MORGAN GROUP HOLDING CO. AND SUBSIDIARY
All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission that are not required under the related instructions or are inapplicable
have been omitted.
MORGAN GROUP HOLDING CO. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
(continued)
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|
|
Year Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Financing activities
|
|
|
|
|
|
|
|
Capital contribution
|
|
$
|
-
|
|
|
$
|
410,889
|
|
|
Return of capital
|
|
|
-
|
|
|
|
(3,300,000
|
)
|
|
Issuance of common stock
|
|
|
-
|
|
|
|
515,000
|
|
|
Cash used in / provided by financing activities
|
|
|
-
|
|
|
|
(2,374,111
|
)
|
|
Net increase/(decrease) in cash and cash equivalents and restricted cash
|
|
|
(1,840,694
|
)
|
|
|
(4,743,608
|
)
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
|
6,787,097
|
|
|
|
11,530,705
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
4,946,403
|
|
|
$
|
6,787,097
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash (paid)/received for Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
Cash received from Associated Capital Group, Inc. for Income taxes
|
|
$
|
107,158
|
|
|
$
|
723,019
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation to cash, cash equivalents and restricted cash
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
4,746,403
|
|
|
$
|
6,587,097
|
|
|
Restricted cash: deposits from clearing organizations
|
|
|
200,000
|
|
|
|
200,000
|
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
4,946,403
|
|
|
$
|
6,787,097
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activity:
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|
|
|
|
|
|
|
|
- On October 31, 2019 Morgan Group merged with G.research by exchanging 50 million shares of Morgan Group
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|
|
(“MGHL” - OTC) common stock for 100% of Associated Capital Group's interest in G.research.
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|
|
|
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|
A. Organization and Business Description
Morgan Group Holding Co. (the “Company,” “Morgan Group,” or “Morgan”) was incorporated in November 2001 as a Delaware corporation to serve as a holding company which seeks acquisitions as part of its
strategic alternatives. Prior to the October 31, 2019 merger with G.research, LLC (“G.research”), discussed below, Morgan Group had no operating companies.
The Company acquired G.research from Associated Capital Group, Inc. (“AC”), an affiliate of the Company, on October 31, 2019, in exchange for issuing 500,000 shares of the
Company’s common stock to AC (the “Merger”). Accordingly, G.research became a wholly owned subsidiary of the Company. Prior to the transaction, G.research was a wholly-owned subsidiary of Institutional Services holdings, LLC, which, in turn, is
a wholly-owned subsidiary of AC. After the transaction, AC had an 83.3% ownership interest in the Company. As a result of this common ownership, the transaction was treated as a combination between entities under common control that led to a
change in the reporting entity. The recognized assets and liabilities were transferred at their carrying amounts at the date of the transaction. For 2019 year comparative information, for the period prior to the Merger the companies have been
combined retrospectively.
On March 16, 2020, AC’s Board of Directors approved the spin-off of the Company to AC’s shareholders. Upon execution of the spin-off on August 5, 2020, AC distributed to its shareholders on a pro rata
basis the 500,000 shares of Morgan that AC owns.
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.
G.research is a broker-dealer registered with the Securities and Exchange Commission (the “SEC”) and is regulated by the Financial Industry Regulatory Authority (“FINRA”).
The Company provides institutional investors and investment partnerships with investment research with a particular focus on small-cap and mid-cap companies. The team of sell-side analysts follows
industry sectors on a global basis and performs fundamental security analysis using a Private Market Value (“PMV”) framework. PMV investing is a disciplined, research-driven approach based on security analysis. In this process, the analyst
selects stocks whose intrinsic value, based on the analyst’s estimate of current asset value and future growth and earnings power, is significantly different from the public market value as reflected in the public market. PMV is defined as the
price an informed industrial buyer would be likely to pay to acquire the business. The research focuses on company fundamentals, cash flow statistics, and catalysts that will help realize returns.
The Company generates brokerage commission revenues from securities transactions executed on an agency basis on behalf of institutional clients and mutual funds, private wealth management clients and
retail customers of affiliated companies. The Company generates revenue from syndicated underwriting activities. It primarily participates in the offerings of certain closed-end funds advised by Gabelli Funds, LLC, a wholly-owned subsidiary of
GAMCO Investors, Inc. (“GBL”) an affiliate. The Company also earns investment income generated from its proprietary trading activities.
The Company acts as an introducing broker, and all securities transactions for the Company and its customers are cleared through and carried by three New York Stock Exchange (“NYSE”) member firms on a
fully disclosed basis. The Company has Proprietary Accounts of Introducing Brokers (“PAIB”) agreements with these firms. Accordingly, open customer transactions are not reflected in the accompanying Consolidated Statement of Financial Condition.
The Company is exposed to credit losses on these open transactions in the event of nonperformance by its customers, pursuant to conditions of its clearing agreements with its clearing brokers. This exposure is mitigated by the clearing brokers’
policy of monitoring the collateral and credit of the counterparties until the transaction is completed.
The Company’s principal market is in the United States.
B. Significant Accounting Policies
Consolidated Financial Statements
All intercompany transactions and balances have been eliminated. The Company consolidated the subsidiary from the date of the Merger with retrospective application.
Segment Analysis
The Company is one segment for reporting purposes.
Cash and Cash Equivalents
The Company held an investment in an affiliated money market mutual fund which is invested solely in U.S. Treasuries.
Securities Owned, at Fair Value
Securities owned, at fair value, including common stocks, closed-end funds and mutual funds, are recorded at fair value with the resulting realized and unrealized gains and losses reflected in
principal transactions in the Consolidated Statements of Operations. Realized gains and losses from securities transactions are recorded on the identified cost basis. All securities transactions and transaction costs are recorded on a trade date
basis. Dividends are recorded on the ex-dividend date. Interest income and interest expense are accrued as earned or incurred.
Deposits with Clearing Organizations
Deposits with clearing organizations is restricted cash held at the clearing organizations.
Fair Value of Financial Instruments
The carrying amounts of all financial instruments in the Consolidated Statements of Financial Condition approximate their fair values.
The Company’s financial instruments have been categorized based upon a fair value hierarchy:
|
•
|
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets include cash equivalents.
|
|
•
|
Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar
assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. As of and during the
years ended December 31, 2020 and 2019, there were no Level 2 securities owned.
|
|
•
|
Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These assets include infrequently traded
common stocks. As of and during the years ended December 31, 2020 and 2019, there were no Level 3 securities owned.
|
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value
measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value
measurement in its entirety requires judgment and considers factors specific to the asset or liability. Investments are transferred into and out of any level at their beginning period values.
The availability of observable inputs can vary from instrument to instrument and is affected by a wide variety of factors, including, for example, the type of instrument, whether the instrument is new
and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value
requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized as Level 3.
In the absence of a closing price, an average of the bid and ask is used. Bid prices reflect the highest price that market participants are willing to pay for an asset. Ask prices represent the
lowest price that market participants are willing to accept for an asset.
Cash equivalents – Cash equivalents consist of an affiliated money market mutual fund, which is invested solely in U.S. Treasuries. Cash equivalents are valued using the mutual fund’s net
asset value (“NAV”) to measure fair value. Accordingly, cash equivalents are categorized in Level 1 of the fair value hierarchy.
Receivables from Affiliates/Payables to Affiliates
Receivables from affiliates consist of receivables from certain affiliates for expenses paid on their behalf. In 2020 and 2019, payables to affiliates are primarily comprised of sales manager fees
and expenses paid on behalf of the Company due to AC. See Notes D and G.
Revenue from Contracts with Customers
See Note C.
Dividends and Interest
Dividends are recorded on the ex-dividend date. Interest income and interest expense are accrued as earned or incurred. These amounts are not related to contracts with customers.
Depreciation
Fixed assets are recorded at cost and depreciated using the straight-line method over their estimated useful lives of four to seven years.
Allocated Expenses
The Company is charged or incurs certain overhead expenses that are included in general and administrative and occupancy and equipment expenses in the Consolidated Statements of Operations. These
overhead expenses are allocated to the Company by AC and other AC affiliates or allocated by the Company to other AC affiliates as the expenses are incurred, based upon methodologies periodically reviewed by the management of the Company and the AC
affiliates. In addition, Gabelli & Company Investment Advisers, Inc. (“GCIA”), a wholly – owned subsidiary of AC, and GAMCO Investors, Inc. (“GBL”) serve as paymasters for the Company under compensation payment sharing agreements. This
includes compensation expense and related payroll taxes and benefits which are allocated to the Company for professional staff performing duties related entirely to the Company and those compensation expenses and related payroll taxes and benefits
which relate to professional staff who serve more than one entity and whose compensation is therefore allocated to the Company as well as to its affiliates. These compensation expenses are included in compensation and related costs in the
Consolidated Statements of Operations.
Income Taxes
Morgan Group Holding Co., which became part of the AC consolidated tax group after the merger on October 31, 2019, would generally not record an income tax provision as it was generally in a loss
position for income tax purposes and any deferred tax benefit from net operating losses would be offset with a full valuation allowance. However, for the years ended December 31, 2020 and 2019, the Company is a member of a tax sharing agreement
among members of the AC consolidated tax group and records an income tax provision. The Company generally settles either the benefit or expense with AC monthly, but not less than annually. The Company accounts for income taxes under the asset and
liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities
are determined based on the differences between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income tax expense/benefit in the period that includes the enactment date of the change in tax rate.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. A valuation allowance would be recorded to reduce the carrying value
of deferred tax assets to the amount that is more likely than not to be realized. In making such a determination of whether a valuation allowance is necessary, the Company considers all available positive and negative evidence, including future
reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event the Company were to determine that the Company would be more likely than not to realize
the Company’s deferred income tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the previously recorded deferred tax asset valuation allowance, which would reduce the provision for income
taxes.
The Company records uncertain tax positions on the basis of a two-step process: (1) the Company determines whether it is more likely than not that the tax positions will be sustained based on the
technical merits of the position; and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is greater than 50 percent likely to be realized upon ultimate
settlement with the related tax authority. The Company recognizes the accrual of interest on uncertain tax positions and penalties in income tax benefit on the Consolidated Statements of Operations. Accrued interest and penalties on uncertain tax
positions are included within accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.
On August 5, 2020, Associated Capital Group, Inc. distributed all its shares of Morgan Group Holdings, Co. (“Morgan”). Management concluded that the spin-off of the Morgan Group Holdings, Co. group represented a
strategic shift pursuant to Accounting Standards Update No. 2014-08. For Federal income tax purposes, the transaction was considered a tax-free spin-off under IRC Section 355 and Morgan Group Holdings, Co. will be required to file standalone
Federal and State tax returns from the date of the spin-off.
As of August 5, 2020, the Company’s operations are included in the consolidated U.S. federal and certain state and local income tax returns of Associated Capital Group, Inc. The Company’s federal and certain state and
local income taxes are calculated as if the Company filed on a separate return basis, and the amount of current tax or benefit is either remitted to or received from AC using a benefits for loss approach such that net operating loss (or other tax
attribute) is characterized as realized by the Company when those tax attributes are utilized in the consolidated tax return of AC. This is the case even if the Company would not otherwise have realized those tax attributes.
Use of Estimates
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during that reporting period.
Actual results could differ from those estimates.
Recent Accounting Developments
In 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 Condition. The Company adopted this ASU effective January 1, 2019 with no material impact on its 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
Consolidated Statement of Operations 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.
C. Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the
Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the
Company satisfies a performance obligation.
Significant judgments that affect the amounts and timing of revenue recognition:
The Company’s analysis of the timing of revenue recognition of each revenue stream is based on the provisions of each respective contract. Performance obligations could, however, change from time to
time if and when existing contracts are modified or new contracts are entered into. These changes could potentially affect the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the
price to performance obligations. In the case of the revenue streams discussed below, the performance obligation is satisfied either at a point in time or over time. The judgments outlined below, where the determination as to these factors is
discussed in detail, are continually reviewed and monitored by the Company when new contracts or contract modifications occur. Transaction price is in all instances formulaic and not subject to significant (or any) judgment at the current time.
The Company’s assessment of the recognition of these revenues is as follows:
Revenue from contracts with customers includes commissions, fees earned from affiliated entities pursuant to research services agreements, underwriting fees and sales manager fees.
Commissions
Brokerage commissions. Acting as agent, the Company buys and sells securities on behalf of its customers. Commissions are charged on the execution of these securities transactions made on
behalf of client accounts and are negotiated. The Company recognizes commission revenue when the related securities transactions are executed on trade date. The Company believes that the performance obligation is satisfied on the trade date because
that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to/from the customer. Commissions earned are typically collected from the clearing
brokers utilized by the Company on a daily or weekly basis.
Hard dollar payments. The Company provides research services to unrelated parties, for which direct payment is received. The company may, or may not, have contracts for such services. Where a
contract for such services is in place, the contractual fee for the period is recognized ratably over the contract period, which is considered the period over which the Company satisfies its performance obligation. For payments where no research
contract exists, revenue is not recognized until agreement is reached with the client at which time the performance obligation is considered to have been met and revenue is recognized.
Commission revenues are impacted by the perceived value of the research product provided to clients, the volume of securities transactions and the acquisition or loss of new client relationships.
Fees earned from affiliated entities pursuant to research services agreements
The Company receives direct payments for research services provided to related parties pursuant to contracts. The contractual fee for the period is fixed and recognized ratably over the contract
period, typically a calendar year, which is considered the period over which the Company satisfies its performance obligation. Payments for contracts with affiliated parties are collected monthly.
Underwriting fees
Underwriting fees. The Company acts as underwriter in an agent capacity. Revenues are earned from fees arising from these offerings and the terms are
set forth in contracts between the underwriters and the issuer. The Company’s underwriting revenue is considered to be conditional revenue because it is subject to reduction to zero once the offsetting syndicate expenses have been quantified by
the syndicate manager (i.e., lead underwriter) and allocated to each underwriter in proportion to their participation in the offering. Revenue recognition is therefore delayed until it is probable that a significant reversal in the amount of
revenue recognized will not occur. That is, it is recognized only when uncertainty associated with the syndicate expenses is subsequently resolved and final settlement of syndicate accounts is effected by the syndicate manager. Payment is
typically received from the syndicate manager within ninety days after settlement date.
Selling concessions. The Company participates as a member of the selling group of underwritten equity offerings and receives compensation based on the
difference between what its customers pay for the securities sold to its institutional clients and what the issuer receives. The terms of the selling concessions are set forth in contracts between the Company and the underwriter. Revenue is
recognized on the trade date (the date on which the Company purchases the securities from the issuer) for the portion the Company is contracted to buy. The Company believes that the trade date is the appropriate point in time to recognize revenue
for securities underwriting transactions as there are no significant actions the Company needs to take subsequent to this date, and the issuer obtains the control and benefit of the capital markets offering at this point. Selling concessions earned
are typically collected from the clearing brokers utilized by the Company on a daily or weekly basis.
Sales manager fees
The Company participates as sales manager of at-the-market offerings of certain affiliated closed-end funds and receives a tiered percentage of proceeds as stipulated in agreements between the
Company, the funds and the funds’ investment adviser. The Company recognizes sales manager fees upon sale of the related closed-end funds. Sales manager fees earned are fixed and typically collected from the clearing brokers utilized by the
Company on a daily or weekly basis.
Total revenues from contracts with customers by type were as follows for the years ended December 31, 2020 and 2019:
|
|
|
2020
|
|
|
2019
|
|
|
Commissions
|
|
$
|
3,586,066
|
|
|
$
|
5,903,200
|
|
|
Hard dollar payments
|
|
|
364,932
|
|
|
|
472,875
|
|
|
|
|
|
3,950,998
|
|
|
|
6,376,075
|
|
|
Research services
|
|
|
-
|
|
|
|
1,502,500
|
|
|
Underwriting fees
|
|
|
70,488
|
|
|
|
431,114
|
|
|
Sales manager fees
|
|
|
334,825
|
|
|
|
733,422
|
|
|
|
|
$
|
4,356,311
|
|
|
$
|
9,043,111
|
|
D. Related Party Transactions
At December 31, 2020 and 2019, the Company had an investment of $4,724,290 and $ 6,579,577, respectively, in The Gabelli U.S. Treasury Money Market Fund advised by Gabelli Funds, LLC, which is an
affiliate of the Company. The amount is recorded in cash and cash equivalents in the Consolidated Statements of Financial Condition. Income earned from this investment totaled $64,504 and $175,846 in 2020 and 2019, respectively, and is included
in dividends and interest revenues in the Consolidated Statements of Operations.
In 2020 and 2019, the Company earned $2,582,914 and $4,875,768 or approximately, 64% and 76%, respectively, of its commission revenue from transactions executed on behalf of funds advised by Gabelli Funds, LLC.,
(“Gabelli Funds”) and private wealth management clients advised by GAMCO Asset Management Inc., (“GAMCO Asset”), each affiliates of the Company. GAMCO Asset and Gabelli Funds each paid $752,550 and $750,000, respectively, to the Company
pursuant to research services agreements (see Note C) for the year ended December 31, 2019. Effective February 1, 2019, the Company amended its existing research services agreements, whereby GAMCO Asset and Gabelli Funds shall each pay $62,500
per month for research services provided. These agreements were terminated on January 1, 2020.
The Company participated as agent in the secondary offerings of the GAMCO Global Gold, Natural Resources & Income Trust (“GGN”). Pursuant to sales agreements between the parties, the Company earned sales manager
fees related to this offering of $334,825 and $729,893 during 2020 and 2019, respectively. In connection with the clearance of the GGN transactions the Company collects and pays GGN and has a payable to GGN for $511,108 as of December 31, 2019
included in payables to affiliates in the Consolidated Statement of Financial Condition. Sales manager fees are separately disclosed in the Consolidated Statements of Operations.
The Company participated in the secondary offerings of the preferred stock of affiliated closed end funds during 2020 and 2019 as participants in the underwriting syndicate and selling groups earning
$16,000 and $431,114, respectively.
The Company made a cash return of capital to AC on June 19, 2019, in the amount of $3,300,000. AC made two capital contributions pursuant to the merger between G.research and Morgan Group on October
28, 2019 and November 21, 2019, of $300,000 and $110,889, respectively. See Note I.
The Company pays AC a management fee equal to 20% of the Company’s year-to-date pretax profits before consideration of this fee. In 2020 and 2019, the Company did not pay a management fee to AC as
there were no pretax profits.
AC has a sublease agreement with GBL that currently expires on April 1, 2020, which is subject to annual renewal. AC allocates this expense to the Company based on the percentage of square footage
occupied by the Company’s employees (including pro rata allocation of common space). Pursuant to the sublease, AC and the Company shall pay a monthly fixed lease amount for the twelve-month contractual period. For the years ended December 31,
2020 and 2019, the Company paid $269,448 and $321,975, respectively, under the sublease agreement. These amounts are included within occupancy and equipment expenses on the Consolidated Statements of Operations.
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 December 31, 2020 and 2019 and indicates the
fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Assets Measured at Fair Value on a Recurring Basis as of December 31, 2020:
|
|
|
December 31, 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
|
|
$
|
4,724,290
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,724,290
|
|
|
Total assets at fair value
|
|
$
|
4,724,290
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,724,290
|
|
There were no transfers between any Levels during the year ended December 31, 2020.
Assets Measured at Fair Value on a Recurring Basis as of December 31, 2019:
|
|
|
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
|
|
$
|
6,579,577
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,579,577
|
|
|
Total assets at fair value
|
|
$
|
6,579,577
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,579,577
|
|
There were no transfers between any Levels during the year ended December 31, 2019.
F. Retirement Plan
The Company participates in Associated Capital’s incentive savings plan (the “Plan”), covering substantially all employees. Company contributions to the Plan are determined annually by management of
the Company and AC’s Board of Directors but may not exceed the amount permitted as a deductible expense under the Internal Revenue Code. Amounts expensed for allocated contributions to this Plan amounted to approximately $17,746 and $17,746 in
2020 and 2019, respectively, and are recorded as compensation and related costs in the Consolidated Statements of Operations.
G. Income Taxes
Morgan Group Holding Co. filed its federal and state tax returns on a standalone basis as of October 31, 2019. On November 1, 2019, AC purchased 100% of the share of Morgan Group Holding Co. where its operations for
the period November 1, 2019 to December 31, 2019 were included in the consolidated U.S. Federal and certain state and local income tax returns of AC.
For the years ended December 31, 2019 and through August 5, 2020,
the operations of Morgan Group Holdings Co. were included in the consolidated U.S. federal and certain state and local income tax returns of AC. The Company’s federal and certain state and local income taxes are calculated as if the Company
filed on a separate return basis, and the amount of current tax or benefit is either remitted to or received from AC using a benefit for loss approach such that the net operating loss (or other tax attribute) is characterized as realized by the
Company when those tax attributes are utilized in the consolidated tax return of AC. This is the case even if the Company would not otherwise have realized those tax attributes.
On August 5, 2020, Associated Capital Group, Inc. distributed all its shares of Morgan Group Holdings, Co. (“Morgan”). Management concluded that the spin-off of the Morgan Group Holdings, Co.
group represented a strategic shift pursuant to Accounting Standards Update No. 2014-08. For Federal income tax purposes, the transaction was considered a tax-free spin-off under IRC Section 355 and Morgan Group Holdings, Co. will be required to
file standalone Federal and State tax returns from the date of the spin-off.
As of August 5, 2020, the Company’s operations are included in the consolidated U.S. federal and certain state and local income tax returns of Associated Capital Group, Inc. The Company’s
federal and certain state and local income taxes are calculated as if the Company filed on a separate return basis, and the amount of current tax or benefit is either remitted to or received from AC using a benefits for loss approach such that net
operating loss (or other tax attribute) is characterized as realized by the Company when those tax attributes are utilized in the consolidated tax return of AC. This is the case even if the Company would not otherwise have realized those tax
attributes.
The Company, however, will be required to file its own federal, state and local income tax returns with its parent, Morgan Group, from the date of the spin-off. Any
tax attributes generated by the Company will not be immediately realized after August 5, 2020 but will instead be deferred and classified as net operating losses and/or other tax attribute carryforwards.
Income tax benefit for the years ending December 31 consisted of:
|
|
|
2020
|
|
|
2019
|
|
|
Federal:
|
|
|
|
|
|
|
|
Current
|
|
$
|
(186,217
|
)
|
|
$
|
(707,040
|
)
|
|
Deferred
|
|
|
2,572
|
|
|
|
215,992
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
(20,159
|
)
|
|
|
(63,942
|
)
|
|
Deferred
|
|
|
361
|
|
|
|
54,087
|
|
|
Total
|
|
$
|
(203,443
|
)
|
|
$
|
(500,903
|
)
|
A reconciliation of the federal statutory rate to the effective tax rate for the years ended December 31 is set forth below:
|
|
|
2020
|
|
|
2019
|
|
|
Statutory Federal income tax rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
|
State income tax, net of Federal benefit
|
|
|
3.12
|
%
|
|
|
-2.18
|
%
|
|
State Valuation Allowance
|
|
|
-2.17
|
%
|
|
|
3.16
|
%
|
|
Federal Valuation Allowance
|
|
|
-8.29
|
%
|
|
|
0.20
|
%
|
|
Other
|
|
|
-1.23
|
%
|
|
|
-1.33
|
%
|
|
Effective income tax rate
|
|
|
12.43
|
%
|
|
|
20.85
|
%
|
Significant components of our deferred tax assets and liabilities as of December 31, 2020 and 2019 are as follows:
|
|
|
2020
|
|
|
2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Federal and State NOL Carryforward
|
|
|
337,606
|
|
|
|
174,590
|
|
|
Stock-based Compensation Expense
|
|
|
-
|
|
|
|
-
|
|
|
Compensation
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
|
29,650
|
|
|
|
5,359
|
|
|
Total Gross DTA
|
|
|
367,256
|
|
|
|
179,949
|
|
|
Less: Valuation Allowance
|
|
|
(354,833
|
)
|
|
|
(174,590
|
)
|
|
Total Deferred Tax Assets
|
|
|
12,423
|
|
|
|
5,359
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Stock Based Compensation
|
|
|
(9,468
|
)
|
|
|
(2,349
|
)
|
|
Deferred State Income Tax
|
|
|
(2,955
|
)
|
|
|
(80
|
)
|
|
|
|
|
(12,423
|
)
|
|
|
(2,429
|
)
|
|
Net deferred tax assets
|
|
|
-
|
|
|
|
2,930
|
|
In accordance to the Code 382 of the Internal Revenue Code corporations are generally required to limit the amount of its income in future years that can be
offset by historic losses, i.e., net operating loss (NOL) carryforwards and certain built-in losses, after a corporation has undergone an ownership change. As a result of the Company’s equity financings in recent years, the Company underwent changes in ownership pursuant to the provisions of the IRC Section 382, therefore, annual use of any of the Company’s net operating loss carry
forwards may be limited if cumulative changes in ownership of more than 50% occur during any three-year period.
At December 31, 2020 and 2019, for Federal and for certain states in which the Company files separate tax returns, the Company recorded deferred tax assets of approximately $354,833 and $174,590,
respectively, relating to net operating losses. The Company concluded that it is not more likely than not that the benefit from federal net operating loss and these separate state net operating loss carryforwards will be realized and has provided a
valuation allowance for the full amount of the related deferred tax assets.
As of December 31, 2020, the Company is not aware of any potentially material uncertain tax positions that were not included in the Company’s financial statements. The Company, which includes G.
research, LLC and is part of the AC’s unitary filing group, is not under any tax examination as of December 31, 2020. The Company has filed most of its 2018 corporate income tax returns in states where they have determined a filing obligation
exists. The Company continues to work on filing tax returns in certain states and intends to complete these filings by first quarter 2021. The Company believes there are no uncertain tax positions (“UTPs”) as it relates to their federal and state
filings, and as such has not recorded any tax expense related to UTPs.
As of December 31, 2020 and 2019, management has not identified any potential subsequent events that could have a significant impact on unrecognized tax benefits within the next twelve months. The
Company remains subject to income tax examination by the IRS for years 2016 and 2018 and state examinations for years after 2013.
H. Earnings per Share
Basic earnings per share is computed by dividing net income/(loss) attributable to shareholders by the weighted average number of shares outstanding during the period.
There were no dilutive shares outstanding during the periods.
The computations of basic and diluted net loss per share are as follows (in thousands, except per share data):
|
|
|
For the Years Ending December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Basic:
|
|
|
|
|
|
|
|
Net loss attributable to shareholders
|
|
$
|
(1,430,036
|
)
|
|
$
|
(1,906,592
|
)
|
|
Weighted average shares outstanding
|
|
|
600,090
|
|
|
|
557,338
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss attributable per share
|
|
$
|
(2.38
|
)
|
|
$
|
(3.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
Net loss attributable to shareholders
|
|
$
|
(1,430,036
|
)
|
|
$
|
(1,906,592
|
)
|
|
Weighted average share outstanding
|
|
|
600,090
|
|
|
|
557,338
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(2.38
|
)
|
|
$
|
(3.42
|
)
|
I. Equity
In the normal course of business, G.research made cash return of capital to AC on June 19, 2019 in the amount of $3,300,000.
In conjunction with the Merger on October 31, 2019, AC made two capital contributions to the Company on October 28, 2019 and November 21, 2019 of $300,000 and $110,889, respectively.
In conjunction with the Merger on October 31, 2019, the Company issued 500,000 shares of common stock to AC. The common stock, additional paid in capital, earnings per share and accumulated deficit
amounts in these consolidated financial statements for the period prior to the Merger have been restated to reflect the recapitalization in accordance with the shares issued as a result of the Merger.
On June 10, 2020, the Company completed a 1-for-100 reverse stock split of the Company’s outstanding common stock (the “Reverse Stock Split”). As a result of the Reverse Stock Split, the Company’s
issued and outstanding common stock decreased from 60,009,005 shares to 600,090. The par value of the common stock was not adjusted as a result of the Reverse Stock Split. Accordingly, unless otherwise noted, all historical share and per share
information as well as common stock and additional paid in capital balances contained in the consolidated financial statements and related footnotes have been restated to retroactively show the effect of the Reverse Stock Split.
See Note D Related Party Transactions for detail.
J. Guarantees, Contingencies, and Commitments
The Company has agreed to indemnify its clearing brokers for losses they may sustain from the customer accounts that trade on margin introduced by the Company. At December 31, 2020 and 2019, the total
amount of customer balances subject to indemnification (i.e., unsecured margin debits) was immaterial. The Company also has entered into arrangements with various other third parties, many of which provide for indemnification of the third parties
against losses, costs, claims and liabilities arising from the performance of the Company’s obligations under the agreements. The Company has had no claims or payments pursuant to these or prior agreements, and management believes the likelihood of
a claim being made is remote, and therefore, an accrual has not been made in the financial statements.
From time to time, the Company is named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The
Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions or other relief. The Company cannot predict
the ultimate outcome of such matters. The financial statements include the necessary provisions for losses that the Company believes are probable and estimable. Furthermore, the Company evaluates whether losses exist which may be reasonably
possible and, if material, makes the necessary disclosures. Such amounts, both those that are probable and those that are reasonably possible, are not considered material to the Company’s financial condition, operations or cash flows.
K. Net Capital Requirements
As a registered broker-dealer, G.research is subject to the SEC Uniform Net Capital Rule 15c3-1 (the “Rule”), which specifies, among other requirements, minimum net capital requirements for registered
broker-dealers. G.research computes its net capital under the alternative method as permitted by the Rule, which requires that minimum net capital be the greater of $250,000 or 2% of the aggregate debit items in the reserve formula for those
broker-dealers subject to Rule 15c3-3. G.research is exempt from Rule 15c3-3 pursuant to paragraph (k)(2)(ii) of that rule which exempts all customer transactions cleared through another broker-dealer on a fully disclosed basis. In addition, our
assets at the clearing broker-dealer are treated as allowable assets for net capital purposes as we have in place PAIB agreements pursuant to Rule 15c3-3. These requirements also provide that equity capital may not be withdrawn, advances to
affiliates may not be made or cash dividends paid if certain minimum net capital requirements are not met. G.research had net capital, as defined, of $3,490,673 and $4,618,033, exceeding the required amount of $250,000 by $3,240,673 and $4,368,033
at December 31, 2020 and 2019, respectively.
L. Subsequent Events
The Company has evaluated subsequent events for adjustment to or disclosure through April 5, 2021, the date of this report and the Company has not identified any
subsequent events not otherwise reported in these financial statements or the notes thereto, that required recognition or additional disclosures in the financial statements.