S. Treasury Money Market Fund advised by Gabelli Funds, LLC, which is an
affiliate of the Company. The amount is recorded in cash and cash equivalents in the Statements of Financial Condition. Income earned from this investment totaled $145,349 and $155,513 in 2019 and 2018, respectively, and is included in dividends
and interest revenues in the Statements of Operations.
During the nine months ended September 30, 2019 and 2018, the Company earned $3,457,302 and $2,725,324, respectively, or approximately 76% and 61%, respectively, of its commission revenue from transactions executed on
behalf of funds advised by Gabelli Funds, LLC and private wealth management clients advised by GAMCO Asset Management Inc., a wholly-owned subsidiary of GBL, respectively.
GAMCO Asset Management Inc. and Gabelli Funds, LLC paid $562,500 and $565,000, respectively, to the Company pursuant to research services agreements (see Note C) for the nine months ended September 30, 2019 and
$814,000 and $835,000, respectively, for the nine months ended September 30, 2018.
Effective February 1, 2019, the Company amended its existing research service agreements with two wholly-owned subsidiaries of GBL, GAMCO Asset Management, Inc. and Gabelli Funds, LLC, whereby each entity shall pay
$62,500 per month for research services provided. On October 10, 2019 these agreements have been terminated effective January 1, 2020.
The Company had investments in a mutual fund and closed-end funds advised by Gabelli Funds, LLC and an investment in GBL stock during 2018. Dividend income earned from these affiliated investments totaled $1,136,946
for the nine months ended September 30, 2018 and is included in dividends and interest revenues in the Statements of Operations. The Company also recorded related investment losses of $15,647,440 for the nine months ended September 30, 2018 which
are included in principal transactions in the Statements of Operations.
The Company participated as agent in the secondary offerings of the GAMCO Global Gold, Natural Resources & Income Trust (“GGN”). Pursuant to sales agreements between the parties, the Company earned sales manager
fees related to this offering of $590,761 and $15,616 during the nine months ending September 30, 2019 and 2018, respectively. Sales manager fees are separately disclosed in the Statements of Operations.
The Company pays AC a management fee equal to 20% of the Company’s year-to-date pretax profits before consideration of this fee. During the nine month periods ended September 30, 2019 and 2018, the Company did not pay
AC this fee as there were no pretax profits.
14
The Company also pays to or receives from AC the amount of its portion of the current tax expense or benefit as part of a tax sharing agreement. During 2018, with respect to the tax amount resulting from the exchange
of GBL stock, AC paid the Company $814,310. See Note H for details.
In June 2016, AC entered into a sublease agreement with GBL which is subject to annual renewal. AC allocates this expense to the Company based on the percentage of square footage occupied by the Company’s employees
(including pro rata allocation of common space). Pursuant to the sublease, AC and its subsidiaries shall pay a monthly fixed lease amount for the twelve month contractual period. For the nine month periods ended September 30, 2019 and 2018, the
Company paid $248,568 and $242,276 respectively, under the sublease agreement, respectively. These amounts are included within occupancy and equipment expenses on the Statements of Operations.
Commencing April 1, 2019, AC extended its existing lease agreement with GBL on a month-to-month basis.
|
E.
|
Securities Owned and Securities Sold, Not Yet Purchased, at Fair Value
|
Securities owned and securities sold, not yet purchased are recorded at fair value and consist of the following at September 30, 2019:
|
Cost
|
Fair Value
|
|||||||
|
Common stocks
|
$
|
15,740
|
$
|
16,725
|
||||
|
Total securities owned
|
$
|
15,740
|
$
|
16,725
|
||||
|
Proceeds
|
Fair Value
|
|||||||
|
Common stocks
|
$
|
555
|
$
|
562
|
||||
|
Total securities sold, not yet purchased
|
$
|
555
|
$
|
562
|
||||
There were no securities owned at December 31, 2018.
|
F.
|
Fair Value
|
The following tables present information about the Company’s assets and liabilities by major category measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018 and indicates the fair
value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Assets Measured at Fair Value on a Recurring Basis as of September 30, 2019:
|
September 30, 2019
|
||||||||||||||||
|
Assets
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1) |
Significant Other
Observable
Inputs (Level 2) |
Significant
Unobservable
Inputs (Level 3) |
Total
|
||||||||||||
|
Cash equivalents
|
$
|
5,387,261
|
$
|
-
|
$
|
-
|
$
|
5,387,261
|
||||||||
|
Investments in securities:
|
||||||||||||||||
|
Common stocks
|
16,725
|
16,725
|
||||||||||||||
|
Total investments in securities
|
16,725
|
-
|
-
|
16,725
|
||||||||||||
|
Total assets at fair value
|
$
|
5,403,986
|
$
|
-
|
$
|
-
|
$
|
5,403,986
|
||||||||
|
Liabilities
|
||||||||||||||||
|
Common stocks
|
$
|
562
|
$
|
-
|
$
|
-
|
$
|
562
|
||||||||
|
Securities sold, not yet purchased
|
$
|
562
|
$
|
-
|
$
|
-
|
$
|
562
|
||||||||
There were no transfers between any Levels during the nine months ended September 30, 2019.
15
Assets Measured at Fair Value on a Recurring Basis as of December 31, 2018:
|
December 31, 2018
|
||||||||||||||||
|
Assets
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1) |
Significant Other
Observable
Inputs (Level 2) |
Significant
Unobservable
Inputs (Level 3) |
Total
|
||||||||||||
|
Cash equivalents
|
$
|
11,147,234
|
$
|
-
|
$
|
-
|
$
|
11,147,234
|
||||||||
|
Total assets at fair value
|
$
|
11,147,234
|
$
|
-
|
$
|
-
|
$
|
11,147,234
|
||||||||
There were no transfers between any Levels during the year ended December 31, 2018.
|
G.
|
Retirement Plan
|
The Company participates in GBL’s incentive savings plan (the “Plan”), covering substantially all employees. Company contributions to the Plan are determined annually by management of the Company and AC’s Board of
Directors but may not exceed the amount permitted as a deductible expense under the Internal Revenue Code. Amounts expensed for allocated contributions to this Plan amounted to approximately $13,309 and $185 in 2019 and 2018, respectively, and are
recorded as compensation and related costs in the Statements of Operations.
|
H.
|
Income Taxes
|
The Company’s operations are included in the consolidated U.S. federal and certain state and local income tax returns of AC. The Company’s federal and certain state and local income taxes are calculated as if the
Company filed on a separate return basis, and the amount of current tax or benefit is either remitted to or received from AC using a benefits for loss approach such that net operating loss (or other tax attribute) is characterized as realized by the
Company when those tax attributes are utilized in the consolidated tax return of AC. This is the case even if the Company would not otherwise have realized those tax attributes. As such, the Company has concluded that it is more likely than not that
the net deferred tax assets of $273,009 are realizable as of December 31, 2018 and no valuation allowance is required.
During 2018, for certain states in which the Company files separate returns, the Company recorded deferred tax assets of approximately $79,000 relating to net operating losses. The Company concluded that it is not
more likely than not that the benefit from these separate state net operating loss carryforwards will be realized and has provided a valuation allowance for the full amount of the related deferred tax assets.
Income tax benefit for the nine month periods ended September 30, 2019 and 2018 consisted of:
|
2019
|
2018
|
|||||||
|
Federal:
|
||||||||
|
Current
|
$
|
(779,223
|
)
|
$
|
(788,786
|
)
|
||
|
Deferred
|
241,292
|
(2,891,163
|
)
|
|||||
|
State and local:
|
||||||||
|
Current
|
(97,144
|
)
|
(172,813
|
)
|
||||
|
Deferred
|
38,689
|
(549,935
|
)
|
|||||
|
Total
|
$
|
(596,386
|
)
|
$
|
(4,402,697
|
)
|
||
16
A reconciliation of the federal statutory rate to the effective tax rate for the nine month periods ended September 30, 2019 and 2018 is set forth below:
|
2019
|
2018
|
|||||||
|
Statutory Federal income tax rate
|
21.0
|
%
|
21.0
|
%
|
||||
|
State income tax net of Federal benefit
|
1.5
|
3.2
|
||||||
|
Dividends received deduction
|
-
|
0.3
|
||||||
|
Other
|
(0.7
|
)
|
(0.1
|
)
|
||||
|
Effective income tax rate
|
21.8
|
%
|
24.4
|
%
|
||||
As of September 30, 2019, the Company did not have any unrecognized tax benefits which relate to uncertain tax positions. As of December 31, 2018, the Company’s gross unrecognized tax benefits which relate to
uncertain tax positions were $5,688 of which $4,494, if recognized, would affect the Company’s effective tax rate. The Company continues to recognize both interest and penalties with respect to unrecognized tax benefits as income tax expense. The
Company had accrued a liability of $3,071 for interest and penalties as of December 31, 2018. These amounts are included in accrued expenses and other liabilities on the Statements of Financial Condition.
Significant components of our deferred tax assets and liabilities as of September 30, 2019 and December 31, 2018 are as follows:
|
2019
|
2018
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Securities owned
|
$
|
-
|
$
|
-
|
||||
|
Compensation
|
-
|
282,423
|
||||||
|
Fixed assets
|
-
|
-
|
||||||
|
-
|
282,423
|
|||||||
|
Deferred tax liabilities :
|
||||||||
|
Fixed assets
|
(6,747
|
)
|
(9,414
|
)
|
||||
|
Other
|
(226
|
)
|
-
|
|||||
|
(6,973
|
)
|
(9,414
|
)
|
|||||
|
Net deferred tax assets/(liabilities)
|
$
|
(6,973
|
)
|
$
|
273,009
|
|||
As of September 30, 2019 and December 31, 2018, management has not identified any potential subsequent events that could have a significant impact on unrecognized tax benefits within the next twelve months. The
Company remains subject to income tax examination by the IRS for years 2017 and 2018 and state examinations for years after 2011.
|
I.
|
Earnings per Share
|
Basic earnings per share is computed by dividing net income/(loss) attributable to our member by the weighted average number of shares outstanding during the period.
There were no dilutive shares outstanding during the periods.
17
The computations of basic and diluted net loss per share are as follows (in thousands, except per share data) for the nine month periods ended September 30, 2019 and 2018:
|
2019
|
2018
|
|||||||
|
Basic:
|
||||||||
|
Net loss attributable to G.research, LLC’s member
|
$
|
(2,140,702
|
)
|
$
|
(13,614,435
|
)
|
||
|
Weighted average shares outstanding
|
200
|
200
|
||||||
|
Basic net loss attributable to G.research, LLC’s member per share
|
$
|
(10,704
|
)
|
$
|
(68,072
|
)
|
||
|
Diluted:
|
||||||||
|
Net loss attributable to G.research, LLC’s member
|
$
|
(2,140,702
|
)
|
$
|
(13,614,435
|
)
|
||
|
Weighted average share outstanding
|
200
|
200
|
||||||
|
Total
|
200
|
200
|
||||||
|
Diluted net loss attributable to G.research, LLC’s member per share
|
$
|
(10,704
|
)
|
$
|
(68,072
|
)
|
||
|
J.
|
Member’s Capital
|
AC made capital contributions to the Parent, which in turn made capital contributions to the Company on February 8, 2017 and November 29, 2017 totaling $10,000,000 and $103,119,604, respectively.
The Company returned capital to the Parent on December 3, 2018 totaling $85,606,259 in the form of securities with a fair value of $80,877,637 and a tax receivable settlement of $4,728,622.
During June 2019 the Company made a return of capital distribution to the Parent in the amount of $3,300,000.
|
K.
|
Guarantees, Contingencies, and Commitments
|
The Company has agreed to indemnify its clearing brokers for losses they may sustain from the customer accounts that trade on margin introduced by the Company. At September 30, 2019 and 2018, the total amount of
customer balances subject to indemnification (i.e., unsecured margin debits) was immaterial. The Company also has entered into arrangements with various other third parties, many of which provide for indemnification of the third parties against
losses, costs, claims and liabilities arising from the performance of the Company’s obligations under the agreements. The Company has had no claims or payments pursuant to these or prior agreements, and management believes the likelihood of a claim
being made is remote, and therefore, an accrual has not been made in the financial statements.
From time to time, the Company is named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject
to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. The Company cannot predict the ultimate outcome of
such matters. The financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exists losses which may be reasonably possible and, if
material, makes the necessary disclosures. Such amounts, both those that are probable and those that are reasonably possible, are not considered material to the Company’s financial condition, operations or cash flows.
18
|
L.
|
Net Capital Requirements
|
As a registered broker-dealer, the Company is subject to the SEC Uniform Net Capital Rule 15c3-1 (the “Rule”), which specifies, among other requirements, minimum net capital requirements for registered broker-dealers.
The Company computes its net capital under the alternative method as permitted by the Rule, which requires that minimum net capital be the greater of $250,000 or 2% of the aggregate debit items in the reserve formula for those broker-dealers
subject to Rule 15c3-3. The Company is exempt from Rule 15c3-3 pursuant to paragraph (k)(2)(ii) of that rule which exempts all customer transactions cleared through another broker-dealer on a fully disclosed basis. In addition, our assets at the
clearing broker-dealer are treated as allowable assets for net capital purposes as we have in place PAIB agreements pursuant to Rule 15c3-3. 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. The Company had net capital, as defined, of $3,893,083 and $9,093,349, exceeding the required amount of $250,000 by $3,643,083 and $8,843,349 at September 30, 2019
and December 31, 2018, respectively.
|
M.
|
Subsequent Events
|
The Company has evaluated subsequent events for adjustment to or disclosure in the financial statements through January 9, 2020, the date of this report and the Company has not identified any subsequent events, not
otherwise reported in these financial statements or the notes thereto, that required recognition or additional disclosures in the financial statements except for the following:
On October 28, 2019 and November 20, 2019 the Parent made cash contributions of $300,000 and $110,885 to the Company, respectively.
On October 31, 2019 Morgan Group Holding Co., an entity under common control of AC’s majority shareholder, acquired the Company in exchange for 50,000,000 shares of Morgan Group Holding Co. common stock.
In October 2019, the research service agreements between the Company and two wholly-owned subsidiaries of GBL, GAMCO Asset Management, Inc. and Gabelli Funds, LLC, were agreed to be terminated effective January 1,
2020. Additionally, compensation and other related costs are expected to decrease.
19
Exhibit 99.2
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with G.research’s audited financial
statements and related notes beginning on page F-1 of Exhibit 99.1 to this amendment to the Form 8‑K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties.
Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in the Information
Statement filed as Exhibit 99.1 to the Form 8-K, particularly under “Special Note Regarding Forward-Looking Statements”.
Introduction
Through G.research, we act as an underwriter and provide institutional research services. Institutional research services revenues consist of brokerage commissions derived from
securities transactions executed on an agency basis on behalf of mutual funds, Institutional and Private Wealth Management clients as well as underwriting profits, selling concessions and management fees associated with underwriting activities.
Commission revenues vary directly with account trading activity and new account generation.
Operating Results for the Nine Months Ended September 30, 2019 as Compared to the Nine Months Ended September 30, 2018
Revenues
Total revenues were $6.3 million for the nine months ended September 30, 2019, $0.1 million, or 2.3%, lower than total revenues of $6.2 million for the nine months ended
September 30, 2018. Total revenues by revenue component, excluding principal transactions, were as follows (dollars in thousands):
|
Nine Months
Ended September 30,
|
Increase
(decrease)
|
|||||||||||||||
| 2019 | 2018 | $ | % | |||||||||||||
|
Commissions
|
$
|
4,207
|
$
|
3,844
|
$
|
363
|
9.4
|
%
|
||||||||
|
Hard dollar payments
|
343
|
588
|
(245
|
)
|
-41.7
|
%
|
||||||||||
|
4,550
|
4,432
|
$
|
118
|
2.7
|
%
|
|||||||||||
|
Research services
|
1,128
|
1,649
|
(521
|
)
|
-31.6
|
%
|
||||||||||
|
Underwriting fees
|
75
|
19
|
56
|
294.7
|
%
|
|||||||||||
|
Sales manager fees
|
590
|
100
|
490
|
490.0
|
%
|
|||||||||||
|
Total
|
$
|
6,343
|
$
|
6,200
|
$
|
143
|
2.3
|
%
|
||||||||
Commissions and hard dollar payments in the 2019 period of $4.6 million were $0.2 million higher than the prior year amount. Research services were $1.1 million in 2019
representing a decline of $0.5 million or (31.6%) from 2018 due to lower services with affiliates. Sales manager fees increased to $0.6 million during 2019 due to increased affiliate fund secondary trade activity.
Principal Transactions
For the nine months ended September 30, 2019, net losses from principal transactions were $8 thousand compared to a net loss of $13.6 million in the prior year primarily due to
mark-to-market changes in the value of the GAMCO stock and other investments. The 2018 net loss was impacted by investments in mutual fund and closed-end funds advised by Gabelli Funds, LLC and an investment in GBL stock then sold during 2018. The
loss from these investments totaled $15.1 million in 2018, of which a loss of $15.7 million and income of $0.6 million are included in principal transactions and dividends and interest revenues in the Statements of Operations, respectively.
Interest and dividend income decreased $0.5 million to $0.2 million in 2019 from $0.7 million in 2018 primarily due to the GAMCO and other investments held that were disposed of
after September 2018.
Expenses
Our operating expenses were $9.3 million in the 2019 period, a decrease of $2.1 million, or 18.4%, from $11.4 million in the 2018 period. The decrease results substantially from
lower compensation and related costs.
Compensation costs, which includes salaries, bonuses and benefits, was $7.0 million for the nine months ended September 30, 2019, a decrease of $1.8 million from $8.8 million for
the six months ended September 30, 2018.
Income Taxes
We recorded income tax benefits of $0.6 million and $4.4 million for the nine months ended September 30, 2019 and 2018, respectively. The effective tax rate (“ETR”) was 21.8%
and 24.4% for the periods ended September 30, 2019 and 2018, respectively. The difference between G.research’s U.S. statutory tax rate of 21.0% and its effective tax rate is mainly due to state and local taxes.
Net Income
Net loss for the nine months ended September 30, 2019 was $2.1 million versus $13.6 million for the nine months ended September 30, 2018. The decreased loss was substantially the
result of decreased losses from principal transactions as well as reduced compensation and related costs.
2
Liquidity and Capital Resources
Summary cash flow data is as follows (in thousands):
|
Nine Months Ended
September 30,
|
||||||||
|
2019
|
2018
|
|||||||
|
Cash flows provided by (used in):
|
||||||||
|
Operating activities
|
$
|
(2,507
|
)
|
$
|
(3,330
|
)
|
||
|
Investing activities
|
-
|
(60
|
)
|
|||||
|
Financing activities
|
(3,300
|
)
|
-
|
|||||
|
Net decrease in cash and cash equivalents
|
(5,807
|
)
|
(3,390
|
)
|
||||
|
Cash and cash equivalents and restricted cash at beginning of year
|
11,401
|
11,640
|
||||||
|
Cash and cash equivalents and restricted cash at end of year
|
$
|
5,594
|
$
|
8,250
|
||||
Net cash used by operating activities was $2.5 million for the nine months ended September 30, 2019, resulting from a net loss of $2.1 million and other non-cash amounts and net
increase in operating assets of $0.3 million and $(0.7) million, respectively. Net cash used by operating activities was $3.3 million for the nine months ended September 30, 2018, principally from a net loss of $13.6 million and other non-cash
amounts and net decrease in operating assets of $(3.4) million and $13.7 million, respectively.
3
Exhibit 99.3
Summary Historical Financial Data
Prior to the Merger, Morgan Group had nominal assets and no liabilities and did not conduct operations other than to pursue business
combination opportunities. Therefore, we believe that a presentation of the historical results of Morgan Group would not be meaningful. Accordingly, the following table sets forth summary historical financial data of G.research as of and for each
of the nine months ended September 30, 2019 and September 30, 2018 and the fiscal years ended December 31, 2018 and December 31, 2017.
The historical financial statements of G.research do not reflect changes that we expect to experience in the future as a result of
the Merger and the Private Placement. Consequently, the financial information included here may not necessarily reflect our financial position, results of operations and cash flows in the future or what G.research’s financial position, results of
operations and cash flows would have been had G.research been wholly owned by us during the periods presented.
The summary historical financial data presented below should be read in conjunction with G.research’s audited and interim unaudited
historical financial statements and accompanying notes, “—Summary Unaudited Pro Forma Condensed Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Exhibit 99.1
to the Form 8-K.
|
|
Nine Months Ended September 30,
|
Year Ended December 31,
|
||||||||||||||
|
|
2019
|
2018
|
2018
|
2017
|
||||||||||||
|
Income
Statement Data (in thousands)
|
||||||||||||||||
|
Revenues
|
$
|
6,531
|
$
|
(6,634
|
)
|
$
|
(12,085
|
)
|
$
|
15,679
|
||||||
|
Total expenses
|
9,268
|
11,383
|
14,255
|
18,130
|
||||||||||||
|
Loss before income tax benefit
|
(2,737
|
)
|
(18,017
|
)
|
(26,340
|
)
|
(2,451
|
)
|
||||||||
|
Income tax benefit
|
(596
|
)
|
(4,403
|
)
|
(6,103
|
)
|
(786
|
)
|
||||||||
|
Net loss attributable to G.research, LLC’s member
|
$
|
(2,141
|
)
|
$
|
(13,614
|
)
|
$
|
(20,237
|
)
|
$
|
(1,665
|
)
|
||||
|
Balance Sheet Data (in
thousands)
|
September 30,
|
December 31,
|
||||||||||
|
|
2019
|
2018
|
2017
|
|||||||||
|
Total assets
|
$
|
6,224
|
$
|
12,247
|
$
|
117,567
|
||||||
|
Other liabilities
|
1,484
|
2,066
|
1,542
|
|||||||||
|
Total liabilities
|
1,484
|
2,066
|
1,542
|
|||||||||
|
Total member’s capital
|
$
|
4,740
|
$
|
10,181
|
$
|
116,025
|
||||||
Exhibit 99.4
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data presented below has been derived in part from, and should be read in conjunction with “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” contained in Exhibit 99.1 to the Form 8-K and Exhibit 99.2 to this amendment to Form 8-K and G.research’s financial statements and the notes thereto beginning on page F-1 contained in Exhibit 99.1 to the Form 8-K
and in Exhibit 99.1 to this amendment to Form 8-K. Amounts included in the tables related to income statement data and balance sheet data are derived from G.research’s audited financial statements for the years ended December 31, 2018 and 2017 and
from G.research’s unaudited condensed consolidated financial statements for the nine months ended September 30, 2019 and 2018.
|
|
Nine Months Ended September 30,
|
Year Ended December 31,
|
||||||||||||||
|
|
2019
|
2018
|
2018
|
2017
|
||||||||||||
|
Income Statement Data (in thousands)
|
||||||||||||||||
|
Revenues
|
||||||||||||||||
|
Commission income
|
$
|
4,550
|
$
|
4,432
|
$
|
6,155
|
$
|
7,517
|
||||||||
|
Fees earned from affiliated entities
|
1,128
|
1,649
|
2,030
|
4,530
|
||||||||||||
|
Principal transactions
|
(8
|
)
|
(13,576
|
)
|
(22,303
|
)
|
2,896
|
|||||||||
|
Dividends and interest
|
158
|
727
|
1,891
|
422
|
||||||||||||
|
Underwriting fees
|
75
|
19
|
103
|
175
|
||||||||||||
|
Sales manager fees
|
591
|
100
|
16
|
40
|
||||||||||||
|
Other revenues
|
37
|
15
|
23
|
99
|
||||||||||||
|
Total revenues
|
6,531
|
(6,634
|
)
|
(12,085
|
)
|
15,679
|
||||||||||
|
Expenses:
|
||||||||||||||||
|
Compensation and related costs
|
6,955
|
8,769
|
10,864
|
13,872
|
||||||||||||
|
Clearing charges
|
934
|
1,014
|
1,313
|
1,963
|
||||||||||||
|
General and administrative expenses
|
712
|
800
|
1,273
|
1,531
|
||||||||||||
|
Occupancy equipment
|
667
|
800
|
805
|
764
|
||||||||||||
|
Total expenses
|
9,268
|
11,383
|
14,255
|
18,130
|
||||||||||||
|
|
||||||||||||||||
|
Loss before income tax benefit
|
(2,737
|
)
|
(18,017
|
)
|
(26,340
|
)
|
(2,451
|
)
|
||||||||
|
Income tax benefit
|
(596
|
)
|
(4,403
|
)
|
(6,103
|
)
|
(786
|
)
|
||||||||
|
Net Loss attributable to G.research, LLC’s member
|
$
|
(2,141
|
)
|
$
|
(13,614
|
)
|
$
|
(20,237
|
)
|
$
|
(1,665
|
)
|
||||
|
Balance Sheet Data (in thousands)
|
September 30,
2019
|
December 31,
|
||||||||||
|
2018
|
2017
|
|||||||||||
|
Cash, cash equivalents and investments
|
$
|
5,411
|
$
|
11,201
|
$
|
116,102
|
||||||
|
Total assets
|
6,224
|
12,247
|
117,567
|
|||||||||
|
Total liabilities
|
1,484
|
2,066
|
1,542
|
|||||||||
|
Total member’s capital
|
$
|
4,740
|
$
|
10,181
|
$
|
116,025
|
||||||
Exhibit 99.5
Unaudited Pro Forma Condensed Financial Statements
On October 31, 2019, G.research and the Company entered into and closed the definitive Merger Agreement. Under the terms of the Merger Agreement, a total of 50,000,000 shares of
Common Stock were issued to ISH upon the cancellation and conversion of the limited liability company interest in G.research held by ISH immediately prior to the effective time of the Merger.
The Merger has been approved by the board of directors of AC, the parent of ISH, and has received regulatory approval from FINRA.
On October 31, 2019 the Company entered into and closed a private placement pursuant to which it issued 5,150,000 shares of common stock to the Company's President and an employee for
aggregate proceeds of $515,000.
The Company’s unaudited pro forma combined condensed statements of operations for the nine months ended September 30, 2019 and 2018 gives effects to the Merger and the Private
Placement as if they had occurred on January 1, 2018 while the unaudited pro forma combined condensed statement of financial condition as of September 30, 2019 gives effect to the Merger and the Private Placement as if they had occurred on that
date. Collectively, the unaudited pro forma combined condensed statements of operations and unaudited pro forma combined condensed statement of financial condition are referred to as Unaudited Pro Forma Combined Condensed Financial Statements.
G.research’s and the Company’s Unaudited Pro Forma Combined Condensed Financial Statements for the nine months ended September 30, 2019 and 2018 were derived from their historical
financial statements, included in Exhibit 99.1 to this amendment to the Form 8-K or incorporated by reference to Morgan Group's Form 10-Q for the quarter ended September 30, 2019, and should be read in conjunction with those historical condensed
financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Exhibit 99.1 to the Form 8-K and in Exhibits 99.1 and 99.2 to this amendment to Form 8-K. The unaudited pro forma combined
condensed statement of financial condition as of September 30, 2019 was derived from the historical balance sheet of Morgan Group as of September 30, 2019 included in its Form 10-Q for the quarter ended September 30, 2019 and the historical unaudited
statement of financial condition as of September 30, 2019 of G.research included in Exhibit 99.1 to this amendment to the Form 8-K.
The Unaudited Pro Forma Combined Condensed Financial Statements are for illustrative purposes only and do not reflect what G.research’s and the Company’s financial position and
results of operations would have been had the Merger occurred on the dates indicated and are not necessarily indicative of our future financial position and future results of operations. Accordingly, the Unaudited Pro Forma Condensed Financial
Statements include certain pro forma adjustments designed to reflect transactions that would be implemented in relation to the Merger.
The Unaudited Pro Forma Condensed Financial Statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to
differ materially from those anticipated. See “Special Note Regarding Forward-Looking Statements” in the Form 8-K and accompanying information statement.
The unaudited pro forma condensed combined financial information was prepared based on the historical financial statements of G.research and the Company. The Merger transaction was a
transaction among entities under common control and 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 for the entity that receives the
net assets or equity interests; however, such a transaction does not meet the definition of a business combination because there is no change in control over the entity by the parent. Therefore, the accounting and reporting for a transaction between
entities under common control is outside the scope of the business combinations guidance in ASC 805-10, ASC 805-20, and ASC 805-30 and is addressed in ASC 805-50. For transactions between entities under common control, there is no change in basis in
the net assets received and therefore they are recorded at their historical carrying amounts.
Morgan Group Holding Co.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Nine Months Ended September 30, 2019
|
Income Statement Data
|
G.research
|
Morgan
|
Pro Forma
|
|||||||||
|
Revenues
|
||||||||||||
|
Commission
|
$
|
4,549,985
|
$
|
–
|
$
|
4,549,985
|
||||||
|
Fees earned from affiliated entities pursuant to research services agreements
|
1,127,500
|
–
|
1,127,500
|
|||||||||
|
Principal transactions
|
(7,623
|
)
|
–
|
(7,623
|
)
|
|||||||
|
Dividends and interest
|
158,195
|
1,708
|
159,903
|
|||||||||
|
Underwriting fees
|
75,000
|
–
|
75,000
|
|||||||||
|
Sales manager fees
|
590,761
|
590,761
|
||||||||||
|
Other revenues
|
37,214
|
–
|
37,214
|
|||||||||
|
Total revenues
|
6,531,032
|
1,708
|
6,532,740
|
|||||||||
|
Expenses:
|
||||||||||||
|
Compensation and related costs
|
6,955,176
|
–
|
6,955,176
|
|||||||||
|
Clearing charges
|
933,620
|
–
|
933,620
|
|||||||||
|
General and administrative
|
712,338
|
67,819
|
780,157
|
|||||||||
|
Occupancy and equipment
|
666,986
|
–
|
666,986
|
|||||||||
|
Total expenses
|
9,268,120
|
67,819
|
9,335,939
|
|||||||||
|
Loss before income tax benefit
|
(2,737,088
|
)
|
(66,111
|
)
|
(2,803,199
|
)
|
||||||
|
Income tax benefit
|
(596,386
|
)
|
–
|
(596,386
|
)
|
|||||||
|
Net loss
|
$
|
(2,140,702
|
)
|
$
|
(66,111
|
)
|
$
|
(2,206,813
|
)
|
|||
|
Net loss attributable to Morgan Group shareholders per share:
|
||||||||||||
|
Basic
|
$
|
(10,703.51
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
|||
|
Diluted
|
$
|
(10,703.51
|
)
|
$
|
(0.01
|
)
|
$
|
(0.04
|
)
|
|||
|
Weighted average shares outstanding:
|
||||||||||||
|
Basic
|
200
|
4,859,055
|
60,009,055
|
(a)
|
||||||||
|
Diluted
|
200
|
4,859,055
|
60,009,055
|
|||||||||
|
Actual shares outstanding
|
200
|
4,859,055
|
60,009,055
|
|||||||||
(a) Includes the issuance of 50,000,000 and 5,150,000 shares of Common Stock issued pursuant to the Merger and the Private Placement, respectively.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Exhibit 99.1 to the Form 8-K and in Exhibit 99.2 to this amendment to Form 8‑K for a discussion of
the expected impact of anticipated operational changes.
2
Morgan Group Holding Co.
Unaudited Pro Forma Combined Condensed Statement of Financial Condition
As of September 30, 2019
|
G.research
|
Morgan
|
Adjustments
|
Pro Forma
|
|||||||||||||
|
Assets
|
||||||||||||||||
|
Cash and cash equivalents
|
$
|
5,394,380
|
$
|
79,074
|
$
|
515,000
|
(b)
|
$
|
5,988,454
|
|||||||
|
Investment in securities
|
16,725
|
–
|
–
|
16,725
|
||||||||||||
|
Receivables from affiliates
|
136,482
|
–
|
–
|
136,482
|
||||||||||||
|
Commissions receivable
|
124,087
|
–
|
–
|
124,087
|
||||||||||||
|
Deposits with clearing organizations
|
200,000
|
–
|
–
|
200,000
|
||||||||||||
|
Income taxes receivable
|
87,406
|
–
|
–
|
87,406
|
||||||||||||
|
Fixed assets, net of accumulated depreciation and amortization
|
47,494
|
–
|
–
|
47,494
|
||||||||||||
|
Other assets
|
217,863
|
9,875
|
–
|
227,738
|
||||||||||||
|
Total assets
|
$
|
6,224,437
|
88,949
|
$
|
515,000
|
$
|
6,828,386
|
|||||||||
|
Liabilities and stockholder’s equity
|
||||||||||||||||
|
Compensation payable
|
$
|
922,447
|
$
|
–
|
–
|
$
|
922,477
|
|||||||||
|
Due to brokers
|
279,500
|
–
|
–
|
279,500
|
||||||||||||
|
Deferred tax liability
|
6,973
|
–
|
–
|
6,973
|
||||||||||||
|
Securities sold, not yet purchased
|
562
|
–
|
–
|
562
|
||||||||||||
|
Accrued expenses and other liabilities
|
274,479
|
18,193
|
–
|
292,672
|
||||||||||||
|
Total liabilities
|
1,483,961
|
18,193
|
–
|
1,502,154
|
||||||||||||
|
Stockholder’s Equity:
|
||||||||||||||||
|
Preferred stock, $0.01 par value, 1,000,000 shares authorized, none outstanding
|
–
|
–
|
–
|
–
|
||||||||||||
|
Common stock, $0.01 par value, 10,000,000 shares authorized,4,589,055 outstanding
|
–
|
48,591
|
5,515,000
|
(a),(b)
|
5,563,591
|
|||||||||||
|
Common stock, $0.01 par value, 200 shares issued and outstanding
|
2
|
–
|
(2
|
)(a)
|
–
|
|||||||||||
|
Additional paid in capital
|
46,980,331
|
5,937,368
|
(4,999,998
|
)(a)
|
47,917,701
|
|||||||||||
|
Accumulated deficit
|
(42,239,857
|
)
|
(5,915,203
|
)
|
–
|
(48,155,060
|
)
|
|||||||||
|
Total stockholder’s equity
|
4,740,476
|
70,756
|
515,000
|
5,326,232
|
||||||||||||
|
Total liabilities and stockholder’s equity
|
$
|
6,224,437
|
$
|
88,949
|
$
|
515,000
|
$
|
6,828,386
|
||||||||
(a) Includes the issuance of 50,000,000 and 5,150,000 shares of Common Stock issued pursuant to the Merger and the Private Placement, respectively
(b) Issuance of 5,150,000 shares of Common Stock pursuant to the Private Placement at $0.10 per share for total proceeds of $515,000.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Exhibit 99.1 to the Form 8-K and in Exhibit 99.2 to this amendment to Form 8‑K for a discussion of the expected impact
of anticipated operational changes.
3
Morgan Group Holding Co.
Unaudited Pro Forma Combined Condensed Statement of Operations
For the Nine Months Ended September 30, 2018
|
Income Statement Data
|
G.research
|
Morgan
|
Pro Forma
|
|||||||||
|
Revenues
|
||||||||||||
|
Commission income
|
$
|
4,432,059
|
$
|
–
|
$
|
4,432,059
|
||||||
|
Fees earned from affiliated entities pursuant to research services agreements
|
1,649,000
|
–
|
1,649,000
|
|||||||||
|
Principal transactions
|
(13,576,471
|
)
|
–
|
(13,576,471
|
)
|
|||||||
|
Dividends and interest
|
727,424
|
1,317
|
728,741
|
|||||||||
|
Underwriting fees
|
18,832
|
–
|
18,832
|
|||||||||
|
Sale Manager Fees
|
99,715
|
–
|
99,715
|
|||||||||
|
Other revenues
|
15,447
|
–
|
15,447
|
|||||||||
|
Total revenues
|
(6,633,994
|
)
|
1,317
|
(6,632,677
|
)
|
|||||||
|
Expenses:
|
||||||||||||
|
Compensation and related costs
|
8,769,294
|
–
|
8,769,294
|
|||||||||
|
Clearing charges
|
1,013,867
|
–
|
1,013,867
|
|||||||||
|
General and administrative expenses
|
800,450
|
48,381
|
848,831
|
|||||||||
|
Occupancy and equipment rental
|
799,527
|
–
|
799,527
|
|||||||||
|
Total expenses
|
11,383,138
|
48,381
|
11,431,519
|
|||||||||
|
Loss before income tax benefit
|
(18,017,132
|
)
|
(47,064
|
)
|
(18,064,196
|
)
|
||||||
|
Income tax benefit
|
(4,402,697
|
)
|
–
|
(4,402,697
|
)
|
|||||||
|
Net loss
|
$
|
(13,614,435
|
)
|
$
|
(47,064
|
)
|
$
|
(13,661,499
|
)
|
|||
|
Net loss attributable to Morgan Group shareholders per share:
|
||||||||||||
|
Basic
|
$
|
(68,072.18
|
)
|
$
|
(0.01
|
)
|
$
|
(0.23
|
)
|
|||
|
Diluted
|
$
|
(68,072.18
|
)
|
$
|
(0.01
|
)
|
$
|
(0.23
|
)
|
|||
|
Weighted average shares outstanding:
|
||||||||||||
|
Basic
|
200
|
4,430,484
|
59,580,484(a
|
)
|
||||||||
|
Diluted
|
200
|
4,430,484
|
59,580,484
|
|||||||||
|
Actual shares outstanding
|
200
|
4,859,055
|
60,009,055
|
|||||||||
(a) Includes the issuance of 50,000,000 and 5,150,000 shares of Common Stock issued pursuant to the Merger and the Private Placement, respectively.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of the expected impact of anticipated operational changes included in Exhibit 99.1 to the Form 8-K and in Exhibit
99.2 to this amendment to Form 8‑K.
4
Exhibit 99.6
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Member of
G.research, LLC
Rye, New York
Opinion on the Financial Statements
We have audited the accompanying statements of financial condition of G.research, LLC (“the Company”) as of December 31, 2018 and 2017, the related statements of operations, changes in member’s capital, and cash flows for the years then ended,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the
results of its operations and its cash flows for the years then ended 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, CT
February 22, 2019, except for earnings per share as included on the Statement of Operations and discussed in Note I, and subsequent events as discussed in Note M, as to which the date is November 6, 2019
We have served as the Company’s auditor since 2009.
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
|
Year Ended December 31,
|
||||||||
|
2018
|
2017
|
|||||||
|
Revenues
|
||||||||
|
Commissions
|
$
|
6,154,567
|
$
|
7,516,633
|
||||
|
Fees earned from affiliated entities pursuant to research services agreements
|
2,030,000
|
4,530,000
|
||||||
|
Principal transactions
|
(22,302,729
|
)
|
2,896,224
|
|||||
|
Dividends and interest
|
1,891,169
|
422,325
|
||||||
|
Underwriting fees
|
102,931
|
174,578
|
||||||
|
Sales manager fees
|
15,616
|
39,782
|
||||||
|
Other revenues
|
23,406
|
99,441
|
||||||
|
Total revenues
|
(12,085,040
|
)
|
15,678,983
|
|||||
|
Expenses
|
||||||||
|
Compensation and related costs
|
10,864,185
|
13,871,652
|
||||||
|
Clearing charges
|
1,312,578
|
1,963,068
|
||||||
|
General and administrative
|
1,273,023
|
1,531,084
|
||||||
|
Occupancy and equipment
|
805,266
|
763,930
|
||||||
|
Total expenses
|
14,255,052
|
18,129,734
|
||||||
|
Loss before income tax benefit
|
(26,340,092
|
)
|
(2,450,751
|
)
|
||||
|
Income tax benefit
|
(6,102,929
|
)
|
(785,588
|
)
|
||||
|
Net loss attributable to G.research, LLC’s member
|
$
|
(20,237,163
|
)
|
$
|
(1,665,163
|
)
|
||
|
Net loss per share attributable to G.research, LLC’s member
|
||||||||
|
Basic
|
$
|
(101,186
|
)
|
$
|
(8,326
|
)
|
||
|
Diluted
|
$
|
(101,186
|
)
|
$
|
(8,326
|
)
|
||
|
Weighted average shares outstanding:
|
||||||||
|
Basic
|
200
|
200
|
||||||
|
Diluted
|
200
|
200
|
||||||
|
Actual shares outstanding
|
200
|
200
|
||||||
See accompanying notes.
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
|
December 31,
2018
|
December 31,
2017
|
|||||||
|
ASSETS
|
||||||||
|
Cash and cash equivalents
|
$
|
11,201,070
|
$
|
11,440,308
|
||||
|
Securities owned, at fair value
|
–
|
104,661,635
|
||||||
|
Receivables from brokers and clearing organizations
|
194,676
|
361,230
|
||||||
|
Receivables from affiliates
|
19,199
|
13,638
|
||||||
|
Deposits with clearing organizations
|
200,000
|
200,000
|
||||||
|
Income taxes receivable (including deferred tax asset of $273,009 and $438,612, respectively)
|
352,599
|
515,703
|
||||||
|
Fixed assets, net of accumulated depreciation of $19,253 and $22,837, respectively
|
55,839
|
5,197
|
||||||
|
Other assets
|
223,728
|
368,808
|
||||||
|
Total assets
|
$
|
12,247,111
|
$
|
117,566,519
|
||||
|
LIABILITIES AND MEMBER’S CAPITAL
|
||||||||
|
Compensation payable
|
$
|
1,439,526
|
$
|
353,504
|
||||
|
Payable to affiliates
|
218,788
|
761,073
|
||||||
|
Accrued expenses and other liabilities
|
407,619
|
427,342
|
||||||
|
Total liabilities
|
2,065,933
|
1,541,919
|
||||||
|
Commitments and contingencies (Note K)
|
||||||||
|
Member’s capital
|
||||||||
|
Common stock, $.01 par value; 200 shares authorized, issued and outstanding
|
2
|
2
|
||||||
|
Additional paid-in capital
|
50,280,331
|
135,886,590
|
||||||
|
Accumulated deficit
|
(40,099,155
|
)
|
(19,861,992
|
)
|
||||
|
Total member’s capital
|
10,181,178
|
116,024,600
|
||||||
|
Total liabilities and member’s capital
|
$
|
12,247,111
|
$
|
117,566,519
|
||||
See accompanying notes.
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
For the year ended December 31, 2018
|
Common
Stock
|
(Accumulated
Deficit)
|
Additional
Paid-in
Capital
|
Total
|
|||||||||||||
|
Balance at December 31, 2017
|
$
|
2
|
$
|
(19,861,992
|
)
|
$
|
135,886,590
|
$
|
116,024,600
|
|||||||
|
Return of capital
|
–
|
–
|
(85,606,259
|
)
|
(85,606,259
|
)
|
||||||||||
|
Net loss
|
–
|
(20,237,163
|
)
|
–
|
(20,237,163
|
)
|
||||||||||
|
Balance at December 31, 2018
|
$
|
2
|
$
|
(40,099,155
|
)
|
$
|
50,280,331
|
$
|
10,181,178
|
|||||||
See accompanying notes.
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
For the year ended December 31, 2017
|
Common
Stock
|
(Accumulated
Deficit)
|
Additional
Paid-in
Capital
|
Total
|
|||||||||||||
|
Balance at December 31, 2016
|
$
|
2
|
$
|
(18,196,829
|
)
|
$
|
22,766,986
|
$
|
4,570,159
|
|||||||
|
Capital contribution
|
–
|
–
|
113,119,604
|
113,119,604
|
||||||||||||
|
Net loss
|
–
|
(1,665,163
|
)
|
–
|
(1,665,163
|
)
|
||||||||||
|
Balance at December 31, 2017
|
$
|
2
|
$
|
(19,861,992
|
)
|
$
|
135,886,590
|
$
|
116,024,600
|
|||||||
See accompanying notes.
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
|
Year Ended December 31,
|
||||||||
|
2018
|
2017
|
|||||||
|
Operating activities
|
||||||||
|
Net loss
|
$
|
(20,237,163
|
)
|
$
|
(1,665,163
|
)
|
||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation
|
9,613
|
4,914
|
||||||
|
Deferred income tax, net
|
165,604
|
1,287,293
|
||||||
|
Other non-cash amounts included in net loss (see Non-cash financing activity)
|
(4,728,622
|
)
|
–
|
|||||
|
(Increase)/decrease in operating assets:
|
||||||||
|
Securities owned, net
|
23,783,998
|
(2,274,748
|
)
|
|||||
|
Receivables from brokers and clearing organizations
|
166,554
|
(81,951
|
)
|
|||||
|
Receivables from affiliates
|
(5,561
|
)
|
23,653
|
|||||
|
Income taxes receivable
|
(2,500
|
)
|
13,402
|
|||||
|
Other assets
|
145,080
|
(147,843
|
)
|
|||||
|
Increase/(decrease) in operating liabilities:
|
||||||||
|
Payable to affiliates
|
(542,285
|
)
|
301,856
|
|||||
|
Distributions costs payable
|
–
|
(122,161
|
)
|
|||||
|
Compensation payable
|
1,086,022
|
(2,457,119
|
)
|
|||||
|
Accrued expenses and other liabilities
|
(19,723
|
)
|
(113,539
|
)
|
||||
|
Total adjustments
|
20,058,180
|
(3,566,243
|
)
|
|||||
|
Net cash used in operating activities
|
(178,983
|
)
|
(5,231,406
|
)
|
||||
|
Investing activities
|
||||||||
|
Purchases of fixed assets
|
(60,255
|
)
|
(1,061
|
)
|
||||
|
Net cash used in investing activities
|
$
|
(60,255
|
)
|
$
|
(1,061
|
)
|
||
G.research, LLC
(A Wholly-owned Subsidiary of Institutional Services Holdings, LLC)
STATEMENTS OF CASH FLOWS (continued)
|
Year Ended December 31,
|
||||||||
|
2018
|
2017
|
|||||||
|
Financing activities
|
||||||||
|
Capital contribution
|
$
|
–
|
$
|
10,000,000
|
||||
|
Cash provided by financing activities
|
–
|
10,000,000
|
||||||
|
Net increase/(decrease) in cash and cash equivalents and restricted cash
|
(239,238
|
)
|
4,767,533
|
|||||
|
Cash, cash equivalents and restricted cash at beginning of period
|
11,640,308
|
6,872,775
|
||||||
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
11,401,070
|
$
|
11,640,308
|
||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Cash (paid)/received for Income taxes
|
$
|
(4,000
|
)
|
$
|
25
|
|||
|
Cash received from Associated Capital Group, Inc. for Income taxes
|
$
|
1,257,279
|
$
|
2,184,300
|
||||
|
Reconciliation to cash, cash equivalents and restricted cash
|
||||||||
|
Cash and cash equivalents
|
$
|
11,201,070
|
$
|
11,440,308
|
||||
|
Restricted cash: deposits from clearing organizations
|
200,000
|
200,000
|
||||||
|
Cash, cash equivalents and restricted cash
|
$
|
11,401,070
|
$
|
11,640,308
|
||||
Non-cash financing activity:
|
|
-
|
On November 29, 2017, the Parent made capital contributions comprised of investments in securities totaling $101,341,926 and related net deferred tax asset of $1,777,678.
|
|
|
-
|
On December 3, 2018, the Company returned capital totaling $85.6 million to its Parent in the form of securities with a fair value of $80.9 million and a tax receivable settlement of $4.7 million. See other non-cash amounts included
in net loss from net cash used in operating activities.
|
See accompanying notes.
G.research, LLC (the “Company”) is a wholly-owned subsidiary of Institutional Services Holdings, LLC (the “Parent”), which, in turn, is a wholly-owned subsidiary of Associated Capital Group, Inc. (“AC”). Prior to
January 23, 2017, the Company was a wholly-owned subsidiary of Gabelli & Company Investment Advisers, Inc. (“GCIA”), a wholly-owned subsidiary of AC. The Company became a subsidiary of AC effective November 30, 2015, subsequent to a spin-off
transaction from GAMCO Investors, Inc. (“GBL”); it was a majority-owned subsidiary of GBL prior to that date. The Company is a broker-dealer registered with the Securities and Exchange Commission (the “SEC”) and is regulated by the Financial
Industry Regulatory Authority (“FINRA”).
The Company provides institutional investors and investment partnerships with investment research with a particular focus on small-cap and mid-cap companies. The team of sell-side analysts follows industry sectors
on a global basis and performs fundamental security analysis using a Private Market Value (“PMV”) framework. PMV investing is a disciplined, research-driven approach based on security analysis. In this process, the analyst selects stocks whose
intrinsic value, based on the analyst’s estimate of current asset value and future growth and earnings power, is significantly different from the public market value as reflected in the public market. PMV is defined as the price an informed
industrial buyer would be likely to pay to acquire the business. The research focuses on company fundamentals, cash flow statistics, and catalysts that will help realize returns.
The Company generates brokerage commission revenues 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. The Company generates revenue from syndicated underwriting activities. It primarily participates in the offerings of certain closed-end funds advised by Gabelli Funds, LLC, a wholly-owned subsidiary of GBL. The Company
also earns investment income generated from its proprietary trading activities.
The Company acts as an introducing broker, and all securities transactions for the Company and its customers are cleared through and carried by three New York Stock Exchange (“NYSE”) member firms on a fully disclosed
basis. The Company has Proprietary Accounts of Introducing Brokers (“PAIB”) agreements with these firms. Accordingly, open customer transactions are not reflected in the accompanying Statement of Financial Condition. The Company is exposed to
credit losses on these open transactions in the event of nonperformance by its customers, pursuant to conditions of its clearing agreements with its clearing brokers. This exposure is mitigated by the clearing brokers’ policy of monitoring the
collateral and credit of the counterparties until the transaction is completed.
The Company’s principal market is in the United States.
B. Significant Accounting Policies
Cash and Cash Equivalents
The Company’s investment in an affiliated money market mutual fund which is invested solely in U.S. Treasuries.
Securities Owned, at Fair Value
Securities owned, at fair value, including common stocks, closed-end funds and mutual funds, are recorded at fair value with the resulting realized and unrealized gains and losses reflected in principal transactions
in the Statements of Operations. Realized gains and losses from securities transactions are recorded on the identified cost basis. All securities transactions and transaction costs are recorded on a trade date basis. Dividends are recorded on
the ex-dividend date. Interest income and interest expense are accrued as earned or incurred.
Fair Value of Financial Instruments
The carrying amounts of all financial instruments in the Statements of Financial Condition approximate their fair values.
The Company’s financial instruments have been categorized based upon a fair value hierarchy. The valuation process and policies reside with the financial reporting and accounting group. The levels of the fair value
hierarchy and their applicability to the Company are described below:
| • |
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets include cash equivalents, common stocks, closed-end funds and mutual funds.
|
| • |
Level 2 inputs utilize 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 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. As of and during the years ending December 31,
2018 and 2017, there were no Level 2 securities owned.
|
| • |
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. As of and during the years ending December 31, 2018 and 2017, there
were no Level 3 securities owned.
|
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 within 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. Investments are transferred into and out of any level at their beginning period values.
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 transaction. 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 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 consist of an affiliated money market mutual fund, which is invested solely in U.S. Treasuries. Cash equivalents are valued using the mutual fund’s net asset value (“NAV”)
to measure fair value. Accordingly, cash equivalents are categorized in Level 1 of the fair value hierarchy.
Receivables from Affiliates/Payables to Affiliates
Receivables from affiliates consist of receivables from certain affiliates for expenses paid on their behalf. Payables to affiliates are primarily comprised of estimated taxes due to AC. See Notes D and H.
Distribution Costs
Effective August 1, 2011, the mutual fund distributor component of the Company’s operations was transferred to an affiliate, G.distributors, LLC (“G.distributors”), a wholly-owned subsidiary of Distributors Holdings,
Inc. (“DHI”). Prior to the transfer of the mutual fund distributor component of the Company’s operations, distribution costs were accrued as they were incurred. During 2017, the Company reversed distribution costs totaling $122,161 for which
there is no longer an obligation to pay due to the expiry of statute of limitations which is six years. These expenses were initially recorded within distribution costs in the Statements of Operations in previous years, and the reversal of these
costs is netted in general and administrative expenses in the Statements of Operations. As of December 31, 2017, there were no distribution costs payable and the Company will therefore record no further reversals of these costs.
Revenue from Contracts with Customers
See Note C.
Principal Transactions
The Company generates realized and unrealized gains and losses from its proprietary trading activities. Realized gains and losses from securities transactions are recorded on the identified cost basis. All
securities transactions and transaction costs are recorded on a trade date basis.
Dividends and Interest
Dividends are recorded on the ex-dividend date. Interest income and interest expense are accrued as earned or incurred. These amounts are not related to contracts with customers.
Depreciation
Fixed assets are recorded at cost and depreciated using the straight-line method over their estimated useful lives of four to seven years.
Allocated Expenses
The Company is charged or incurs certain overhead expenses that are paid by or paid on behalf of other affiliates and are included in general and administrative and occupancy and equipment expenses in the Statements
of Operations. These overhead expenses are allocated to the Company by its parent and other affiliates or allocated by the Company to other affiliates as the expenses are incurred, based upon methodologies periodically reviewed by the management
of the Company and the affiliates. In addition, GCIA and GBL serve as paymasters for the Company under compensation payment sharing agreements. This includes compensation expense and related payroll taxes and benefits which are allocated to the
Company for professional staff performing duties related entirely to the Company and those compensation expenses and related payroll taxes and benefits which relate to professional staff who serve more than one entity and whose compensation is
therefore allocated to the Company as well as to its affiliates. These compensation expenses are included in compensation and related costs in the Statements of Operations.
Income Taxes
A single member LLC would generally not record an income tax provision as it is disregarded as an entity for federal income tax purposes. However, the Company is a member of a tax sharing agreement
among members of the AC consolidated tax group and records an income tax provision. The Company generally settles either the benefit or expense with AC monthly, but not less than annually. The Company accounts for income taxes under 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 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. See Note H for detail on impact pertaining to the enactment of Tax Cuts and Jobs Act (the
“Act”).
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 more likely than not 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 previously recorded deferred tax asset valuation allowance, which would reduce the provision for income
taxes.
The Company records uncertain tax positions in accordance with Accounting Standards Codification (“ASC”) Topic 740 on the basis of a two-step process: (1) the Company determines whether it is more
likely than not that the tax positions will be sustained based on the technical merits of the position; and (2) 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 percent 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 benefit on the Statements
of Operations. Accrued interest and penalties on uncertain tax positions are included within accrued expenses and other liabilities on the Statements of Financial Condition.
Use of Estimates
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during that reporting period. Actual results
could differ from those estimates.
Recent Accounting Developments
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes
the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance of the ASC. The core principle of ASU 2014-09 requires companies to recognize revenue from the
transfer of goods or services to customers in amounts that reflect the consideration the company expects to receive in exchange for those goods or services. The new standard also requires expanded disclosures about revenue recognition. The new
revenue standard was effective for annual fiscal years and interim periods within those fiscal years beginning after December 15, 2017. The Company has adopted this ASU effective January 1, 2018 with no material impact on its financial statements
other than expanded disclosure.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the
guidance in GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in
equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The new standard
was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. To adopt the amendments, entities were required to make a cumulative-effect adjustment to beginning retained earnings as of the
beginning of the fiscal year in which the guidance is effective. The Company has adopted this ASU effective January 1, 2018 with no material impact on its financial statements.
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 Statement of Financial Condition. The new standard was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018. The Company adopted
this ASU effective January 1, 2019 with no material impact on its financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,
which adds and clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new standard was effective for fiscal years and interim periods within those fiscal years beginning after
December 15, 2017. The Company adopted this ASU effective January 1, 2018 with no material impact on its financial statements.
In October 2016, the FASB issued ASU 2016-16, Intra-Equity Transfers of Assets Other Than Inventory, which removes the prohibition in ASC 740 against the immediate
recognition of the current and deferred income tax effects of intra-entity transfers of assets other than inventory. The ASU is intended to reduce the complexity of U.S. GAAP and diversity in practice related to the tax consequences of certain
types of intra-entity transfers, particularly those involving intellectual property. The ASU is effective for annual periods beginning after December 15, 2017. Early adoption was permitted. The Company has evaluated this guidance and has concluded
that it has no material impact on its financial statements. The Company has adopted this ASU effective January 1, 2018.
In November 2016, the FASB issued ASU 2016-18, Restricted Cash, which clarifies the classification and presentation of restricted cash in the statement of cash flows. The
new standard was effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. The Company adopted this ASU effective January 1, 2018 with no material impact on its 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 this
ASU effective January 1, 2018 with no material impact on its financial statements.
C. Revenue from Contracts with Customers
Effective January 1, 2018, the Company adopted ASU No. 2014-09, Revenue from Contracts with Customers, which provides a five-step approach to be applied to all contracts with
customers and requires expanded disclosures about revenue recognition.
Significant judgments that affect the amounts and timing of revenue recognition:
The Company’s analysis of the timing of revenue recognition of each revenue stream is based on the provisions of each respective contract. Performance obligations could, however, change from time to time if and when
existing contracts are modified or new contracts are entered into. These changes could potentially affect the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the price to
performance obligations. In the case of the revenue streams discussed below, the performance obligation is satisfied either at a point in time or over time. The judgments outlined below, where the determination as to these factors is discussed in
detail, are continually reviewed and monitored by the Company when new contracts or contract modifications occur. Transaction price is in all instances formulaic and not subject to significant (or any) judgment at the current time.
The Company’s assessment of the recognition of these revenues is as follows:
Revenue from contracts with customers includes commissions, fees earned from affiliated entities pursuant to research services agreements, underwriting fees and sales manager fees.
Commissions
Brokerage commissions. Acting as agent, the Company buys and sells securities on behalf of its customers. Commissions are charged on the execution of these securities transactions made on behalf of client
accounts and are based on a rate schedule. The Company recognizes commission revenue when the related securities transactions are executed on trade date. The Company believes that the performance obligation is satisfied on the 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/from the customer. Commissions earned are typically collected from the clearing
brokers utilized by the Company on a daily or weekly basis.
Hard dollar payments. The Company provides research services to unrelated parties, for which direct payment is received. The company 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 the Company 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. Additionally, at that time, a value is assigned to those services and an invoice is presented to
the client for payment.
Commission 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.
Fees earned from affiliated entities pursuant to research services agreements
The Company receives direct payments for research services provided to related parties pursuant to contracts. The contractual fee for the period is fixed and recognized ratably over the contract period, typically a
calendar year, which is considered the period over which the Company satisfies its performance obligation. Payments for contracts with affiliated parties are collected monthly.
Underwriting fees
Underwriting fees. The Company acts as underwriter in an agent capacity. Revenues are earned from fees arising from these offerings and the terms are set forth in
contracts between the underwriters and the issuer. The Company’s underwriting revenue is considered to be conditional revenue because it is subject to reduction to zero once the offsetting syndicate expenses have been quantified by the syndicate
manager (i.e., lead underwriter) and allocated to each underwriter in proportion to their participation in the offering. Revenue recognition is therefore delayed until it is probable that a significant reversal in the amount of revenue recognized
will not occur. That is, it is recognized only when uncertainty associated with the syndicate expenses is subsequently resolved and final settlement of syndicate accounts is effected by the syndicate manager. Payment is typically received from
the syndicate manager within ninety days after settlement date.
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.
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 the Company on a daily or weekly
basis.
Total revenues by type were as follows for the years ended December 31, 2018 and 2017:
|
2018
|
2017
|
|||||||
|
Commissions
|
$
|
5,349,348
|
$
|
6,393,823
|
||||
|
Hard dollar payments
|
805,219
|
1,122,810
|
||||||
|
6,154,567
|
7,516,633
|
|||||||
|
Research services
|
2,030,000
|
4,530,000
|
||||||
|
Underwriting fees
|
102,931
|
174,578
|
||||||
|
Sales manager fees
|
15,616
|
39,782
|
||||||
|
$
|
8,303,114
|
$
|
12,260,993
|
|||||
D. Related Party Transactions
At December 31, 2018 and 2017, the Company had an investment of $11,147,234 and $11,433,188, respectively, in The Gabelli U.S. Treasury Money Market Fund advised by Gabelli Funds, LLC, which is an affiliate of the
Company. The amount is recorded in cash and cash equivalents in the Statements of Financial Condition. Income earned from this investment totaled $155,513 and $97,953 in 2018 and 2017, respectively, and is included in dividends and interest
revenues in the Statements of Operations.
In 2018 and 2017, the Company earned $3,825,998 and $4,499,689, respectively or approximately, 62% and 60%, respectively, of its commission revenue from transactions executed on behalf of funds advised by Gabelli
Funds, LLC and private wealth management clients advised by GAMCO Asset Management Inc., a wholly-owned subsidiary of GBL, respectively.
GAMCO Asset Management Inc. and Gabelli Funds, LLC paid $1,000,000 and $1,030,000, respectively, to the Company pursuant to research services agreements (see Note C) for the year ended December 31, 2018 and
$2,250,000 and $2,280,000, respectively, for the year ended December 31, 2017.
Effective February 1, 2019, the Company amended its existing research service agreements with two wholly-owned subsidiaries of GBL, GAMCO Asset Management, Inc. and Gabelli Funds, LLC, whereby each entity shall pay
$62,500 per month for research services provided. These agreements may be terminated immediately upon notice.
Throughout 2017, the Company participated in three preferred stock offerings of certain GBL closed-end funds. In September 2017, the Company acted as co-underwriter in the Ellsworth Growth and Income Fund Ltd 5.25%
Series A Fixed Rate Preferred Stock and The Gabelli Multimedia Trust 5.25% Series E Cumulative Preferred Stock offerings. During October 2017, the Company acted as co-underwriter in the GAMCO Natural Resources, Gold & Income Trust 5.20% Series
A Cumulative Preferred Stock offering. Underwriting fees and selling concessions, net of expenses, related to the launch of these funds amounted to $172,730 and are separately disclosed in the Statements of Operations.
The Company participated as agent in the secondary offerings of the GAMCO Global Gold, Natural Resources & Income Trust (“GGN”). Pursuant to sales agreements between the parties, the Company earned sales manager
fees related to this offering of $15,616 and $39,782 during 2018 and 2017, respectively. Sales manager fees are separately disclosed in the Statements of Operations.
On February 8, 2017, the Parent made a capital contribution to the Company of $10,000,000 in The Gabelli U.S. Treasury Money Market Fund. The Parent also made non-cash capital contributions to the Company on
November 29, 2017 totaling $103,119,604. These non-cash contributions included certain common stocks, closed-end funds and a mutual fund, of which $91,303,463 were affiliated investments, and a related net deferred tax asset $1,777,678.
The Company had investments totaling $28,689,887 in a mutual fund and closed-end funds advised by Gabelli Funds, LLC and an investment of $65,230,000 in GBL stock as of December 31, 2017. These amounts are included
in Securities owned, at fair value in the Statements of Financial Condition. Income earned from these investments totaled $2,660,442 in 2017, of which $2,386,679 and $273,763 are included in principal transactions and dividends and interest
revenues in the Statements of Operations, respectively. Dividend income earned from these affiliated investments totaled $1,393,132 in 2018 and is included in dividends and interest revenues in the Statements of Operations. The Company also
recorded related investment losses of $21,332,884 during 2018 which are included in principal transactions in the Statements of Operations.
The Company made a non-cash return of capital to the Parent on December 3, 2018 totaling $85,606,259 in the form of securities with a fair value of $80,877,637 and a tax receivable settlement of $4,728,622. The
securities included certain common stocks, closed-end funds and a mutual fund, of which $70,970,347 million were affiliated investments. The Company consequently realized net losses totaling $16,880,403, which are included in the affiliated
investment losses of $21,332,884 noted above.
On December 31, 2018, AC paid $3,436,000 to G.research in exchange for the remaining 200,000 shares of GBL common stock. The Company realized net losses of $2,332,000 in relation to this exchange, which is included
in the affiliated investment losses of $21,332,884 noted above.
The Company pays AC a management fee equal to 20% of the Company’s year-to-date pretax profits before consideration of this fee. In 2018 and 2017, the Company did not pay AC this fee as there were no pretax profits.
The Company also pays to or receives from AC the amount of its portion of the current tax expense or benefit as part of a tax sharing agreement. During 2018, with respect to the tax amount resulting from the
exchange of GBL stock, AC paid the Company $814,310. There was no such payment in 2017. See Note H for details.
In June 2016, AC entered into a sublease agreement with GBL which is subject to annual renewal. AC allocates this expense to the Company based on the percentage of square footage occupied by the Company’s employees
(including pro rata allocation of common space). Pursuant to the sublease, AC and its subsidiaries shall pay a monthly fixed lease amount for the twelve month contractual period. For the years ended December 31, 2018 and 2017, the Company paid
$314,691 and $269,448, respectively, under the sublease agreement, respectively. These amounts are included within occupancy and equipment expenses on the Statements of Operations.
Commencing April 1, 2019, AC extended its existing lease agreement with GBL on a month-to-month basis.
E. Securities Owned, at Fair Value
Securities owned are recorded at fair value and consist of the following at December 31, 2017:
|
Cost
|
Fair Value
|
|||||||
|
Common stocks
|
$
|
73,553,534
|
$
|
75,971,749
|
||||
|
Closed-end funds
|
26,230,698
|
26,929,307
|
||||||
|
Mutual funds
|
1,854,510
|
1,760,579
|
||||||
|
$
|
101,638,742
|
$
|
104,661,635
|
|||||
There were no securities owned at December 31, 2018.
F. Fair Value
The following tables present information about the Company’s assets and liabilities by major category measured at fair value on a recurring basis as of December 31, 2018 and 2017 and indicates the fair value
hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Assets Measured at Fair Value on a Recurring Basis as of December 31, 2018:
|
December 31, 2018
|
||||||||||||||||
|
Assets
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
Significant Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total
|
||||||||||||
|
Cash equivalents
|
$
|
11,147,234
|
$
|
–
|
$
|
–
|
$
|
11,147,234
|
||||||||
|
Total assets at fair value
|
$
|
11,147,234
|
$
|
–
|
$
|
–
|
$
|
11,147,234
|
||||||||
There were no transfers between any Levels during the year ended December 31, 2018.
Assets Measured at Fair Value on a Recurring Basis as of December 31, 2017:
|
December 31, 2017
|
||||||||||||||||
|
Assets
|
Quoted Prices in Active
Markets for Identical
Assets (Level 1)
|
Significant Other
Observable
Inputs (Level 2)
|
Significant
Unobservable
Inputs (Level 3)
|
Total
|
||||||||||||
|
Cash equivalents
|
$
|
11,433,188
|
$
|
–
|
$
|
–
|
$
|
11,433,188
|
||||||||
|
Investments in securities (including GBL stock):
|
||||||||||||||||
|
Common stocks
|
75,971,749
|
–
|
–
|
75,971,749
|
||||||||||||
|
Closed-end funds
|
26,929,307
|
–
|
–
|
26,929,307
|
||||||||||||
|
Mutual funds
|
1,760,579
|
–
|
–
|
1,760,579
|
||||||||||||
|
Total investments in securities
|
104,661,635
|
–
|
–
|
104,661,635
|
||||||||||||
|
Total assets at fair value
|
$
|
116,094,823
|
$
|
–
|
$
|
–
|
$
|
116,094,823
|
||||||||
There were no transfers between any Levels during the year ended December 31, 2017.
G. Retirement Plan
The Company participates in GBL’s incentive savings plan (the “Plan”), covering substantially all employees. Company contributions to the Plan are determined annually by management of the Company and AC’s Board of
Directors but may not exceed the amount permitted as a deductible expense under the Internal Revenue Code. Amounts expensed for allocated contributions to this Plan amounted to approximately $6,919 and $28,872 in 2018 and 2017, respectively, and
are recorded as compensation and related costs in the Statements of Operations.
H. Income Taxes
The Company’s operations are included in the consolidated U.S. federal and certain state and local income tax returns of AC. The Company’s federal and certain state and local income taxes are calculated as if the
Company filed on a separate return basis, and the amount of current tax or benefit is either remitted to or received from AC using a benefits for loss approach such that net operating loss (or other tax attribute) is characterized as realized by
the Company when those tax attributes are utilized in the consolidated tax return of AC. This is the case even if the Company would not otherwise have realized those tax attributes. As such, the Company has concluded that it is more likely than
not that the net deferred tax assets of $273,009 and $438,612 are realizable as of December 31, 2018 and 2017, respectively, and no valuation allowance is required.
During 2018, for certain states in which the Company files separate returns, the Company recorded deferred tax assets of approximately $79,000 relating to net operating losses. The Company concluded that it is not
more likely than not that the benefit from these separate state net operating loss carryforwards will be realized and has provided a valuation allowance for the full amount of the related deferred tax assets.
Income tax benefit for 2018 and 2017 consisted of:
|
2018
|
2017
|
|||||||
|
Federal:
|
||||||||
|
Current
|
$
|
(4,689,749
|
)
|
$
|
(1,777,307
|
)
|
||
|
Deferred
|
(754,514
|
)
|
1,172,347
|
|||||
|
State and local:
|
||||||||
|
Current
|
(456,626
|
)
|
(295,574
|
)
|
||||
|
Deferred
|
(202,040
|
)
|
114,946
|
|||||
|
Total
|
$
|
(6,102,929
|
)
|
$
|
(785,588
|
)
|
||
The Company has revalued its net deferred tax assets and other tax balances in December 2017, the enactment date of the Act. The impact of these adjustments was a net tax benefit of $88,805 which is
included in the income tax benefit on the Statements of Operations.
A reconciliation of the federal statutory rate to the effective tax rate for the years ended December 31, 2018 and 2017 is set forth below:
|
2018
|
2017
|
|||||||
|
Statutory Federal income taxrate
|
21.0
|
%
|
34.0
|
%
|
||||
|
State income tax, net of Federal benefit
|
2.0
|
6.5
|
||||||
|
Dividends received deduction
|
0.3
|
0.3
|
||||||
|
Revaluation of net deferred tax liabilities due to tax reform
|
–
|
(8.4
|
)
|
|||||
|
Other
|
(0.1
|
)
|
(0.3
|
)
|
||||
|
Effective income taxrate
|
23.2
|
%
|
32.1
|
%
|
||||
As of December 31, 2018, the Company’s gross unrecognized tax benefits which relate to uncertain tax positions were $5,688 of which $4,494, if recognized, would affect the Company’s effective tax rate. As of December
31, 2017, the Company’s gross unrecognized tax benefits which relate to uncertain tax positions were $10,923 of which $8,629, if recognized, would affect the Company’s effective tax rate. The Company continues to recognize both interest and
penalties with respect to unrecognized tax benefits as income tax expense. The Company had accrued a liability of $3,071 and $6,241 for interest and penalties as of December 31, 2018 and 2017, respectively. These amounts are included in accrued
expenses and other liabilities on the Statements of Financial Condition.
Significant components of our deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows:
|
2018
|
2017
|
|||||||
|
Deferred tax assets:
|
||||||||
|
Securities owned
|
$
|
–
|
$
|
448,660
|
||||
|
Compensation
|
282,423
|
–
|
||||||
|
Fixed assets
|
–
|
3,444
|
||||||
|
282,423
|
452,104
|
|||||||
|
Deferred tax liabilities:
|
||||||||
|
Fixed assets
|
(9,414
|
)
|
–
|
|||||
|
Other
|
–
|
(13,492
|
)
|
|||||
|
(9,414
|
)
|
(13,492
|
)
|
|||||
|
Net deferred tax assets
|
$
|
273,009
|
$
|
438,612
|
||||
As of December 31, 2018 and 2017, management has not identified any potential subsequent events that could have a significant impact on unrecognized tax benefits within the next twelve months. The Company remains
subject to income tax examination by the IRS for years 2015 and 2017 and state examinations for years after 2011.
I. Earnings per Share
Basic earnings per share is computed by dividing net income/(loss) attributable to our member by the weighted average number of shares outstanding during the period.
There were no dilutive shares outstanding during the periods.
The computations of basic and diluted net loss per share are as follows (in thousands, except per share data):
|
For the Years Ending December 31,
|
||||||||
|
2018
|
2017
|
|||||||
|
Basic:
|
||||||||
|
Net loss attributable to G.research, LLC’s member
|
$
|
(20,237,163
|
)
|
$
|
(1,665,163
|
)
|
||
|
Weighted average shares outstanding
|
200
|
200
|
||||||
|
Basic net loss attributable to G.research, LLC’s member per share
|
$
|
(101,186
|
)
|
$
|
(8,326
|
)
|
||
|
Diluted:
|
||||||||
|
Net loss attributable to G.research, LLC’s member
|
$
|
(20,237,163
|
)
|
$
|
(1,665,163
|
)
|
||
|
Weighted average shares outstanding
|
200
|
200
|
||||||
|
Total
|
200
|
200
|
||||||
|
Diluted net loss attributable to G.research, LLC’s member per share
|
$
|
(101,186
|
)
|
$
|
(8,326
|
)
|
||
J. Member’s Capital
AC made capital contributions to the Parent, which in turn made capital contributions to the Company on February 8, 2017 and November 29, 2017 totaling $10,000,000 and $103,119,604, respectively. See Note D for
detail.
The Company returned capital to the Parent on December 3, 2018 totaling $85,606,259 in the form of securities with a fair value of $80,877,637 and a tax receivable settlement of $4,728,622. See Note D for detail.
K. Guarantees, Contingencies, and Commitments
The Company has agreed to indemnify its clearing brokers for losses they may sustain from the customer accounts that trade on margin introduced by the Company. At December 31, 2018 and 2017, the total amount of
customer balances subject to indemnification (i.e., unsecured margin debits) was immaterial. The Company also has entered into arrangements with various other third parties, many of which provide for indemnification of the third parties against
losses, costs, claims and liabilities arising from the performance of the Company’s obligations under the agreements. The Company has had no claims or payments pursuant to these or prior agreements, and management believes the likelihood of a claim
being made is remote, and therefore, an accrual has not been made in the financial statements.
From time to time, the Company is named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also
subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. The Company cannot predict the ultimate
outcome of such matters. The financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exists losses which may be reasonably possible
and, if material, makes the necessary disclosures. Such amounts, both those that are probable and those that are reasonably possible, are not considered material to the Company’s financial condition, operations or cash flows.
L. Net Capital Requirements
As a registered broker-dealer, the Company is subject to the SEC Uniform Net Capital Rule 15c3-1 (the “Rule”), which specifies, among other requirements, minimum net capital requirements for registered
broker-dealers. The Company computes its net capital under the alternative method as permitted by the Rule, which requires that minimum net capital be the greater of $250,000 or 2% of the aggregate debit items in the reserve formula for those
broker-dealers subject to Rule 15c3-3. The Company is exempt from Rule 15c3-3 pursuant to paragraph (k)(2)(ii) of that rule which exempts all customer transactions cleared through another broker-dealer on a fully disclosed basis. In addition, our
assets at the clearing broker-dealer are treated as allowable assets for net capital purposes as we have in place PAIB agreements pursuant to Rule 15c3-3. 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. The Company had net capital, as defined, of $9,093,349 and $41,829,929, exceeding the required amount of $250,000 by $8,843,349 and
$41,571,929 at December 31, 2018 and 2017, respectively.
M. Subsequent Events
The Company has evaluated subsequent events for adjustment to or disclosure in the financial statements through November 6, 2019, the date of this report, and the Company has not identified any subsequent events, not
otherwise reported in these financial statements or the notes thereto, that required recognition or additional disclosures in the financial statements except for the following:
On June 25, 2019, the Company made a distribution of $3,300,000 to the Parent.
On October 28, 2019 the Parent made a cash contribution of $300,000 to the Company.
On October 31, 2019 Morgan Group Holding Co., an entity under common control with AC’s majority shareholder, acquired the Company in exchange for 50,000,000 shares of Morgan Group Holding Co. stock.
In October 2019, the research service agreements between the Company and two wholly-owned subsidiaries of GBL, GAMCO Asset Management, Inc. and Gabelli Funds, LLC, were agreed to be terminated effective January 1,
2020. Additionally, compensation and other related costs are expected to decrease.
F-20