SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 001-37387

ASSOCIATED CAPITAL GROUP, INC.

(Exact name of Registrant as specified in its charter)

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

191 Mason Street, Greenwich, CT		06830

(Address of principle executive offices)		(Zip Code)

(203) 629-9595

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

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

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

Large accelerated filer ☐	Accelerated filer ☒

Non-accelerated filer ☐	Smaller reporting company ☒	Emerging growth company ☒

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

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

Indicate the number of shares outstanding of each of the Registrant’s classes of Common Stock, as of the latest practical date.

Class		Outstanding at October 30, 2020
Class A Common Stock, .001 par value		3,342,228
Class B Common Stock, .001 par value		18,962,918

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION	Page

Item 1.	Unaudited Condensed Consolidated Financial Statements	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38

Item 4.	Controls and Procedures	38

PART II.	OTHER INFORMATION *

Item 1.	Legal Proceedings	39

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 6.	Exhibits	40

	Signature	40

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

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

UNAUDITED

(Dollars in thousands, except per share data)

	September 30, 2020			December 31, 2019
ASSETS
Cash and cash equivalents (a)	$	47,331		$	342,001
Investments in government securities (a)		330,942			29,037
Investments in equity securities (Including GBL stock with a value of $34.0 million and $57.2 million, respectively) (a)		213,586			271,320
Investments in affiliated registered investment companies		146,391			159,311
Investments in partnerships (a)		127,965			145,372
Receivable from brokers (a)		21,065			23,141
Investment advisory fees receivable		1,160			9,582
Receivable from affiliates		588			4,369
Deferred tax assets and taxes receivable (including taxes receivable of $2,132 in 2020 and $0 for 2019)		10,059			1,820
Goodwill		3,519			3,519
Other assets (a)		23,003			13,297
Investments in government securities held in trust		175,002			-
Assets of discontinued operations (including receivable from affiliates of $31)		-			8,137
Total assets	$	1,100,611		$	1,010,906

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Payable to brokers	$	8,443		$	14,889
Income taxes payable		897			3,622
Compensation payable		7,445			19,536
Securities sold, not yet purchased (a)		12,827			16,419
Payable to affiliates		455			483
Accrued expenses and other liabilities (a)		6,088			6,037
Deferred underwriting fee payable		6,125			-
Liabilities of discontinued operations (including payable to affiliates $986)		-			2,100
Total liabilities		42,280			63,086

Redeemable noncontrolling interests (a)		204,164			50,385

Equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; none issued and outstanding		-			-
Class A Common Stock, $0.001 par value; 100,000,000 shares authorized; 6,629,254 and 6,569,254 shares issued, respectively; 3,369,896 and 3,452,381 shares outstanding, respectively		6			6
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 19,196,792 shares issued; 18,962,918 and 19,022,918 shares outstanding, respectively		19			19
Additional paid-in capital		999,047			1,003,450
Accumulated deficit		(35,241	)		(701	)
Treasury stock, at cost (3,259,358 and 3,116,873 shares outstanding, respectively)		(111,736	)		(106,342	)
Total Associated Capital Group, Inc. equity		852,095			896,432
Noncontrolling interests (from discontinued operations in 2019)		2,072			1,003
Total equity		854,167			897,435
Total liabilities and equity	$	1,100,611		$	1,010,906

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

See accompanying notes.

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED

(Dollars in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2020			2019			2020			2019
Revenues
Investment advisory and incentive fees	$	1,865		$	2,753		$	6,424		$	8,199
Other		80			1			550			12
Total revenues		1,945			2,754			6,974			8,211
Expenses
Compensation		3,026			3,071			8,405			10,287
Other operating expenses		2,471			2,276			6,422			9,072
Total expenses		5,497			5,347			14,827			19,359

Operating loss		(3,552	)		(2,593	)		(7,853	)		(11,148	)
Other income (expense)
Net gain/(loss) from investments		15,603			7,613			(34,770	)		42,358
Interest and dividend income		1,218			2,581			4,675			9,541
Interest expense		(32	)		(70	)		(146	)		(148	)
Shareholder-designated contribution		(2,782	)		-			(3,007	)		-
Total other income (expense), net		14,007			10,124			(33,248	)		51,751
Income/(loss) before income taxes		10,455			7,531			(41,101	)		40,603
Income tax expense/(benefit)		3,564			1,638			(8,858	)		8,064
Income/(loss) from continuing operations before noncontrolling interests		6,891			5,893			(32,243	)		32,539
Income/(loss) attributable to noncontrolling interests		937			(359	)		(572	)		2,232
Income/(loss) from continuing operations		5,954			6,252			(31,671	)		30,307
Income/(loss) from discontinued operations, net of taxes and noncontrolling interests		(139	)		(301	)		(632	)		(2,141	)
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders	$	5,815		$	5,951		$	(32,303	)	$	28,166

Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders per share:
Basic- Continuing operations	$	0.27		$	0.27		$	(1.41	)	$	1.34
Basic - Discontinued operations		(0.01	)		(0.01	)		(0.03	)		(0.09	)
Basis - Total	$	0.26		$	0.26		$	(1.44	)	$	1.25

Diluted- Continuing operations	$	0.27		$	0.27		$	(1.41	)	$	1.34
Diluted - Discontinued operations		(0.01	)		(0.01	)		(0.03	)		(0.09	)
Diluted - Total	$	0.26		$	0.26		$	(1.44	)	$	1.25

Weighted average shares outstanding:
Basic		22,354			22,514			22,391			22,550
Diluted		22,354			22,514			22,391			22,550

Actual shares outstanding - end of period		22,333			22,496			22,333			22,496

Dividends declared:	$	0.10		$	0.10		$	0.10		$	0.10

See accompanying notes.

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

(Dollars in thousands)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2020		2019			2020			2019

Net income/(loss)	$	5,815	$	5,951		$	(32,303	)	$	28,166
Less: Comprehensive income/(loss) attributable to noncontrolling interests		937		(359	)		(572	)		2,232

Comprehensive income/(loss) attributable to Associated Capital Group, Inc.	$	4,878	$	6,310		$	(31,731	)	$	25,934

See accompanying notes.

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

UNAUDITED

(Dollars in thousands, except per share data)

For the three months ended March 31, 2020, June 30, 2020 and September 30, 2020

	Associated Capital Group, Inc. shareholders
	Common Stock		Accumulated Deficit			Additional Paid-in Capital			Treasury Stock			Noncontrolling Interest			Total			Redeemable Noncontrolling Interests
Balance at December 31, 2019	$	25	$	(701	)	$	1,003,450		$	(106,342	)	$	1,003		$	897,435		$	50,385
Redemptions of noncontrolling interests		-		-			-			-			-			-			(531	)
Net loss		-		(73,355	)		-			-			(52	)		(73,407	)		(3,945	)
Purchase of treasury stock		-		-			-			(3,225	)		-			(3,225	)		-
Balance at March 31, 2020	$	25	$	(74,056	)	$	1,003,450		$	(109,567	)	$	951		$	820,803		$	45,909
Redemptions of noncontrolling interests		-		-			-			-			-			-			(1,167	)
Net income/(loss)		-		35,237			-			-			(48	)		35,189			2,436
Dividends declared ($0.10 per share)		-		(2,237	)		-			-			-			(2,237	)		-
Purchase of treasury stock		-		-			-			(1,068	)		-			(1,068	)		-
Balance at June 30, 2020	$	25	$	(41,056	)	$	1,003,450		$	(110,635	)	$	903		$	852,687		$	47,178
Contributions from redeemable noncontrolling interests ⁽¹⁾		-		-			-			-			-			-			156,049
Spin-off of MGHL		-		-			(4,403	)		-			(903	)		(5,306	)		-
PMV Sponsor members' interest		-		-			-			-			2,072			2,072			-
Net income		-		5,815			-			-			-			5,815			937
Purchase of treasury stock		-		-			-			(1,101	)		-			(1,101	)		-
Balance at September 30, 2020	$	25	$	(35,241	)	$	999,047		$	(111,736	)	$	2,072		$	854,167		$	204,164

(1) Net of deferred underwriting fees

See accompanying notes.

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

UNAUDITED

(Dollars in thousands, except per share data)

For the three months ended March 31, 2019, June 30, 2019 and September 30, 2019

	Associated Capital Group, Inc. shareholders
	Common Stock		Accumulated Deficit			Additional Paid-in Capital			Treasury Stock			Total			Redeemable Noncontrolling Interests
Balance at December 31, 2018	$	25	$	(39,889	)	$	1,008,319		$	(102,207	)	$	866,248		$	49,800
Redemptions of noncontrolling interests		-		-			-			-			-			(526	)
Net income		-		23,147			-			-			23,147			1,507
Purchase of treasury stock		-		-			-			(391	)		(391	)		-
Balance at March 31, 2019	$	25	$	(16,742	)	$	1,008,319		$	(102,598	)	$	889,004		$	50,781
Redemptions of noncontrolling interests		-		-			-			-			-			(2,197	)
Net income		-		(932	)		-			-			(932	)		1,084
Dividends declared ($0.10 per share)		-		-			(2,254	)		-			(2,254	)		-
Purchase of treasury stock		-		-			-			(1,630	)		(1,630	)		-
Balance at June 30, 2019	$	25	$	(17,674	)	$	1,006,065		$	(104,228	)	$	884,188		$	49,668
Redemptions of noncontrolling interests		-		-			-			-			-			390
Net income		-		5,951			-			-			5,951			(359	)
Purchase of treasury stock		-		-			-			(1,342	)		(1,342	)		-
Balance at September 30, 2019	$	25	$	(11,723	)	$	1,006,065		$	(105,570	)	$	888,797		$	49,699

See accompanying notes.

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

(Dollars in thousands)

	Nine Months Ended September 30,
	2020			2019
Operating activities
Net income (loss)	$	(32,875	)	$	30,398
Loss from discontinued operations, net of taxes		632			2,141
Loss from continuing operations		(32,243	)		32,539
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
from continuing activities
Equity in net (gains) losses from partnerships		(4,316	)		(5,029	)
Deferred income taxes		(5,923	)		4,739
Depreciation and amortization		40			10
Donated securities		441			1,875
Unrealized (gains) losses on securities		37,511			(18,450	)
Realized gains (losses) on sales of securities		1,017			(220	)
(Increase) decrease in assets:
Investments in trading securities		(283,070	)		(54,341	)
Investments in partnerships:
Contributions to partnerships		(4,229	)		(22,671	)
Distributions from partnerships		24,841			2,772
Receivable from affiliates		3,600			688
Receivable from brokers		2,077			856
Investment advisory fees receivable		8,423			3,107
Income taxes receivable		(2,207	)		8
Other assets		1,260			8,604
Increase (decrease) in liabilities:
Payable to brokers		(6,446	)		4,766
Income taxes payable		(2,833	)		311
Payable to affiliates		122			176
Compensation payable		(12,092	)		723
Accrued expenses and other liabilities		1,824			(2,784	)
Total adjustments		(239,960	)		(74,860	)
Net cash used in operating activities	$	(272,203	)	$	(42,321	)

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED (continued)

(Dollars in thousands)

	Nine Months Ended September 30,
	2020			2019
Investing activities
Purchases of securities	$	(434	)	$	(1,366	)
Proceeds from sales of securities		8,406			2,699
Return of capital on securities		1,320			1,326
Purchase of building		(11,084	)		(6,250	)
Investment of cash in Trust Account		(175,000	)		-
Net cash used in investing activities		(176,792	)		(3,591	)

Financing activities
Contributions from redeemable noncontrolling interests		162,020			-
Redemptions of redeemable noncontrolling interests		-			(2,333	)
Dividends paid		(4,486	)		(4,513	)
Purchase of treasury stock		(5,395	)		(3,363	)
Contributions from nonredeemable noncontrolling interests		2,072			-
Proceeds from promissory note from Executive Chairman		-			2,124
Repayment of promissory note to Executive Chairman		-			(2,126	)
Net cash used in financing activities		154,211			(10,211	)
Cash flows of discontinued operations
Net cash provided by (used in) operating activities		114			(2,507	)
Net decrease in cash and cash equivalents		(294,670	)		(58,630	)
Cash and cash equivalents at beginning of period		342,001			398,363
Cash and cash equivalents at end of period	$	47,331		$	339,733

Supplemental disclosures of cash flow information:
Cash paid for interest	$	114		$	79
Cash paid for taxes	$	2,000		$	2,200

Non-cash activity:
- On September 21, 2020 a deferred underwriting fee of $6.1 million was recorded with an offset to redeemable noncontrolling interests.

See accompanying notes.

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2020

(Unaudited)

A. Basis of Presentation and Significant Accounting Policies

Unless we have indicated otherwise, or the context otherwise requires, references in this report to “Associated Capital Group, Inc.,” “AC Group,” “the Company,” “AC,” “we,” “us” and “our” or similar terms are to Associated Capital Group, Inc., its predecessors and its subsidiaries.

Organization

We are a Delaware corporation that provides alternative investment management services. In addition, we derive investment income/(loss) from proprietary trading of cash and other assets awaiting deployment in our operating business.

We conduct our investment management activities through our wholly-owned subsidiary Gabelli & Company Investment Advisers, Inc. (“GCIA” f/k/a Gabelli Securities, Inc.). GCIA and its wholly-owned subsidiary, Gabelli & Partners, LLC (“Gabelli & Partners”), collectively serve as general partners or investment managers to investment funds including limited partnerships and offshore companies (collectively, “Investment Partnerships”), and separate accounts. We primarily manage assets in equity event-driven value strategies, across a range of risk and event arbitrage portfolios. The business earns management and incentive fees from its advisory activities. Management fees are largely based on a percentage of assets under management. Incentive fees are based on the percentage of the investment returns of certain clients’ portfolios. GCIA is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended.

We may make direct investments in operating businesses using a variety of techniques and structures. We added Gabelli Special Purpose Acquisition Vehicles (“SPAC”) in 2018. Gabelli Value for Italy (VALU), our initial vehicle launched and listed on the Italian Borsa, approached its second anniversary at the apex of the pandemic in Italy. In light of this challenge, the board voted to commence liquidation which was completed on July 8, 2020. The VALU effort successfully canvassed private company opportunities in Italy, with deal flow expanding throughout Europe. We believe the platform is in place to further expand our direct investment efforts across the European continent.

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

PMV Consumer Acquisition Corp.

On September 22, 2020, Associated Capital announced the $175 million initial public offering of its special purpose acquisition corporation, PMV Consumer Acquisition Corp. (NYSE:PMVC).

PMV Consumer Acquisition Corp. (“PMV”) was created to pursue an initial business combination following the consumer globally with companies having an enterprise valuation in the range of $200 million to $3.5 billion. PMV Consumer Acquisition Holding Company, LLC (“Sponsor”) was created to assist PMV in sourcing, analyzing and consummating acquisition opportunities for that initial business combination.

The Sponsor and PMV have been consolidated in the financial statements of AC as of September 30, 2020 because AC has a controlling financial interest in these entities. This resulted in total assets of $1.1 billion at September 30, 2020, inclusive of $177.7 million of assets, $6.6 million of liabilities and $155.0 million of redeemable noncontrolling interests and $2.1 million of noncontrolling interests relating to PMV and the Sponsor. In addition to PMV and the Sponsor, there are several other entities that are consolidated within the financial statements. The details to the impact of consolidating these entities on the condensed consolidated financial statements can be seen in Footnote D. Investment Partnerships and Other Entities

See footnote D for a further discussion of PMV Consumer Acquisition Corp. as well as their registration statement and Form 10Q as of September 30, 2020 both located on the U.S. Securities and Exchange Commission website https://www.sec.gov/edgar/searchedgar/companysearch.html under the symbol PMVC.

Index

Associated Capital Group, Inc. Spin-Off

On November 30, 2015, GAMCO Investors, Inc. (“GAMCO” or “GBL”) distributed all the outstanding shares of each class of AC common stock on a pro rata one-for one basis to the holders of each class of GAMCO’s common stock (the “Spin-off”).

Morgan Group Holding Co. Merger and Spin-Off

On October 31, 2019, the Company closed on a transaction whereby Morgan Group Holding Co., (“Morgan Group”) a company that trades in the over the counter market under the symbol “MGHL” and is under common control of AC’s majority shareholder, acquired all of the Company’s interest in G.research for 50,000,000 shares of Morgan Group common stock. In addition, immediately prior to the closing, 5.15 million Morgan Group shares were issued under a private placement for $515,000. Subsequent to the transaction and private placement, the Company had an 83.3% ownership interest in Morgan Group and consolidated the entity, which includes G.research. The transaction has been accounted for pursuant to Accounting Standards Codification (“ASC”) 805-50, Transactions Between Entities Under Common Control. A common-control transaction is similar to a business combination, however, does not meet the definition of a business combination because there is no change in control over the entity by the parent.

On March 16, 2020, the Company announced that its Board of Directors approved the spin-off of Morgan Group to AC’s shareholders in which AC would distribute to its shareholders on a pro rata basis the 50,000,000 shares of Morgan Group that it owns upon close of the spin-off.

On May 5, 2020, the Morgan Group board approved a reverse stock split of the issued and outstanding shares of their common stock, par value $0.01 per share, in a ratio of 1‑for‑100 that was effective on June 10, 2020.

On August 5, 2020 the distribution of Morgan Group shares was completed to shareholders of record as of July 30, 2020. Based on the distribution ratio, on the distribution date, AC stockholders of record as of 5:00 pm, New York City time, on the record date, received approximately. 0.022356 shares of Morgan Group common stock for each share of AC common stock they held on the record date.

Associated Capital held 83.3% of the outstanding shares of Morgan Group through August 5, 2020.

The historical financial results of Morgan Group have been reflected in the Company’s consolidated financial statements as discontinued operations in both the condensed consolidated statements of income and financial condition for all periods presented through August 5, 2020.

Index

Basis of Presentation

The unaudited interim condensed consolidated financial statements of AC Group included herein have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP in the United States for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position, results of operations and cash flows of the Company for the interim periods presented and are not necessarily indicative of a full year’s results.

The interim condensed consolidated financial statements include the accounts of AC Group and its subsidiaries. All material intercompany transactions and balances have been eliminated.

These interim condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

The Company separately presented investments in debt securities and investments in equity securities in the condensed consolidated statement of financial condition as of September 30, 2020. A reclassification was made to conform prior period information as of December 31, 2019 to the current period presentation. This change has also been made to the corresponding notes to condensed consolidated financial statements.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported on the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Investments in government securities held in trust account

At September 30, 2020, government securities of our consolidated SPAC, PMV, are held in a trust account and consist of U.S. Treasury Bills accounted for as held-to-maturity in accordance with ASC 320 “Investments – Debt and Equity Securities.” Held-to-maturity securities are those securities which the Company has the ability and intent to hold until maturity. Held-to-maturity treasury securities are recorded at amortized cost on the accompanying condensed consolidated balance sheet and adjusted for the amortization or accretion of premiums or discounts.

Index

Recent Accounting Developments

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which amends the guidance in GAAP for the accounting for leases. ASU 2016-02 requires a lessee to recognize assets and liabilities arising from most operating leases in the consolidated statement of financial position. The Company adopted this ASU effective January 1, 2019 with no material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Accounting for Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), which requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Currently, U.S. GAAP requires an “incurred loss” methodology that delays recognition until it is probable a loss has been incurred. Under ASU 2016-13, the allowance for credit losses must be deducted from the amortized cost of the financial asset to present the net amount expected to be collected. The Statement of Income will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. In November 2019, the FASB issued ASU 2019-10, which deferred the effective date of this guidance for smaller reporting companies for three years. This guidance is effective for the Company on January 1, 2023 and requires a modified retrospective transition method, which will result in a cumulative-effect adjustment in retained earnings upon adoption. Early adoption is permitted. The Company is currently assessing the potential impact of this new guidance on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, to simplify the process used to test for impairment of goodwill. Under the new standard, an impairment loss must be recognized in an amount equal to the excess of the carrying amount of a reporting unit over its fair value, limited to the total amount of goodwill allocated to that reporting unit. As a smaller reporting company pursuant to ASU 2019-10, the ASU is effective for the Company on January 1, 2023. This guidance will be effective for the Company on January 1, 2023 using a prospective transition method and early adoption is permitted. The Company is currently evaluating the potential effect of this new guidance on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This ASU adds certain disclosure requirements and modifies or eliminates requirements under current GAAP. This ASU is effective for fiscal years beginning after December 15, 2019 and early adoption is permitted. The Company has early adopted the eliminated and modified disclosure requirements effective January 1, 2019.

B. Revenue

The Company’s revenue is accounted for as contracts with customers, and the timing of revenue recognition is based on the Company’s analysis of the provisions of each respective contract. Depending upon the specific terms, revenue may be recognized over time or at a point in time. Modifications to contracts may affect the timing of the satisfaction of performance obligations, the determination of the transaction price, and the allocation of the price to performance obligations, any of which may impact the timing of the recognition of the related revenue.

The Company’s major revenue sources are as follows:

Investment advisory and incentive fees. The Company and its subsidiaries act as general partner, investment manager or sub-advisor to investment funds and/or separately managed accounts of institutional investors (e.g., corporate pension plans). The fees that are paid to the Company are set forth in the offering documents for the investment fund or the separately managed account agreement. Investment advisory and incentive fee revenue consists of:

Asset-based advisory fees – The Company receives a management fee, payable monthly in advance based on value of the net assets of the client. It is generally set at a rate of 1%-1.5% per annum. Asset-based management fee revenue is recognized only as the services are performed over the period.

Index

Performance-based advisory fees – Certain client contracts call for additional fees and or allocations of income tied to a certain percentage, generally 20%, of the investment performance of the account over a measurement period, typically the calendar year. In addition, the contracts provide that performance-based fees or allocations become fixed in the event of an investor redemption prior to the end of the measurement period. In the event that an account suffers a loss in one period, it must be recovered before incentive fees are earned by the Company; this is commonly referred to as a “high water mark” provision. While the Company’s performance obligation is satisfied over time, the Company does not recognize performance-based fees until the end of the measurement period or the time of the investor redemption when the uncertainty surrounding the amount of the variable consideration is resolved.

Sub-advisory fees – Pursuant to agreements with other investment advisors, the Company receives a percentage of advisory fees received by such advisors from certain of their investment fund clients. These fees may be either asset- or performance-based. In addition, they may be subject to reduction by certain expenses as set forth in the respective agreements. Sub-advisory fee revenue which is asset-based is recognized ratably as the services are performed over the relevant contractual performance period. Sub-advisory fee revenue which is performance-based is recognized only when it becomes fixed and not subject to adjustment.

Total revenues by type were as follows for the three and nine months ended September 30, 2020 and 2019, respectively (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
Investment advisory and incentive fees
Asset-based advisory fees	$	1,161	$	1,723	$	4,284	$	5,208
Performance-based advisory fees		8		35		8		61
Sub-advisory fees		696		995		2,132		2,930
		1,865		2,753		6,424		8,199

Other
Miscellaneous		80		1		550		12
		80		1		550		12
Total	$	1,945	$	2,754	$	6,974	$	8,211

Index

C. Investment in Securities

Investments in debt securities at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020				December 31, 2019
	Cost		Fair Value		Cost		Fair Value

Trading Securities
Government securities	$	330,795	$	330,942	$	28,428	$	29,037
Total investments in debt securities	$	330,795	$	330,942	$	28,428	$	29,037

Investments in equity securities at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020				December 31, 2019
	Cost		Fair Value		Cost		Fair Value

Equity Securities
Common stocks	$	244,611	$	205,413	$	271,627	$	262,562
Mutual funds		555		1,128		1,207		2,196
Other investments		8,040		7,045		7,847		6,562
Total investments in securities	$	253,206	$	213,586	$	280,681	$	271,320

Securities sold, not yet purchased at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020				December 31, 2019
	Proceeds		Fair Value		Proceeds		Fair Value
Equity securities
Common stocks	$	10,730	$	11,661	$	13,863	$	16,300
Other investments		645		1,166		13		119
Total securities sold, not yet purchased	$	11,375	$	12,827	$	13,876	$	16,419

Investments in affiliated registered investment companies at September 30, 2020 and December 31, 2019 consisted of the following (in thousands):

	September 30, 2020				December 31, 2019
	Cost		Fair Value		Cost		Fair Value
Equity securities
Closed-end funds	$	74,741	$	87,307	$	75,646	$	99,834
Mutual funds		48,287		59,084		48,348		59,477
Total investments in affiliated registered investment companies	$	123,028	$	146,391	$	123,994	$	159,311

The Company recognizes all equity derivatives as either assets or liabilities measured at fair value and includes them in either investment in securities or securities sold, not yet purchased on the consolidated statements of financial condition. From time to time, the Company and/or consolidated funds will enter into hedging transactions to manage their exposure to foreign currencies and equity prices related to their proprietary investments. At September 30, 2020 and December 31, 2019 we held derivative contracts on 2.2 million and 3.4 million equity shares, respectively, that are included in investments in securities or securities sold, not yet purchased on the consolidated statements of financial condition as shown in the table below. We had two foreign exchange contracts outstanding at December 31, 2019. Except for the foreign exchange contracts entered into by the Company, these transactions are not designated as hedges for accounting purposes, and changes in fair values of these derivatives are included in net gain/(loss) from investments on the consolidated statements of income and included in investments in securities, securities sold, not yet purchased, or receivable from or payable to brokers on the consolidated statements of financial condition.

Index

The following table identifies the fair values of all derivatives and foreign currency positions held by the Company (in thousands):

	Asset Derivatives					Liability Derivatives
	Statement of	Fair Value				Statement of	Fair Value
	Financial Condition	September 30,		December 31,		Financial Condition	September 30,		December 31,
	Location	2020		2020		Location	2020		2019
Derivatives designated as hedging
instruments under FASB ASC 815-20
Foreign exchange contracts	Receivable from brokers	$	-	$	23	Payable to brokers	$	-	$	-


Derivatives not designated as hedging
instruments under FASB ASC 815-20
Equity contracts
Investments in securities		$	771	$	291	Securities sold, not yet purchased	$	705	$	119

Total derivatives		$	771	$	314		$	705	$	119

The following table identifies gains and losses of all derivatives held by the Company (in thousands):

Type of Derivative	Income Statement Location	Three Months ended September 30,					Nine Months ended September 30,
		2020			2019		2020			2019

Foreign exchange contracts	Net gain/(loss) from investments	$	(57	)	$	124	$	(44	)	$	$177
Equity contracts	Net gain/(loss) from investments		99			1,143		(411	)		(324	)

Total		$	42		$	1,267	$	(455	)	$	$(147	)

The Company is a party to enforceable master netting arrangements for swaps entered into with major U.S. financial institutions as part of its investment strategy. They are typically not used as hedging instruments. These swaps, while settled on a net basis with the counterparties, are shown gross in assets and liabilities on the consolidated statements of financial condition. The swaps have a firm contract end date and are closed out and settled when each contract expires.

							Gross Amounts Not Offset in the Statements of Financial Condition
	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts of Assets Presented in the Statements of Financial Condition		Financial Instruments			Cash Collateral Received		Net Amount
Swaps:	(In thousands)
September 30, 2020	$	771	$	-	$	771	$	(705	)	$	-	$	66
December 31, 2019		291		-		291		(119	)		-		172

							Gross Amounts Not Offset in the Statements of Financial Condition
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts of Liabilities Presented in the Statements of Financial Condition		Financial Instruments			Cash Collateral Pledged		Net Amount
Swaps:	(In thousands)
September 30, 2020	$	705	$	-	$	705	$	(705	)	$	-	$	0
December 31, 2019		119		-		119		(119	)		-		-

Index

D. Investment Partnerships and Other Entities

The Company is general partner or co-general partner of various affiliated entities in which the Company had investments totaling $106.0 million and $124.8 million at September 30, 2020 and December 31, 2019, respectively, and whose underlying assets consist primarily of marketable securities (“Affiliated Entities). We also had investments in unaffiliated partnerships, offshore funds and other entities of $22.0 million and $20.5 million at September 30, 2020 and December 31, 2019, respectively (“Unaffiliated Entities”). We evaluate each entity to determine its appropriate accounting treatment and disclosure. Certain of the Affiliated Entities, and none of the Unaffiliated Entities, are consolidated.

Investments in partnerships that are not required to be consolidated are accounted for using the equity method and are included in investments in partnerships on consolidated statements of financial condition. This caption includes investments in Affiliated Entities and Unaffiliated Entities which the Company accounts for under the equity method of accounting. The Company reflects the equity in earnings of these Affiliated Entities and Unaffiliated Entities as net gain/(loss) from investments on the consolidated statements of income.

PMV Consumer Acquisition Corp.

The Company has determined that PMV is a voting interest entity (VOE) and since the Sponsor has substantive control of PMV due to its ability to control the board of directors of PMV, the Sponsor consolidates the assets and liabilities of PMV. The Company invested $4.0 million, or approximately 64% of the $6.25 million total Sponsor partnership commitment. The Sponsor is managed by company executives. The Company has determined that the Sponsor is a variable interest entity (VIE) and that the Company is the primary beneficiary and therefore consolidates the assets and liabilities of the Sponsor. However, neither AC nor PMV have a right to the benefits from nor does it bear the risks associated with the government securities held in trust assets held by PMV. Further, if the Company were to liquidate, the government securities held in trust assets would not be available to its general creditors, and as a result, the Company does not consider these assets available for the benefit of its investors.

The registration statement for the PMV initial public offering was declared effective on September 21, 2020. On September 24, 2020, PMV consummated the initial public offering of 17,500,000 units at $10.00 per Unit, generating gross proceeds of $175,000,000.

Simultaneously with the closing of the initial public offering, PMV consummated the sale of 6,150,000 warrants (the “Private Warrants”) at a price of $1.00 per Private Warrant in a private placement to the Sponsor, generating gross proceeds of $6,150,000.

AC owns $10 million in Class A units in PMV and the Sponsor own $6.1 million in Private Warrants which are eliminated in consolidation.

Following the closing of the initial public offering on September 24, 2020, an amount of $175,000,000 ($10.00 per Unit) from the net proceeds of the sale of the Units in the initial public offering and the sale of the Private Warrants was placed in a trust account (the “Trust Account”) located in the United States, which will only be invested in U.S. government securities.

PMV will have until September 24, 2022 to complete a business combination. If PMV is unable to complete a business combination by September 24, 2022, PMV will cease all operations except for the purpose of winding up, and as promptly as reasonably possible but not more than 10 business days thereafter, redeem the Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account including interest earned on the funds held in the Trust Account.

Index

The following table includes the net impact by line item on the condensed consolidated statements of financial condition for the consolidated entities (in thousands):

	September 30, 2020
	Prior to Consolidation		Consolidated Entities			As Reported
Assets
Cash and cash equivalents	$	35,808	$	11,523		$	47,331
Investments in government securities		319,943		10,999			330,942
Investments in equity securities (including GBL stock)		136,428		77,158			213,586
Investments in affiliated investment companies		195,737		(49,346	)		146,391
Investments in partnerships		147,326		(19,361	)		127,965
Receivable from brokers		6,524		14,541			21,065
Investment advisory fees receivable		1,189		(29	)		1,160
Other assets		37,238		(69	)		37,169
Investments in government securities held in trust		-		175,002			175,002
Total assets	$	880,193	$	220,418		$	1,100,611
Liabilities and equity
Securities sold, not yet purchased	$	6,397	$	6,430		$	12,827
Accrued expenses and other liabilities		19,629		9,824			29,453
Redeemable noncontrolling interests		-		204,164			204,164
Total equity		854,167		-			854,167
Total liabilities and equity	$	880,193	$	220,418		$	1,100,611

	December 31, 2019
	Prior to Consolidation		Consolidated Entities			As Reported
Assets
Cash and cash equivalents	$	328,834	$	13,167		$	342,001
Investments in government securities		25,050		3,987			29,037
Investments in equity securities (including GBL stock)		157,623		113,697			271,320
Investments in affiliated investment companies		211,024		(51,713	)		159,311
Investments in partnerships		167,781		(22,409	)		145,372
Receivable from brokers		6,750		16,391			23,141
Investment advisory fees receivable		9,604		(22	)		9,582
Other assets		22,976		29			23,005
Assets of discontinued operations		8,137		-			8,137
Total assets	$	937,779	$	73,127		$	1,010,906
Liabilities and equity
Securities sold, not yet purchased	$	4,625	$	11,794		$	16,419
Accrued expenses and other liabilities		33,618		10,949			44,567
Liabilities of discontinued operations		2,100					2,100
Redeemable noncontrolling interests		1		50,384			50,385
Total equity		897,435		-			897,435
Total liabilities and equity	$	937,779	$	73,127		$	1,010,906

Index

The following table includes the net impact by line item on the condensed consolidated statements of income for the consolidate entities (in thousands)

	Three Months Ended September 30, 2020
	Prior to Consolidation			Consolidated Entities			As Reported
Total revenues	$	2,117		$	(172	)	$	1,945
Total expenses		4,754			743			5,497
Operating loss		(2,637	)		(915	)		(3,552	)
Total other income, net		12,040			1,967			14,007
Income before income taxes		9,403			1,052			10,455
Income tax expense		3,456			108			3,564
Income before NCI		5,947			944			6,891
Income/(loss) attributable to NCI		(7	)		944			937
Income from continuing operations		5,954			-			5,954
Loss from discontinued operations, net of taxes		(139	)		-			(139	)
Net income	$	5,815		$	-		$	5,815

	Three Months Ended September 30, 2019
	Prior to Consolidation			Consolidated Entities			As Reported
Total revenues	$	2,935		$	(181	)	$	2,754
Total expenses		5,471			(124	)		5,347
Operating loss		(2,536	)		(57	)		(2,593	)
Total other income, net		10,426			(302	)		10,124
Income before income taxes		7,890			(359	)		7,531
Income tax expense		1,638			-			1,638
Net income before NCI		6,252			(359	)		5,893
Net income/(loss) attributable to NCI		-			(359	)		(359	)
Income from continuing operations		6,252			-			6,252
Loss from discontinued operations, net of taxes		(301	)		-			(301	)
Net income	$	5,951		$	-		$	5,951

	Nine Months Ended September 30, 2020
	Prior to Consolidation			Consolidated Entities			As Reported
Total revenues	$	6,669		$	305		$	6,974
Total expenses		13,131			1,696			14,827
Operating loss		(6,462	)		(1,391	)		(7,853	)
Total other income/(expense), net		(34,181	)		934			(33,248	)
Loss before income taxes		(40,643	)		(457	)		(41,101	)
Income tax benefit		(8,965	)		108			(8,858	)
Net loss before NCI		(31,678	)		(565	)		(32,243	)
Net loss attributable to NCI		(7	)		(565	)		(572	)
Loss from continuing operations		(31,671	)		-			(31,671	)
Loss from discontinued operations, net of taxes		(632	)		-			(632	)
Net loss	$	(32,303	)	$	-		$	(32,303	)

	Nine Months Ended September 30, 2019
	Prior to Consolidation			Consolidated Entities			As Reported
Total revenues	$	8,737		$	(526	)	$	8,211
Total expenses		18,102			1,257			19,359
Operating loss		(9,365	)		(1,783	)		(11,148	)
Total other income, net		47,736			4,015			51,751
Income before income taxes		38,371			2,232			40,603
Income tax expense		8,064			-			8,064
Net income before NCI		30,307			2,232			32,539
Net income/(loss) attributable to NCI		-			2,232			2,232
Income from continuing operations		30,307			-			30,307
Loss from discontinued operations, net of taxes		(2,141	)		-			(2,141	)
Net income	$	28,166		$	-		$	28,166

Index

Variable Interest Entities

With respect to each consolidated VIE, its assets may only be used to satisfy its obligations. The investors and creditors of any consolidated VIE have no recourse to the Company’s general assets. In addition, the Company neither benefits from such VIE’s assets nor bears the related risk beyond its beneficial interest in the VIE.

The following table presents the balances related to VIEs that are consolidated and included on the condensed consolidated statements of financial condition as well as the Company’s net interest in these VIEs (in thousands):

	September 30, 2020			December 31, 2019

Cash and cash equivalents	$	4,027		$	2,224
Investments in securities ⁽¹⁾		22,521			18,454
Receivable from brokers		1,491			2,601
Investments in partnerships and affiliates		8,022			8,363
Accrued expenses and other liabilities		(823	)		(329	)
Nonredeemable noncontrolling interests		(2,072	)		-
Redeemable noncontrolling interests		(10,292	)		(9,592	)
AC Group’s net interests in consolidated VIEs	$	22,874		$	21,721

(1) In 2020, includes $6.15 million in private placement warrants eliminated in consolidation with PMV.

Voting Ownership Entities

The following table presents the balances related to PMV and another investment partnership that are consolidated as VOE’s and included on the condensed consolidated statements of financial condition as well as the Company’s net interest in these VOE’s (in thousands):

	September 30, 2020			December 31, 2019

Cash and cash equivalents	$	7,496		$	10,943
Investments in securities		88,615			99,231
Receivable from brokers		13,052			13,790
Investments in government securities held in trust		175,002			-
Other assets		82			28
Securities sold, not yet purchased		(6,430	)		(11,794	)
Accrued expenses and other liabilities		(9,842	)		(10,665	)
Redeemable noncontrolling interests		(193,873	)		(40,792	)
AC Group’s net interests in consolidated VOEs	$	74,102		$	60,741

E. 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, 2020 and December 31, 2019 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value.

Index

The following tables present assets and liabilities measured at fair value on a recurring basis as of the dates specified (in thousands):

	September 30, 2020
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	$	39,552	$	-	$	-	$	39,552
Investments in government securities:
Trading - Gov’t securities		330,942						330,942
Total investments in government securities		330,942		-		-		330,942
Investments in equity securities (including GBL stock):
Common stocks		198,266		7,111		36		205,413
Mutual funds		1,128		-		-		1,128
Other		1,269		771		5,005		7,045
Total investments in equity securities		200,663		7,882		5,041		213,586
Investments in affiliated registered investment companies:
Closed-end funds		87,307		-		-		87,307
Mutual funds		59,084		-		-		59,084
Total investments in affiliated registered investment companies		146,391		-		-		146,391
Total investments held at fair value		677,996		7,882		5,041		690,919
Total assets at fair value	$	717,548	$	7,882	$	5,041	$	730,471
Liabilities
Common stocks	$	11,661	$	-	$	-	$	11,661
Other		461		705		-		1,166
Securities sold, not yet purchased	$	12,122	$	705	$	-	$	12,827

	December 31, 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	$	343,428	$	-	$	-	$	343,428
Investments in government securities:
Trading - Gov’t securities		29,037		-		-		29,037
Total investments in government securities		29,037		-		-		29,037
Investments in equity securities (including GBL stock):
Common stocks		257,520		4,444		89		262,562
Mutual funds		2,196		-		-		2,196
Other		2,428		509		4,134		6,562
Total investments in equity securities		262,144		4,953		4,223		271,320
Investments in affiliated registered investment companies:
Closed-end funds		99,834		-		-		99,834
Mutual funds		59,477		-		-		59,477
Total investments in affiliated registered investment companies		159,311		-		-		159,311
Total investments held at fair value		450,492		4,953		4,223		459,668
Total assets at fair value	$	793,920	$	4,953	$	4,223	$	803,096
Liabilities
Common stocks	$	16,300	$	-	$	-	$	16,300
Other		-		119		-		119
Securities sold, not yet purchased	$	16,300	$	119	$	-	$	16,419

Index

The following table presents additional information about assets by major category measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:

	Three months ended September 30, 2020						Three months ended September 30, 2019
	Common Stocks		Other		Total		Common Stocks			Other			Total

Beginning balance	$	36	$	4,988	$	5,024	$	191		$	4,255		$	4,446
Total gains/(losses)		-		17		17		(102	)		(46	)		(148	)
Purchases		-		-		-		-			-			-
Sales		-		-		-		-			-			-
Transfers		-		-		-		-			-			-
Ending balance	$	36	$	5,005	$	5,041	$	89		$	4,209		$	4,298
Changes in net unrealized gain/(loss) included in Net gain/(loss) from investments related to level 3 assets still held as of the reporting date	$	-	$	17	$	17	$	(102	)	$	(46	)	$	(148	)

Total realized and unrealized gains and losses for level 3 assets are reported in net gain/(loss) from investments in the condensed consolidated statements of income.

	Nine months ended September 30, 2020									Nine months ended September 30, 2019
	Common Stocks			Other			Total			Common Stocks		Other		Total

Beginning balance	$	89		$	4,134		$	4,223		$	12	$	3,458	$	3,470
Consolidated fund		-			-			-			-		-		-
Total gains/(losses)		(53	)		(6	)		(59	)		14		751		765
Purchases		-			-			-			-		-		-
Sales		-			(41	)		(41	)		-		-		-
Transfers		-			918			918			63		-		63
Ending balance	$	36		$	5,005		$	5,041		$	89	$	4,209	$	4,298
Changes in net unrealized gain/(loss) included in Net gain/(loss) from investments related to level 3 assets still held as of the reporting date	$	(53	)	$	(18	)	$	(71	)	$	14	$	751	$	765

During the nine months ended September 30, 2020 and 2019, the Company transferred investments with a value of approximately $918,000 and $63,000, respectively, from Level 1 to Level 3 due to the unavailability of observable inputs.

At September 30, 2020, assets held in the trust account through PMV were comprised of U.S. Treasury Bills with an amortized cost and fair value of $175 million

Index

F. Income Taxes

The effective tax rate (“ETR”) for the three months ended September 30, 2020 and September 30, 2019 was 34.1% and 21.7%, respectively. The ETR in the third quarter of 2020 differs from the standard corporate tax rate of 21% primarily due (a) state and local taxes (net of federal benefit), (b) deferred tax asset valuation allowances related to the carryforward of charitable contributions and the (c) rate differential on the carryback of a net operating loss. The ETR in the third quarter of 2019 differs from the standard corporate tax rate of 21% primarily due to (a) state and local taxes (net of federal benefit), the benefit of (b) the donation of appreciated securities and (c) the dividends received deduction.

The ETR for the nine months ended September 30, 2020 and September 30, 2019 was 21.5% and 19.9%, respectively. The 2020 year-to-date ETR differs from the standard corporate tax rate of 21% primarily due to (a) state and local taxes (net of federal benefit), (b) deferred tax asset valuation allowances related to the carryforward of charitable contributions and the (c) rate differential on the carryback of a net operating loss. The 2019 year-to-date ETR differs from the standard corporate tax rate of 21% primarily due to (a) state and local taxes (net of federal benefit), (b) the donation of appreciated securities and (c) noncontrolling interest consolidated partnerships.

G. Earnings Per Share

Basic earnings per share is computed by dividing net income/(loss) attributable to our shareholders by the weighted average number of shares outstanding during the period. Diluted earnings per share is computed by dividing net income/(loss) attributable to our shareholders by the weighted average number of shares outstanding during the period because there are no dilutive securities outstanding during the periods presented.

Index

The computations of basic and diluted net income/(loss) per share are as follows (in thousands, except per share data):

	Three Months Ending September 30,
(In thousands, except per share amounts)	2020			2019
Basic:
Income from continuing operations	$	5,954		$	6,252
Loss from discontinued operations, net of taxes		(139	)		(301	)
Net income attributable to Associated Capital Group, Inc.’s shareholders	$	5,815		$	5,951

Weighted average shares outstanding		22,354			22,514

Basic net income per share attributable to Associated Capital Group, Inc.’s shareholders:
Continuing operations	$	0.27		$	0.27
Discontinued operations		(0.01	)		(0.01	)
Total	$	0.26		$	0.26

Diluted:
Income from continuing operations	$	5,954		$	6,252
Loss from discontinued operations, net of taxes		(139	)		(301	)
Net income attributable to Associated Capital Group, Inc.’s shareholders	$	5,815		$	5,951

Weighted average share outstanding		22,354			22,514

Diluted net income per share attributable to Associated Capital Group, Inc.'s shareholders:
Continuing operations	$	0.27		$	0.27
Discontinued operations		(0.01	)		(0.01	)
Total	$	0.26		$	0.26

	Nine Months Ending September 30,
(In thousands, except per share amounts)	2020			2019
Basic:
Income/(loss) from continuing operations	$	(31,671	)	$	30,307
Loss from discontinued operations, net of taxes		(632	)		(2,141	)
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders	$	(32,303	)	$	28,166

Weighted average shares outstanding		22,391			22,550

Basic net income per share attributable to Associated Capital Group, Inc.’s shareholders:
Continuing operations	$	(1.41	)	$	1.34
Discontinued operations		(0.03	)		(0.09	)
Total	$	(1.44	)	$	1.25

Diluted:
Income from continuing operations	$	(31,671	)	$	30,307
Income/(loss) from discontinued operations, net of taxes		(632	)		(2,141	)
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders	$	(32,303	)	$	28,166

Weighted average share outstanding		22,391			22,550

Diluted net income per share attributable to Associated Capital Group, Inc.'s shareholders:
Continuing operations	$	(1.41	)	$	1.34
Discontinued operations		(0.03	)		(0.09	)
Total	$	(1.44	)	$	1.25

Index

H.	Stockholders’ Equity

Shares outstanding were 22.3 million and 22.5 million at September 30, 2020 and December 31, 2019, respectively.

Dividends

During the nine months ended September 30, 2020 and 2019, the Company declared dividends of $0.10 per share to class A and class B shareholders.

Stock Repurchase Program

For the three months ended September 30, 2020 and 2019, the Company repurchased approximately 30 thousand and 36 thousand shares at an average price of $37.03 per share and $36.75 per share for a total investment of $1.1 million and $1.3 million, respectively. During the nine months ended September 30, 2020 and 2019, the Company repurchased approximately 143 thousand and 89 thousand shares at an average price of $37.86 and $37.81 per share for a total investment of $5.4 million and $3.4 million, respectively.

Voting Rights

The holders of Class A Common stock (“Class A Stock”) and Class B Common stock (“Class B Stock”) have identical rights except that holders of Class A Stock are entitled to one vote per share, while holders of Class B Stock are entitled to ten votes per share on all matters to be voted on by shareholders in general. Holders of each share class, however, are not eligible to vote on matters relating exclusively to the other share class.

Stock Award and Incentive Plan

The Company maintains one stock award and incentive plan (the “Plan”) approved by the shareholders on May 3, 2016, which is designed to provide incentives to attract and retain individuals key to the success of AC through direct or indirect ownership of our common stock. Benefits under the Plan may be granted in any one or a combination of stock options, stock appreciation rights, restricted stock, restricted stock units, stock awards, dividend equivalents and other stock or cash-based awards. A maximum of 2 million shares of Class A Stock have been reserved for issuance under the Plan by the Compensation Committee of the Board of Directors (the “Compensation Committee”) which is responsible for administering the Plan. Under the Plan, the Compensation Committee may grant RSAs and either incentive or nonqualified stock options with a term not to exceed ten years from the grant date and at an exercise price that it may determine. Through September 30, 2020, approximately 700,000 shares have been awarded under the Plan leaving approximately 1.3 million shares for future grants.

In August and December 2018, the Company’s Board of Directors approved the grant of 172,800 shares of Phantom Restricted Stock awards (“Phantom RSAs”). Under the terms of the grants, which were effective August 8 and December 31 of 2018, the Phantom RSAs vest 30% and 70% after three and five years, respectively. The Phantom RSAs will be settled by a cash payment, net of applicable withholding tax, on the vesting dates. In addition, an amount equivalent to the cumulative dividends declared on shares of the Company’s Class A common stock during the vesting period will be paid to participants on vesting.

Pursuant to Accounting Standards Codification (“ASC”) 718, the Phantom RSAs are treated as a liability because cash settlement is required and compensation will be recognized over the vesting period. In determining the compensation expense to be recognized each period, the Company re-measures the fair value of the liability at each reporting date taking into account the remaining vesting period attributable to each award and the current market value of the Company’s Class A stock. In making these determinations, the Company considers the impact of Phantom RSAs that have been forfeited prior to vesting (e.g., due to an employee termination). The Company has elected to consider forfeitures as they occur. Based on the closing price of the Company’s Class A Common Stock on September 30, 2020 and December 31, 2019, the total liability recorded by the Company in compensation payable as of September 30, 2020 and December 31, 2019, with respect to the Phantom RSAs was $1.7 million and $2.0 million, respectively.

Index

For the three and nine month periods ended September 30, 2020, the Company recorded approximately $0.1 million and ($0.3) million in stock-based compensation expense net of forfeitures, respectively. For the three and nine month periods ending September 30, 2019, the Company recorded approximately $0.3 million and $1.0 million in stock-based compensation expense, respectively. This expense is included in compensation expense in the consolidated statements of income.

As of September 30, 2020, there were 88,650 unvested Phantom RSAs outstanding. The unrecognized compensation cost related to these was $1.6 million which is expected to be recognized over a weighted-average period of 2.8 years. On February 4, 2020, 23,000 Phantom RSA’s were forfeited by teammates who transferred to Morgan Group.

As of December 31, 2019, 119,650 awarded but unvested Phantom RSAs were outstanding.

I.	Goodwill and Identifiable Intangible Assets

At September 30, 2020, goodwill and intangible assets on the condensed consolidated statements of financial condition includes $3.4 million of goodwill related to GCIA. The Company assesses the recoverability of goodwill at least annually, or more often should events warrant, using a qualitative assessment of whether it is more likely than not that an impairment has occurred to determine if a quantitative analysis is required. There were no indicators of impairment for the three months ended September 30, 2020 or September 30, 2019, and as such there was no impairment analysis performed or charge recorded.

J.	Commitments and Contingencies

From time to time, the Company may be named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. We are also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether losses exist which may be reasonably possible and will, if material, make the necessary disclosures. Management believes, however, that such amounts, both those that are probable and those that are reasonably possible, are not material to the Company’s financial condition, results of operations or cash flows at September 30, 2020 and December 31, 2019.

The Company has also 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 obligations under the agreements. The Company has had no claims or payments pursuant to these or prior agreements and believes the likelihood of a claim being made is remote, and, therefore, no accrual has been made on the condensed consolidated financial statements.

K.	Discontinued Operations

As a result of the Morgan Group spin-off, the results of its operations through August 5, 2020 have been classified in the consolidated statements of income as discontinued operations for all periods presented. There was no gain or loss on the spin-off for the Company, and it was a tax-free spin-off to AC’s shareholders.

Other than a transition services agreement, Associated Capital does not have any significant continuing involvement in the operations of Morgan Group after the spin-off, and Associated Capital will not have the ability to influence operating or financial policies of Morgan Group. All stockholders received 0.022356 shares of Morgan Group stock for each share of AC stock that they held on the record date for the distribution.

Index

Operating results for the period from January 1, 2020 through August 5, 2020 and the three and nine month periods ending September 30, 2019 are summarized below:

	Three Months Ended September 30, ⁽¹⁾						Nine Months Ended September 30, ⁽¹⁾
	2020			2019			2020			2019
Revenues
Institutional research services	$	446		$	2,354		$	2,924		$	6,343
Other		37			10			36			37
Total revenues		483			2,364			2,960			6,380
Expenses
Compensation		296			1,993			2,276			6,956
Other operating expenses		266			787			1,699			2,312
Total expenses		562			2,780			3,975			9,268
Operating loss		(79	)		(416	)		(1,015	)		(2,888	)
Other income (expense)
Net loss from investments		(5	)		(7	)		(8	)		(7	)
Interest and dividend income		2			38			81			158
Total other income (expense), net		(3	)		31			73			151
Income/(loss) from discontinued operations before income taxes		(82	)		(385	)		(942	)		(2,737	)
Income tax provision/(benefit)		62			(84	)		(205	)		(596	)
Income/(loss) from discontinued operations, net of taxes		(144	)		(301	)		(737	)		(2,141	)
Net income/(loss) attributable to noncontrolling interests		(5	)		-			(105	)		-
Net income/(loss) attributable to GAMCO Investors, Inc.'s discontinued operations, net of taxes	$	(139	)	$	(301	)	$	(632	)	$	(2,141	)

(1) During 2020 reflects the periods through August 5, 2020.

The assets and liabilities of Morgan Group have been classified in the consolidated statement of financial condition as of December 31, 2019 as assets and liabilities of discontinued operations and consist of the following:

	December 31, 2019

Cash and cash equivalents	$	6,587
Receivable from brokers		1,009
Receivable from affiliates		31
Deferred tax assets		184
Other assets		326
Total assets of discontinued operations		8,137

Income taxes payable		54
Compensation payable		710
Accrued expenses and other liabilities		1,336
Total liabilities of discontinued operations		2,100

Noncontrolling interests from discontinued operations		1,003

Net assets of discontinued operations	$	5,034

Index

The following table summarizes the net impact of the spin-off to the Company’s stockholders’ equity (deficiency) as of August 5, 2020:

Decrease in additional paid-in capital	$	(4,403	)
Decrease in noncontrolling interest		(903	)
Total	$	(5,306	)

L.	Subsequent Events

During the period from October 1, 2020 to November 9, 2020, the Company repurchased 29,471 shares at an average price of $33.85 per share.

On November 9, 2020, AC’s board of directors declared a semi-annual dividend of $0.10 per share, which is payable on December 15, 2020 to class A and class B shareholders of record on December 1, 2020.

Index

ITEM 2:

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK) (“MD&A”)

Introduction

MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s unaudited interim consolidated financial statements and accompanying notes thereto included in this Quarterly Report on Form 10-Q, as well as the Company’s audited annual financial statements included in our Form 10-K filed with the SEC on March 16, 2020 to help provide an understanding of our financial condition, changes in financial condition and results of operations. Unless the context otherwise requires, all references to “we,” “us,” “our,” “AC Group” or the “Company” refer collectively to Associated Capital Group, Inc., a holding company, and its subsidiaries through which our operations are actually conducted.

Overview

We are a Delaware corporation that provides alternative investment management, institutional research and underwriting services. In addition, we derive investment income/(loss) from proprietary trading of cash and other assets awaiting deployment in our operating business.

On November 30, 2015, GAMCO Investors, Inc. (“GAMCO” or “GBL”) distributed all the outstanding shares of each class of AC common stock on a pro rata one-for-one basis to the holders of each class of GAMCO’s common stock (the “Spin-off”).

On August 5, 2020 (the “Spin-Off Date”), AC distributed to its stockholders all of the common stock of Morgan Group Holdings Company (“MGHL”) and its subsidiaries held by the Company. MGHL owns and operates, directly or indirectly, the institutional research businesses previously owned and operated by AC. In the spin-off, each holder of AC’s common Stock of record as of 5:00 p.m. New York City time on July 30, 2020 (the “Record Date”), received 0.022356 share of MGHL common stock for each share of AC common stock held on the Record Date. Subsequent to the spin-off, AC no longer consolidates the financial results of MGHL for the purposes of its own financial reporting and the historical financial results of MGHL have been reflected in the Company’s consolidated financial statements as discontinued operations for all periods presented through the spin-off Date.

Event-Driven Asset Management

The alternative investment strategies focus on fundamental, active, event-driven special situations and merger arbitrage. Merger activity in the third quarter topped $1 trillion, an increase of 94% compared to the second quarter and the strongest quarter for deal making since the second quarter of 2018. Returns for the quarter were driven by completed deals, as well as continued progress on deals in the pipeline. For third quarter, our gross return was 3.15%, (2.6% net of fees). The strategy is offered domestically through partnerships and to institutional investors. Internationally, the strategy is offered through a number of vehicles, including EU regulated UCITS structures and the London Stock Exchange listed investment company, Gabelli Merger Plus Trust (GMP-LN).

Index

Institutional Research Services

On October 31, 2019, the Company closed on the transaction whereby Morgan Group Holding Co. (“Morgan Group”), an entity under common control of the majority shareholder of AC, acquired G.research in exchange for 50 million shares of its stock. In addition, management acquired 5.15 million Morgan Group shares under a private placement for $515,000. Subsequent to the transaction and private placement, AC had an 83.3% ownership interest in Morgan Group and consolidated the entity, which included G.research.

On March 16, 2020 our board of directors approved the distribution of AC’s Morgan Group Holdings to shareholders.

The Company’s Board of Directors established the record date of July 30, 2020, and distribution date of August 5, 2020 for the spin-off of Morgan Group to AC’s shareholders.

Based on the distribution ratio, on the distribution date, AC stockholders of record as of 5:00 pm, New York City time, on the record date, received approximately 0.022356 shares of Morgan Group common stock for each share of AC common stock they held on the record date.

Direct Investing Business

The Gabelli direct investment business was re-launched after the spin-off of Associated Capital in 2015. Our objective is to partner with management to identify and surface value through strategic direction, operational improvements and financial structuring. The compounded, accumulated knowledge of our team in sectors across our core competencies provides advantages to value creation. The steps taken since formation are expected to grow long term value. In this effort, we seek to collaborate with the management of target companies, establish common goals, support the restructuring and growth process, and more importantly, add value by bringing in creative capital solutions and extensive industry insights. This effort follows the framework we established with Gabelli-Rosenthal, a private equity fund launched in 1985.

Our direct investment business is developing along three core pillars; Gabelli Private Equity Partners, LLC (“GPEP”), formed in August 2017 with $150 million of authorized capital as a “fund-less” sponsor; the formation of Gabelli special purpose acquisition vehicles, the SPAC business (“SPAC”), launched in April 2018; and, the formation of Gabelli Principal Strategies Group, LLC (“GPS”) to pursue strategic operating initiatives. Gabelli & Partners team is extending our marketing reach within Asia and Europe, resulting in searches, proposal and new business for the UCITs, offshore funds and SMA’s. Gabelli & Partners currently has a relationship with more than 20 third party marketing firms, principally private banks on continental Europe. Gabelli Value for Italy (VALU), our initial vehicle launched and listed on the Italian Borsa, approached its second anniversary at the apex of the pandemic in Italy. In light of this challenge, the board approved a liquidation of this entity which was completed on July 8, 2020. However, the VALU effort successfully canvassed private company opportunities in Italy, with deal flow expanding throughout Europe. We believe the platform is in place to further expand our direct investment efforts across the European continent.

On September 22, 2020, AC announced the $175 million initial public offering of its special purpose acquisition corporation, PMV Consumer Acquisition Corp. (NYSE:PMVC).

PMV Consumer Acquisition Corp. (“PMV”) was created to pursue an initial business combination following the consumer globally along with companies having an enterprise valuation in the range of $200 million to $3.5 billion.

PMV Consumer Acquisition Holding Company, LLC (“Sponsor”) was created to assist PMV in sourcing, analyzing and consummating acquisition opportunities for that initial business combination.

PMV and Sponsor are both included in the consolidated results of operations and consolidated statement of financial condition of the Company.

Index

GPEP has the flexibility to form partnerships with former executives of global industrial conglomerates to create long term value with no pre-determined exit timetable. The Gabelli SPAC business allows us to leverage our capital markets expertise through a direct investing vehicle. We invite you to visit our activities on the corporate website:

https://www.associated-capital-group.com/DirectInvesting

In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China and has since spread quickly to numerous countries, including the United States. On March 11, 2020, COVID-19 was identified as a global pandemic by the World Health Organization. In response to its spread, governmental authorities have imposed restrictions on travel and congregation and the temporary closure of many non-essential businesses in affected jurisdictions, including, beginning in March 2020, in the United States. As world leaders focused on the unprecedented human and economic challenges of COVID-19, global equity markets plunged as the coronavirus pandemic spread. In March, the unfolding events led to the worst month for stocks since 2008 and the worst first quarter since 1937. In the second quarter, as a result of unprecedented fiscal and monetary stimulus and the fast tracking of potential COVID-19 vaccines, the markets rebounded strongly. During the third quarter, markets continued to recover but at a slower pace than the earlier quarter in anticipation of further fiscal and monetary stimulus. Any potential impact to our results of operations and financial condition will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain COVID-19 or treat its impact, all of which are beyond our control. These potential impacts, while uncertain, could adversely affect our operating results and financial condition.

The pandemic and resulting economic dislocations have had adverse consequences on our AUM, resulting in decreased revenues, and increased realized and unrealized losses on our investment portfolio partially offset by decreased variable operating and compensation expenses. As a result of this pandemic, the majority of our employees (“teammates”) are working remotely. However, there has been no material impact of remote work arrangements on our operations, including our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures, and there has been no material challenge in implementing our business continuity plan.

Condensed Consolidated Statements of Income

Investment advisory and incentive fees, which are based on the amount and composition of assets under management (“AUM”) in our funds and accounts, represent our largest source of revenues. Growth in revenues depends on good investment performance, which influences the value of existing AUM as well as contributes to higher investment and lower redemption rates and facilitates the ability to attract additional investors while maintaining current fee levels. Growth in AUM is also dependent on being able to access various distribution channels, which is usually based on several factors, including performance and service.

Incentive fees generally consist of an incentive allocation on the absolute gain in a portfolio or a fee of 20% of the economic profit, as defined in the agreements governing the investment vehicle or account. We recognize such revenue only when the uncertainty surrounding the amount of variable consideration has ended or at the time of an investor redemption.

Compensation costs include variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research and all other professional staff. Variable compensation paid to sales personnel and portfolio management and may represent up to 55% of certain revenue streams.

Management fee is incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is paid to Mario J. Gabelli or his designee for acting as Executive Chairman pursuant to his Employment Agreement so long as he is with the Company.

Other income and expense includes net gains and losses from investments (which include both realized and unrealized gains and losses from securities and equity in earnings of investments in partnerships), interest and dividend income, and interest expense. Net gains and losses from investments are derived from our proprietary investment portfolio consisting of various public and private investments and from consolidated investment funds.

Index

Net income/(loss) attributable to noncontrolling interests represents the share of net income attributable to third-party limited partners of certain partnerships and offshore funds we consolidate. Please refer to Notes A and D in our condensed consolidated financial statements included elsewhere in this report.

Condensed Consolidated Statements of Financial Condition

We ended the third quarter of 2020 with approximately $853 million in cash and investments, net of securities sold, not yet purchased of $13 million. This includes $47 million of cash and cash equivalents; $532 million of securities, net of securities sold, not yet purchased, including government obligations of $331 million, shares of GAMCO with market values of $34 million and $274 million invested in affiliated and third-party funds and partnerships, including investments in affiliated closed end funds which have a value of $87 million and more limited liquidity. Our financial resources provide flexibility to pursue strategic objectives that may include acquisitions, lift-outs, seeding new investment strategies, and co-investing, as well as shareholder compensation in the form of share repurchases and dividends.

Included in the Company’s assets are $177.7 million in assets comprised primarily of $175 million of government securities held in trust, liabilities of $6.6 million and redeemable noncontrolling interest of $155.0 million related to PMV and $2.1 million of nonredeemable noncontrolling interest related to the Sponsor.

Total shareholders’ equity was $854 million or $38.25 per share at September 30, 2020 compared to $897 million or $39.93 per share on December 31, 2019. The decrease in equity from the end of 2019 is driven primarily by our net loss of $32.3 million, $5.4 million in repurchases of Class A Common Stock of AC and the spin-off of MGHL of $5.3 million.

Index

RESULTS OF OPERATIONS

(in thousands, except per share data)	Three months ended September 30,						Nine months ended September 30,
	2020			2019			2020			2019
Revenues
Investment advisory and incentive fees	$	1,865		$	2,753		$	6,424		$	8,199
Other		80			1			550			12
Total revenues		1,945			2,754			6,974			8,211
Expenses
Compensation		3,026			3,071			8,405			10,287
Other operating expenses		2,471			2,276			6,422			9,072
Total expenses		5,497			5,347			14,827			19,359
Operating loss		(3,552	)		(2,593	)		(7,853	)		(11,148	)
Other income/(expense)
Net gain/(loss) from investments		15,603			7,613			(34,770	)		42,358
Interest and dividend income		1,218			2,581			4,675			9,541
Interest expense		(32	)		(70	)		(146	)		(148	)
Shareholder-designated contribution		(2,782	)		-			(3,007	)		-
Total other income/(expense), net		14,007			10,124			(33,248	)		51,751
Income/(loss) before income taxes		10,455			7,531			(41,101	)		40,603
Income tax expense/(benefit)		3,564			1,638			(8,858	)		8,064
Income/(loss) before noncontroling interests		6,891			5,893			(32,243	)		32,539
Income/(loss) attributable to noncontrolling interests		937			(359	)		(572	)		2,232
Income/(loss from continuing operations		5,954			6,252			(31,671	)		30,307
Income/(loss) from discontinued operations, net of taxes		(139	)		(301	)		(632	)		(2,141	)
Net income/(loss) attributable to Associated Capital Group, Inc.'s shareholders	$	5,815		$	5,951		$	(32,303	)	$	28,166

Net income/(loss) attributable to Associated Capital Group, Inc.'s shareholders per share:
Basic- Continuing operations	$	0.27		$	0.27		$	(1.41	)	$	1.34
Basic - Discontinued operations		(0.01	)		(0.01	)		(0.03	)		(0.09	)
Basis - Total	$	0.26		$	0.26		$	(1.44	)	$	1.25

Diluted- Continuing operations	$	0.27		$	0.27		$	(1.41	)	$	1.34
Diluted - Discontinued operations		(0.01	)		(0.01	)		(0.03	)		(0.09	)
Diluted - Total	$	0.26		$	0.26		$	(1.44	)	$	1.25

Weighted average shares outstanding:
Basic		22,354			22,514			22,391			22,550
Diluted		22,354			22,514			22,391			22,550

Actual shares outstanding - end of period		22,333			22,496			22,333			22,496

Three Months Ended September 30, 2020 Compared To Three Months Ended September 30, 2019

Overview

Our operating loss for the quarter was $3.6 million compared to $2.6 million for the comparable quarter of 2019. The increase in operating loss was attributable to lower revenues of $0.8 million and higher other operating expenses of $0.2 million. Other income was $14.0 million in the 2020 quarter compared to a gain of $10.1 million in the prior year’s quarter primarily due to mark-to-market changes in the value of our investment portfolio offset by our shareholder-designated contribution of $2.8 million. The Company recorded an income tax expense in the current quarter of $3.5 million compared to an income tax expense of $1.6 million in the year ago quarter. Our current quarter income from continuing operations was $6.0 million, or $0.27 per diluted share, compared to a income from continuing operations of $6.3 million, or $0.27 per diluted share, in the prior year’s comparable quarter.

Index

Revenues

Total revenues were $1.9 million for the quarter ended September 30, 2020, $0.8 million lower than the prior year period.

We earn advisory fees based on the average level of AUM in our products. Advisory fees were $1.9 million for 2020, compared to $2.8 million for the prior year period, a decrease of $0.9 million. AUM of $1.25 billion decreased $0.4 billion in the current quarter from prior year quarter. Incentive fees are not recognized until the uncertainty surrounding the amount of variable consideration ends and the fee is crystalized, typically annually on December 31. If the uncertainty surrounding the amount of variable consideration had ended on September 30, we would have recognized $1.1 million and $2.2 million of incentive fees for the quarter ended September 30, 2020 and 2019, respectively.

Expenses

Compensation, which includes variable compensation, salaries, bonuses and benefits, was $3.0 million for the three months ended September 30, 2020, compared to $3.1 million for the three months ended September 30, 2019. Fixed compensation, which include salaries and benefits, increased to $1.7 million for the 2020 period from $1.3 million in the prior year. Discretionary bonus accruals were $0.5 million and $0.6 million in the 2020 and 2019 periods, respectively. The remainder of the compensation expense represents variable compensation that fluctuates with management fee and incentive allocation revenues and gains on investment portfolios. Variable payouts as a percent of revenues are impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs. For 2020, these variable payouts were $0.8 million, down $0.1 million from $0.9 million in 2019.

For the three months ended September 30, 2020 and 2019, stock-based compensation was $0.1 million and $0.3 million, respectively.

Management fee expense, recorded in other operating expense, represents incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is payable to Mario J. Gabelli pursuant to his employment agreement. No management fee expense was recorded for the three-month period ended September 30, 2020 due to the year to date pre-tax loss. A management fee expense of $0.8 million was recorded for the three-month period ended September 30, 2019.

Other operating expenses prior to management fees were $2.5 million during the third quarter of 2020 compared to $1.4 million in the third quarter of 2019. The increase was due primarily to higher legal and accounting fees of $0.6 million related to the Morgan Group spin-off.

Other

Net gain/(loss) from investments is primarily related to the performance of our securities portfolio and investments in partnerships. Investment gains were $15.6 million in the 2020 quarter versus a gain of $7.6 million in the comparable 2019 quarter reflecting mark-to-market recoveries in the value of our investments.

Interest and dividend income decreased to $1.2 million in the 2020 quarter from $2.5 million in the 2019 quarter primarily due to lower interest rates on our cash balances and US Treasuries and decreased dividends from the prior year’s quarter.

Nine Months Ended September 30, 2020 Compared To Nine Months Ended September 30, 2019

Overview

Index

Our operating loss for the year-to-date period was $7.9 million compared to $11.1 million for the comparable period of 2019. Revenues declined by $1.2 million from $8.2 million in the prior year-to-date period. Other income decreased to a loss $33.2 million in the 2020 period from a gain of $51.8 million in the prior year’s period primarily due to mark-to-market gains on our investment portfolio. Stock-based compensation fell by $1.3 million year-over-year. The Company recorded an income tax benefit of $9.0 million in the current year compared to an expense of $8.1 million in the year ago period. Consequently, our 2020 period net loss from continuing operations increased to $31.7 million, or $(1.41) per diluted share, from net income from continuing operations of $30.3 million, or $1.34 per diluted share, in the prior year’s comparable period.

Revenues

Total revenues were $7.0 million and $8.2 million for the nine month periods ended September 30, 2020 and 2019, respectively.

Advisory fees, including incentive fees, were $6.4 million for the 2020 nine months compared to $8.2 million for the prior year nine months, a decrease of $1.8 million. This decrease is due to the decrease in average AUM over the period.

Other revenues were $0.6 million for the nine month period ended September 30, 2020 primarily due to rental income on properties acquired in the U.S. and the UK during 2019 and 2020, respectively.

Compensation, which includes variable compensation, salaries, bonuses and benefits, was $8.4 million for the nine months ended September 30, 2020, compared to $10.3 million for the nine months ended September 30, 2019. Fixed compensation, which include salaries and benefits, declined to $4.6 million for the 2020 period from $4.1 million in the prior year. Discretionary bonus accruals were $1.6 million and $1.7 million in the 2020 and 2019 periods, respectively. The remainder of the compensation expense represents variable compensation that fluctuates with management fee and incentive allocation revenues and gains on investment portfolios. Variable payouts as a percent of revenues are impacted by the mix of products upon which performance fees are earned and the extent to which they may exceed their allocated costs. For 2020, these variable payouts were $2.5 million, down $1.0 million from $3.5 million in 2019.

For the nine months ended September 30, 2020 and 2019, stock-based compensation was $(0.3) million and $1.0 million, respectively. The decrease was due to the cancellation of Phantom RSAs related to headcount reductions at G.research and volatility in AC stock price.

Management fee expense, recorded in other operating expense, represents incentive-based and entirely variable compensation in the amount of 10% of the aggregate pre-tax profits which is payable to Mario J. Gabelli pursuant to his employment agreement. AC recorded management fee expense of $4.0 million for the nine month period ended September 30, 2019. No management fee expense was recorded for the nine month period ended September 30, 2020 due to the year to date pre-tax loss.

Other operating expenses were $6.4 million during the first nine months of 2020 compared to $5.1 million in the prior year. The increase was due primarily to higher legal and accounting fees of $1.0 million related to the Morgan Group spin-off.

Investment losses were $34.8 million in the 2020 nine month period compared to a $42.4 million gain in the comparable 2019 period reflecting mark-to-market changes in the value of our investments.

Interest and dividend income decreased to $4.7 million in the 2020 period from $9.5 million in 2019 primarily due to lower interest rates on our cash balances and lower dividend income of $4.5 million.

Index

ASSETS UNDER MANAGEMENT

Our revenues are highly correlated to the level of assets under management and fees associated with our various investment products, rather than our own corporate assets. Assets under management, which are directly influenced by the level and changes of the overall equity markets, can also fluctuate through acquisitions, the creation of new products, and the addition of new accounts or the loss of existing accounts. Since various equity products have different fees, changes in our business mix may also affect revenues. At times, the performance of our equity products may differ markedly from popular market indices, and this can also impact our revenues.

Assets under management were $1.25 billion as of September 30, 2020, a decrease of 27.1% and 24.2% over the December 31, 2019 and September 30, 2019 periods, respectively. The changes were attributable to market appreciation/(depreciation) and investor redemptions.

Assets Under Management (in millions)

							% Change From
	September 30, 2020		December 31, 2019		September 30, 2019		December 31, 2019			September 30, 2019

Event Merger Arbitrage	$	1,091	$	1,525	$	1,466		(28.5	)		(25.6	)
Event-Driven Value		105		132		128		(20.5	)		(18.0	)
Other		55		59		57		(6.8	)		(3.5	)
Total AUM	$	1,251	$	1,716	$	1,651		(27.1	)		(24.2	)

Fund flows for the three months ended September 30, 2020 (in millions):

	June 30, 2020		Market appreciation/ (depreciation)		Net cash flows			September 30, 2020

Event Merger Arbitrage	$	1,147	$	46	$	(102	)	$	1,091
Event-Driven Value		104		2		(1	)		105
Other		54		2		(1	)		55
Total AUM	$	1,305	$	50	$	(104	)	$	1,251

LIQUIDITY AND CAPITAL RESOURCES

Our principal assets are highly liquid in nature and consist of cash and cash equivalents, short-term investments, marketable securities and investments in funds and investment partnerships. Cash and cash equivalents are comprised primarily of U.S. Treasury money market funds. Although investments in partnerships and offshore funds are subject to restrictions as to the timing of redemptions, the underlying investments of such partnerships or funds are, for the most part, liquid, and the valuations of these products reflect that underlying liquidity.

Index

Summary cash flow data is as follows (in thousands):

	Nine months ended September 30,
	2020			2019
Cash flows provided by (used in) from continuing operations:
Operating activities	$	(272,203	)	$	(42,321	)
Investing activities		(176,792	)		(3,591	)
Financing activities		154,211			(10,211	)
Net decrease from continuing operations		(294,784	)		(56,123	)
Cash flows provided by (used in) discontinued operations
Operating activities		114			(2,507	)
Net decrese in cash and cash equivalents		(294,670	)		(58,630	)
Cash and cash equivalents at beginning of period		342,001			398,363
Cash and cash equivalents at end of period	$	47,331		$	339,733

We require relatively low levels of capital expenditures and have a highly variable cost structure which fluctuates based on the level of revenues we receive. We anticipate that our available liquid assets should be more than sufficient to meet our cash requirements. At September 30, 2020, we had total cash and cash equivalents of $47 million and $678 million in net investments. Of these amounts, $11.3 million and $24.4 million, respectively, were held by consolidated investment funds and may not be readily available for the Company to access.

Net cash used in operating activities from continuing operations was $272.2 million for the nine months ended September 30, 2020 due to $283.1 million of increases in trading securities, our net loss of $32.3 million, and net receivables/payables of $6.1 million partially offset by net distributions from investment partnerships of $20.6 million and $28.7 million of adjustments for noncash items, primarily losses on investments securities and partnership investments and deferred taxes. Net cash used in investing activities from continuing operations was $176.8 million due to the investment of cash in a trust account by the PMV SPAC of $175 million, the purchase of a building for $11.1 million and purchases of securities of $0.4 million partially offset by proceeds from sales of securities of $8.4 million and return of capital on securities of $1.3 million. Net cash provided by financing activities from continuing operations was $154.2 million resulting from contributions from redeemable non-controlling interests of $162.6 million and nonredeemable non-controlling interests of $2.1 million reduced by dividends paid of $4.5 million and stock buyback payments of $5.4 million. Cash provided by discontinued operations from the spin-off of MGHL were $0.1 million.

Net cash used in operating activities from continuing operations was $42.3 million for the nine months ended September 30, 2019 primarily due to our net income adjusted for non-cash items of $34.1 million and $38.6 million of net losses on sale of securities and net contributions to partnerships, $54.3 million of increases in trading securities and net decreases of $16.5 million to receivables and accrued expenses. Net cash used by investing activities from continuing operations was $3.6 million due to net proceeds from sales of available for sale securities and return of capital distributions of $2.7 million offset by the purchase of a building for $6.3 million. Net cash used in financing activities from continuing operations was $10.2 million largely resulting from dividends and stock buyback payments of $7.9 million and redemptions from consolidated funds of $2.3 million. Net cash used in operating activities by discontinued operations from the spin-off of MGHL were $2.5 million.

Critical Accounting Policies and Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ significantly from those estimates. See Note A and the Company’s Critical Accounting Policies in Management’s Discussion and Analysis of Financial Condition and Results of Operations in AC’s 2019 Annual Report on Form 10-K filed with the SEC on March 16, 2020 for details on Critical Accounting Policies.

Index

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company this information is not required to be provided.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our current management, including our CEO and CAO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2020. Based on this evaluation of our disclosure controls and procedures management has concluded that our disclosure controls and procedures were not effective as of September 30, 2020 because of a material weakness in our internal control over financial reporting, as further described below.

Notwithstanding that our disclosure controls and procedures as of September 30, 2020 were not effective, and the material weakness in our internal control over financial reporting as described below, management believes that the consolidated financial statements and related financial information included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows as of the dates presented, and for the periods ended on such dates, in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Management's Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act and based upon the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”)). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP.

An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error or overriding of controls, and therefore can provide only reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements, including the possibility of human error, the circumvention or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis.

Under the supervision and with the participation of our management we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the COSO framework. Based on evaluation under these criteria, management determined, based upon the existence of the material weakness described below, that we did not maintain effective internal control over financial reporting as of September 30, 2020.

The material weakness in internal control over financial reporting was identified in 2019 and caused by the Company not having sufficient personnel with technical accounting and reporting skills, which resulted in the lack of segregation of duties to separate financial statement preparation from senior management review and misstatements during 2019 related to nonroutine transactions that were corrected before issuance of our Form 10Qs and 10K for periods in 2019. This material weakness resulted in an increased risk of a material misstatement in the financial statements.

Changes in Internal Control Over Financial Reporting

There were no changes during the quarter ended September 30, 2020 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Index

Remediation Plan and Status

In light of the material weakness in our internal controls over financial reporting, management has taken steps to enhance and improve the design and operating effectiveness of our internal controls over financial reporting, including the following implemented steps: (i) appointed additional qualified personnel to address inadequate segregation of duties; (ii) assigned preparation and review responsibilities to additional personnel for the financial reporting process; (iii) documented the completion and review of assigned responsibilities through checklists and commenced a search to add additional finance staff to augment accounting personnel.

We are working to remediate the material weakness as quickly and efficiently as possible. However, we did identify misstatements during the period ended September 30, 2020 related to nonroutine transactions that were corrected before the issuance of our Form 10Q. The material weakness will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

Forward-Looking Information

Our disclosure and analysis in this report contain some forward-looking statements. Forward-looking statements give our current expectations or forecasts of future events. You can identify these statements because they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. They also appear in any discussion of future operating or financial performance. In particular, these include statements relating to future actions, future performance of our products, expenses, the outcome of any legal proceedings, and financial results. Although we believe that we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know about our business and operations, there can be no assurance that our actual results will not differ materially from what we expect or believe. Some of the factors that could cause our actual results to differ from our expectations or beliefs include, without limitation:

•

the adverse effect from a decline in the securities markets

•

a decline in the performance of our products

•

a general downturn in the economy

•

changes in government policy or regulation

•

changes in our ability to attract or retain key employees

•

unforeseen costs and other effects related to legal proceedings or investigations of governmental and self-regulatory organizations

We also direct your attention to any more specific discussions of risk contained in our Form 10 and other public filings. We are providing these statements as permitted by the Private Litigation Reform Act of 1995. We do not undertake to update publicly any forward-looking statements if we subsequently learn that we are unlikely to achieve our expectations or if we receive any additional information relating to the subject matters of our forward-looking statements.

Part II:

Other Information

Item 1.

Legal Proceedings

From time to time, the Company may be 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. For any such matters, the condensed consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether there exist losses which may be reasonably possible and will, if material, make the necessary disclosures. However, management believes such amounts, both those that would be probable and those that would be reasonably possible, are not material to the Company’s financial condition, results of operations or cash flows at September 30, 2020.

Index

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information with respect to the repurchase of Class A Common Stock of AC during the three months ended September 30, 2020:

Period	Total Number of Shares Repurchased		Average Price Paid Per Share, net of Commissions			Total Number of Shares Repurchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs
07/01/20 - 07/31/20		804	$	35.94			804		980,804
08/01/20 - 08/31/20		8,607		38.11			8,607		972,197
09/01/20 - 09/30/20		20,326		36.62	(a)		20,326		951,871
Totals		29,737	$	37.03			29,737

(a) Post Spin-off of MGHL

Item 6.

(a) Exhibits

31.1	Certification of CEO pursuant to Rule 13a-14(a).

31.2	Certification of CAO pursuant to Rule 13a-14(a).

32.1	Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certification of CAO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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 thereunto duly authorized.

ASSOCIATED CAPITAL GROUP, INC.

(Registrant)

By: /s/ Kenneth D. Masiello

Name: Kenneth D. Masiello

Title: Chief Accounting Officer

Date: November 10, 2020