Associated Capital Group, Inc. - Quarter Report: 2018 September (Form 10-Q)

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, 2018

☐	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.)

One Corporate Center, Rye, NY		10580-1422
(Address of principle executive offices)		(Zip Code)

(203) 629-9595

Registrant’s telephone number, including area code

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes☒ No☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (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 November 2, 2018
Class A Common Stock, .001 par value		3,539,753
Class B Common Stock, .001 par value		19,057,885

INDEX

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

PART I.	FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk (Included in Item 2)	35
Item 4.	Controls and Procedures	36

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 6.	Exhibits	37

SIGNATURES		38

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

UNAUDITED

(Dollars in thousands, except per share data)

	September 30, 2018			December 31, 2017
ASSETS
Cash and cash equivalents	$	348,887		$	293,112
Investments in securities		268,414			222,383
Investment in GBL stock (3,726,250 and 4,393,055 shares, respectively)		87,269			130,254
Investments in affiliated registered investment companies		146,446			145,914
Investments in partnerships		142,283			145,591
Receivable from brokers		18,352			34,881
Investment advisory fees receivable		1,367			5,739
Receivable from affiliates		415			15,866
Goodwill and intangible assets		3,519			3,422
Other assets		4,037			9,753
Total assets	$	1,020,989		$	1,006,915

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Payable to brokers	$	13,325		$	13,281
Income taxes payable and deferred tax liabilities		827			5,484
Compensation payable		6,790			12,785
Securities sold, not yet purchased		22,353			5,731
Payable to affiliates		602			442
Accrued expenses and other liabilities		2,148			4,815
Total liabilities		46,045			42,538

Redeemable noncontrolling interests		51,119			46,230

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; 6,534,287 and 6,404,287 shares issued, respectively; 3,913,334 and 4,451,379 shares outstanding, respectively		6			6
Class B Common Stock, $0.001 par value; 100,000,000 shares authorized; 19,196,792 shares issued; 19,057,885 and 19,187,885 shares outstanding, respectively		19			19
Additional paid-in capital		1,010,577			1,010,505
Retained earnings		426			13,800
GBL 4% PIK Note		-			(50,000	)
Accumulated comprehensive income		-			6,712
Treasury stock, at cost (2,620,953 and 1,952,908 shares, respectively)		(87,203	)		(62,895	)
Total Associated Capital Group, Inc. stockholders’ equity		923,825			918,147

Total liabilities and equity	$	1,020,989		$	1,006,915

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,
	2018			2017			2018			2017
Revenues
Investment advisory and incentive fees	$	2,805		$	2,587		$	7,949		$	7,318
Institutional research services		1,855			2,584			6,179			7,917
Other		6			77			37			95
Total revenues		4,666			5,248			14,165			15,330
Expenses
Compensation		5,907			8,354			18,173			24,922
Other operating expenses		2,258			3,006			7,187			7,305
Total expenses		8,165			11,360			25,360			32,227

Operating loss		(3,499	)		(6,112	)		(11,195	)		(16,897	)
Other income (expense)
Net gain/(loss) from investments		(7,977	)		5,234			(18,936	)		(1,018	)
Interest and dividend income		3,466			2,347			9,338			7,295
Interest expense		(70	)		(69	)		(142	)		(210	)
Shareholder-designated contribution		-			-			-			(4,895	)
Total other income (expense), net		(4,581	)		7,512			(9,740	)		1,172
Income/(loss) before income taxes		(8,080	)		1,400			(20,935	)		(15,725	)
Income tax expense/(benefit)		(858	)		67			(4,204	)		(8,667	)
Net income/(loss)		(7,222	)		1,333			(16,731	)		(7,058	)
Net income/(loss) attributable to noncontrolling interests		157			(186	)		1,053			(95	)
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders	$	(7,379	)	$	1,519		$	(17,784	)	$	(6,963	)

Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders per share:
Basic	$	(0.32	)	$	0.06		$	(0.77	)	$	(0.29	)
Diluted	$	(0.32	)	$	0.06		$	(0.77	)	$	(0.29	)

Weighted average shares outstanding:
Basic		22,979			23,841			23,187			23,826
Diluted		22,979			23,841			23,187			23,826

Dividends declared:	$	-		$	-		$	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,
	2018			2017			2018			2017

Net income/(loss)	$	(7,222	)	$	1,333		$	(16,731	)	$	(7,058	)
Other comprehensive income, net of tax:
Net unrealized gains on securities available for sale (a)		-			1,686			-			14,201
Other comprehensive income		-			1,686			-			14,201

Comprehensive income/(loss)		(7,222	)		3,019			(16,731	)		7,143
Less: Comprehensive income attributable to noncontrolling interests		157			(186	)		1,053			(95	)

Comprehensive income/(loss) attributable to Associated Capital Group, Inc.	$	(7,379	)	$	3,205		$	(17,784	)	$	7,238

(a) Net of income tax expense of $0, $948, $0, and $7,988, respectively.

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 nine months ended September 30, 2018

	Associated Capital Group, Inc. shareholders
	Common Stock		Retained Earnings			Additional Paid-in Capital		GBL 4% PIK Note			Accumulated Comprehensive Income			Treasury Stock			Total			Redeemable Noncontrolling Interests
Balance at December 31, 2017	$	25	$	13,800		$	1,010,505	$	(50,000	)	$	6,712		$	(62,895	)	$	918,147		$	46,230
Reclassifications pursuant to adoption of new accounting guidance		-		6,712			-		-			(6,712	)		-			-			-
Redemptions of noncontrolling interests		-		-			-		-			-			-			-			(2,652	)
Consolidation of certain investment funds		-		-			-		-			-			-			-			6,488
Net income/(loss)		-		(17,784	)		-		-			-			-			(17,784	)		1,053
Stock-based compensation expense		-		-			72		-			-			-			72			-
Proceeds from payment of GBL 4% PIK Note		-		-			-		50,000			-			-			50,000			-
Dividends declared ($0.10 per share)				(2,302	)													(2,302	)		-
Exchange offer		-		-			-		-			-			(17,737	)		(17,737	)		-
Purchase of treasury stock		-		-			-		-			-			(6,571	)		(6,571	)		-
Balance at September 30, 2018	$	25	$	426		$	1,010,577	$	-		$	-		$	(87,203	)	$	923,825		$	51,119

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 nine months ended September 30, 2017

	Associated Capital Group, Inc. shareholders
	Common Stock		Retained Earnings			Additional Paid-in Capital			GBL 4% PIK Note			Accumulated Comprehensive Income		Treasury Stock			Total			Redeemable Noncontrolling Interests
Balance at December 31, 2016	$	25	$	7,327		$	1,007,027		$	(100,000	)	$	1,317	$	(41,674	)	$	874,022		$	4,230
Redemptions of noncontrolling interests		-		-			-			-			-		-			-			(236	)
Contributions from noncontrolling interests		-		-			-			-			-		-			-			38,220
Net loss		-		(6,963	)		-			-			-		-			(6,963	)		(95	)
Net unrealized gains on securities available for sale, net of income tax expense ($1,161)		-		-			-			-			2,064		-			2,064			-
Amounts reclassified from accumulated other comprehensive income, net of income tax expense ($6,827)		-		-			-			-			12,137		-			12,137			-
Dividends declared ($.10 per share)		-		-			(2,401	)		-			-		-			(2,401	)		-
Stock-based compensation expense		-		-			5,226			-			-		-			5,226			-
Proceeds from payment of GBL 4% PIK Note		-		-			-			30,000			-		-			30,000			-
Purchase of treasury stock		-		-			-			-			-		(15,877	)		(15,877	)		-
Balance at September 30, 2017	$	25	$	364		$	1,009,852		$	(70,000	)	$	15,518	$	(57,551	)	$	898,208		$	42,119

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,
	2018			2017
Operating activities
Net loss	$	(16,731	)	$	(7,058	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Equity in net gains from partnerships		(3,697	)		(6,325	)
Depreciation and amortization		15			12
Stock-based compensation expense		72			5,226
Loss on exchange offer		2,127			-
Other-than-temporary loss on available for sale securities		-			19,131
Donated securities		-			2,627
Net gains on sales of available for sale securities		-			(167	)
(Increase) decrease in assets:
Investments in trading securities		1,983			(91,584	)
Investments in partnerships:
Contributions to partnerships		(8,077	)		(16,928	)
Distributions from partnerships		9,512			11,557
Receivable from affiliates		451			(1,651	)
Goodwill and intangible assets		(97	)		-
Receivable from brokers		19,706			(3,165	)
Investment advisory fees receivable		4,372			8,351
Other assets		5,983			2,672
Increase (decrease) in liabilities:
Payable to brokers		44			11,025
Income taxes payable and deferred tax liabilities		(4,656	)		(10,619	)
Payable to affiliates		161			(1,019	)
Compensation payable		(5,994	)		(8,237	)
Accrued expenses and other liabilities		(557	)		(33,368	)
Total adjustments		21,348			(112,462	)
Net cash provided by (used in) operating activities	$	4,617		$	(119,520	)

Index

ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED (continued)

(Dollars in thousands)

	Nine Months Ended September 30,
	2018			2017
Investing activities
Purchases of available for sale securities	$	-		$	(3,583	)
Proceeds from sales of available for sale securities		-			271
Return of capital on available for sale securities		-			1,337
Proceeds from note receivable		15,000			-
Net cash provided by (used in) investing activities		15,000			(1,975	)

Financing activities
Contributions from redeemable noncontrolling interests		-			38,220
Redemptions of redeemable noncontrolling interests		(2,652	)		(236	)
Dividends paid		(4,666	)		(2,403	)
Purchase of treasury stock		(6,571	)		(15,877	)
Proceeds from payment of GBL 4% PIK Note		50,000			30,000
Net cash provided by financing activities		36,111			49,704
Net increase (decrease) in cash and cash equivalents		55,728			(71,791	)
Cash and cash equivalents at beginning of period		293,112			314,093
Increase in cash from consolidation		47			-
Cash and cash equivalents at end of period	$	348,887		$	242,302

Supplemental disclosures of cash flow information:
Cash paid for interest	$	141		$	210
Cash paid for taxes	$	304		$	2,077

Non-cash activity:

For the nine months ended September 30, 2017, Associated Capital Group, Inc. (“AC”) accrued dividends on restricted stock awards of $8.

On July 19, 2017, AC was deemed to have control over a certain investment fund which resulted in its consolidation and an increase of approximately $99,276 of other net assets and an increase of approximately $37,901 of redeemable noncontrolling interests.

On January 1, 2018, AC was deemed to have control over certain investment funds which resulted in their consolidation and an increase of approximately $47 of cash and cash equivalents, $6,441 of net assets and an increase of approximately $6,488 of redeemable noncontrolling interests.

During the first quarter of 2018, AC completed an exchange offer with respect to its Class A shares. The Company exchanged 666,805 GBL Class A shares valued at $17,737 for 493,954 Class A shares.

See accompanying notes.

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ASSOCIATED CAPITAL GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(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.

The Spin-off and Related Transactions

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 businesses. 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”).

We conduct our investment management business through Gabelli & Company Investment Advisers, Inc. (“GCIA” f/k/a Gabelli Securities, Inc.). GCIA and its wholly-owned subsidiary, Gabelli & Partners, LLC, 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 event and risk arbitrage portfolios. The business earns management and incentive fees from its advisory assets under management. GCIA is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended.

We provide our institutional research and underwriting services through G.research, LLC (“G.research”), an indirect wholly-owned subsidiary of the Company. G.research is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and is regulated by the Financial Industry Regulatory Authority. G.research’s revenues are derived primarily from institutional research services.

In connection with the Spin-off, GAMCO issued a promissory note (the “GAMCO Note”) to AC Group in the original principal amount of $250 million bearing interest at 4% per annum and with an original maturity date of November 30, 2020. GAMCO could prepay the GAMCO Note prior to maturity without penalty. As of June 30, 2018, AC had received principal repayments totaling $230 million on the GAMCO Note and, during the third quarter, GBL repaid the outstanding $20 million balance. In addition, GCIA purchased 4,393,055 shares of GAMCO Class A common stock for $150 million.

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.

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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, 2017.

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.

Recent Accounting Developments

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, and most industry-specific guidance of the ASC. The core principle of ASU 2014-09 requires companies to recognize revenue from the transfer of goods or services to customers in amounts that reflect the consideration the company expects to receive in exchange for those goods or services. The new standard also requires expanded disclosures about revenue recognition. The Company has adopted this ASU effective January 1, 2018 with no material impact on its condensed consolidated financial statements other than expanded disclosure.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, which amends the guidance in GAAP on the classification and measurement of financial instruments. Although the ASU retained many current requirements, it significantly revised an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. Under the new guidance, all equity investments in unconsolidated entities (other than those accounted for using the equity method of accounting) will generally be measured at fair value through earnings. In addition, available for sale (“AFS”) classification for equity securities with readily determinable fair values will no longer be available. As a result, changes in the fair value of such securities will be reported in net income rather than other comprehensive income. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The Company has adopted this ASU effective January 1, 2018 with no material impact on its condensed consolidated financial statements other than the reclassification of the cumulative unrealized gain on equity AFS securities net of tax from accumulated comprehensive income to retained earnings.

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. ASU 2016-02 is effective beginning January 1, 2019. The Company is currently evaluating this guidance and the impact it will have on its condensed consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which adds and clarifies guidance on the classification of certain cash receipts and payments in the consolidated statements of cash flows. The Company adopted this ASU effective January 1, 2018 with no material impact on its condensed 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. For public companies, the ASU is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. Early adoption was permitted for impairment tests that occur after January 1, 2017. The Company is currently evaluating this guidance and the impact it will have on its condensed consolidated financial statements.

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On May 10, 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation, which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The Company has adopted this ASU effective January 1, 2018 with no material impact on its condensed consolidated financial statements.

On December 22, 2017, the SEC issued SAB 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act, to address the application of ASC 740, Income Taxes, in the reporting period that includes December 22, 2017, the date legislation commonly referred to as the Tax Cuts and Jobs Act (the “Act”) was signed into law. In general, the SAB provides that a company should reflect the income tax impacts of the Act in the period in which the accounting under ASC 740 is complete. If a company is unable to complete the required accounting as a result of incomplete information, preparation or analysis, however, it may record a reasonable estimate as a provisional amount. Additional provisions deal with situations in which no reasonable estimate can be determined. Changes to estimates determined during a measurement period up to one year from the date of enactment will be reflected as an adjustment to tax expense or benefit in the reporting period the amounts are determined. The SAB also provides requirements concerning financial statement disclosures about the material financial reporting impacts of the Act. With the exception of the book/tax differences related to the Company’s investments in funds that are partnerships and/or passive foreign investment companies, the Company completed its analysis and made a reasonable estimate of the tax impact as part of the prior year’s tax provision. As additional information is received from underlying funds (e.g., Form K-1s are received that set out AC’s share of the funds’ taxable income), these estimates will be adjusted, most likely in the fourth quarter of 2018 following the filing of the Company’s 2017 consolidated income tax return.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, dealing with the accounting for the tax effects of components of other comprehensive income (“OCI”) as a result of the reduction of the U.S. federal corporate income tax rate under the Act. We adopted this ASU as of January 1, 2018 and reflected an increase to OCI and a decrease to retained earnings of approximately $1.5 million in the first quarter of 2018.

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 disclosure 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 and is currently evaluating this guidance as it relates to the new disclosure requirements.

In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification. The rule amends certain disclosure requirements that have become redundant, overlapping, outdated or superseded. The rule is effective for the Company’s current quarterly report. The Company has elected, however, to defer the changes to the interim period disclosure rules related to changes to shareholders’ equity until its first quarter report in 2019 as permitted under subsequent SEC guidance.

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). Investors in the investment funds include high net worth individuals, family entities, and retirement 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:

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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.

Performance-based advisory fees – Certain accounts’ management 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. The Company does not recognize performance-based fees until the end of the measurement period or the time of the investor redemption when the liability for such fees becomes fixed and not subject to adjustment.

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 only as the services are performed over the relevant period. Sub-advisory fee revenue which is performance-based is recognized only when it becomes fixed and not subject to adjustment.

The Company reserves the right to waive or reduce asset-based and performance-based fees with respect to certain investors in the investment funds which may include investments by employees and other related parties. Advisory and incentive fees payable by investment funds are typically approved by third-party administrators and paid directly from the accounts’ assets. Such fees attributable to separate accounts may be subject to review and approval by the client and may be paid either from the accounts’ assets or directly by the client.

Our advisory fee revenues are influenced by both the amount of assets under management (“AUM”) and the investment performance of our products. An overall decline in the prices of securities may cause our advisory fees to decline by either causing the value of our AUM to decrease or causing our clients to withdraw funds in favor of investments they perceive to offer greater opportunity or lower risk. Similarly, success in the investment management business is dependent on investment performance as well as distribution and client servicing. Good performance can stimulate sales of our investment products and tends to keep withdrawals and redemptions low, which generates higher asset-based management fees. Conversely, poor performance, both in absolute terms and/or relative to peers and industry benchmarks, tends to result in decreased sales, increased withdrawals and redemptions and in the loss of clients, with corresponding decreases in revenues to us.

Institutional Research Services. The Company, through G.research, generates institutional research services revenues via hard dollar payments or through commissions on securities transactions executed on an agency basis on behalf of clients. Clients include institutional investors (e.g., hedge funds and asset managers) as well as affiliated mutual funds and managed accounts. These revenues consist of:

Hard dollar payments – The Company receives direct payments for research services provided to related and unrelated parties. Where a contract for such services is in place, the contractual fee for the period is 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. For other payments where no research contract exists, revenue is not recognized until agreement is reached with the client that services have been performed, a value is assigned to those services, and an invoice presented to the client for payment.

Commissions – Commissions are charged on the execution of securities transactions made on behalf of client accounts on an agency basis and are based on a rate schedule. The Company recognizes commission revenue when the related securities transactions are executed. Commissions earned are typically collected from the clearing brokers utilized by G.research on a daily or weekly basis.

Index

Selling concessions – The Company participates as a member of the selling group of underwritten equity offerings and receives compensation based on the difference between what its clients pay for the securities sold to its institutional clients and what the issuer receives. The terms of the selling concessions are set forth in contracts between the Company and the underwriter. The Company recognizes selling commissions upon the sale of the related securities to its clients.

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 typically collected from the clearing brokers utilized by G.research on a daily or weekly basis.

Institutional research revenues are impacted by the perceived value of the research product provided to clients, the volume of securities transactions and the acquisition or loss of new client relationships.

Other. Other revenues include (a) underwriting fees include gains, losses, and fees, net of syndicate expenses, arising from public equity and debt offerings in which G.research acts as underwriter or agent and are accrued as earned, and (b) other miscellaneous revenues.

Total revenues by type were as follows for the three and nine months ended September 30, 2018, respectively (in thousands):

	Three months ended September 30, 2018		Nine months ended September 30, 2018
Investment advisory and incentive fees
Asset-based advisory fees	$	1,879	$	5,561
Performance-based advisory fees		27		34
Sub-advisory fees		899		2,354
		2,805		7,949

Institutional research services
Hard dollar payments		541		2,236
Commissions		1,284		3,844
Selling concessions		15		84
Sales manager fees		15		15
		1,855		6,179

Other
Underwriting fees		-		19
Miscellaneous		6		18
		6		37

Total	$	4,666	$	14,165

C.	Investment in Securities

Investments in United States Treasury Bills and Notes with maturities of greater than three months at the time of purchase are classified as investments in securities, and those with maturities of three months or less at the time of purchase are classified as cash equivalents.

Debt and equity securities are stated at fair value, with any unrealized gains or losses reported in current period earnings. Prior to the adoption of ASU 2016-01 on January 1, 2018, only investments in securities held for resale in anticipation of short-term market movements were classified as trading securities. Other securities were treated as available for sale (“AFS”) investments and were stated at fair value, with any unrealized gains or losses, net of taxes, generally reported as other comprehensive income, a component of equity. Realized gains and losses from AFS equity securities were reclassified from equity to current period income and losses deemed to be other-than- temporary (“OTT”) were recorded as realized losses in the condensed consolidated statements of income.

Index

Investments in securities, including GBL stock, at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):

	September 30, 2018				December 31, 2017
	Cost		Fair Value		Cost		Fair Value

Debt and equity securities:
Government obligations	$	34,970	$	35,256	$	53,681	$	53,804
Common stocks		319,880		313,742		209,686		228,557
Mutual funds		808		1,553		1,959		3,157
Other investments		5,446		5,132		825		1,824
Total debt and equity securities		361,104		355,683		266,151		287,342

Available for sale securities:
Common stocks		-		-		65,331		65,024
Mutual funds		-		-		103		271
Total available for sale securities		-		-		65,434		65,295

Total investments in securities	$	361,104	$	355,683	$	331,585	$	352,637

Securities sold, not yet purchased at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):

	September 30, 2018				December 31, 2017
	Proceeds		Fair Value		Proceeds		Fair Value
Debt and equity securities:
Common stocks	$	21,297	$	22,093	$	4,862	$	5,396
Other investments		2		260		1		335
Total securities sold, not yet purchased	$	21,299	$	22,353	$	4,863	$	5,731

Investments in affiliated registered investment companies at September 30, 2018 and December 31, 2017 consisted of the following (in thousands):

	September 30, 2018				December 31, 2017
	Cost		Fair Value		Cost		Fair Value
Debt and equity securities:
Closed-end funds	$	79,097	$	90,610	$	26,231	$	26,929
Mutual funds		47,727		55,836		41,950		48,328
Total debt and equity securities		126,824		146,446		68,181		75,257

Available for sale securities:
Closed-end funds		-		-		53,782		66,218
Mutual funds		-		-		3,420		4,439
Total available for sale securities		-		-		57,202		70,657

Total investments in affiliated registered investment companies	$	126,824	$	146,446	$	125,383	$	145,914

Index

The following table identifies all reclassifications out of accumulated other comprehensive income (“AOCI”) into income for the three and nine months ended September 30, 2018 and 2017 (in thousands):

Amount Reclassified from AOCI					Affected Line Items in the Statements Of Income	Reason for Reclassification from AOCI
Three months ended September 30,
2018		2017

$	-	$	125		Net gain/(loss) from investments	Realized gain on sale of AFS securities
	-		125		Income/(loss) before income taxes
	-		(45	)	Income tax (expense)/benefit
$	-	$	80		Net income/(loss)

Amount Reclassified from AOCI					Affected Line Items in the Statements Of Income	Reason for Reclassification from AOCI
Nine months ended September 30,
2018		2017

$	-	$	167		Net gain/(loss) from investments	Realized gain on sale of AFS securities
	-		(19,131	)	Net gain/(loss) from investments	OTT impairment of AFS securities
	-		(18,964	)	Income/(loss) before income taxes
	-		6,827		Income tax (expense)/benefit
$	-	$	(12,137	)	Net income/(loss)

The Company recognizes all equity derivatives as either assets or liabilities measured at fair value and includes them in either investments in securities or securities sold, not yet purchased on the condensed consolidated statements of financial condition. From time to time, the Company and/or the partnerships and offshore funds that the Company consolidates will enter into hedging transactions to manage their exposure to foreign currencies and equity prices related to their investments. At September 30, 2018 and December 31, 2017, we held derivative contracts on 0.6 million and 1.7 million equity shares, respectively, that are included in investments in securities or securities sold, not yet purchased on the condensed consolidated statements of financial condition. We had foreign exchange contracts outstanding at September 30, 2018, but none at December 31, 2017. 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 condensed consolidated statements of income.

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

	Asset Derivatives					Liability Derivatives
	Statement of Financial Condition Location	Fair Value				Statement of Financial Condition Location	Fair Value
		September 30,		December 31,			September 30,		December 31,
		2018		2017			2018		2017
Derivatives designated as hedging instruments under FASB ASC 815-20
Foreign exchange contracts	Receivable from brokers	$	138	$	-	Payable to brokers	$	-	$	-

Sub total		$	138	$	-		$	-	$	-

Derivatives not designated as hedging instruments under FASB ASC 815-20
Equity contracts	Investments in securities	$	425	$	229	Securities sold, not yet purchased	$	260	$	335
Foreign exchange contracts	Receivable from brokers		-		-	Payable to brokers		-		-

Sub total		$	425	$	229		$	260	$	335

Total derivatives		$	563	$	229		$	260	$	335

Index

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,
		2018		2017			2018		2017

Foreign exchange contracts	Net gain/(loss) from investments	$	36	$	-		$	138	$	-
Equity contracts	Net gain/(loss) from investments		652		(456	)		3,304		(490	)

Total		$	688	$	(456	)	$	3,442	$	(490	)

The Company is a party to enforceable master netting arrangements for swaps entered into with major U.S. financial institutions as part of the investment strategy of the Company’s proprietary portfolio. 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 condensed 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 of Recognized Assets		Gross Amounts Offset in the Statements of Financial Condition		Net Amounts of Assets Presented in the Statements of Financial Condition		Gross Amounts Not Offset in the Statements of Financial Condition
	Gross Amounts of Recognized Assets						Financial Instruments			Cash Collateral Received		Net Amount
Swaps:	(In thousands)
September 30, 2018	$	250	$	-	$	250	$	(250	)	$	-	$	-
December 31, 2017		229		-		229		(229	)		-		-

	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		Gross Amounts Not Offset in the Statements of Financial Condition
							Financial Instruments			Cash Collateral Pledged		Net Amount


Swaps:	(In thousands)
September 30, 2018	$	259	$	-	$	259	$	(250	)	$	-	$	9
December 31, 2017		334		-		334		(229	)		-		105

The following is a summary of the cost, gross unrealized gains, gross unrealized losses and fair value of AFS investments as of December 31, 2017 (in thousands):

	December 31, 2017
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value



Common stocks	$	65,331	$	-	$	(307	)	$	65,024
Closed-end funds		53,782		12,436		-			66,218
Mutual funds		3,523		1,187		-			4,710
Total available for sale securities	$	122,636	$	13,623	$	(307	)	$	135,952

Changes in net unrealized gains, net of taxes, for AFS securities for the three months ended September 30, 2017 of $1.7 million have been included in other comprehensive income, a component of equity, at September 30, 2017. Return of capital on AFS securities was $0.5 million for the three months ended September 30, 2017. For the three months ended September 30, 2017, proceeds and gross gains from the sales of AFS investments were approximately $0.2 million and $0.1 million, respectively.

Changes in net unrealized gains, net of taxes, for AFS securities for the nine months ended September 30, 2017 of $14.2 million have been included in other comprehensive income, a component of equity, at September 30, 2017. Return of capital on AFS securities was $1.3 million for the nine months ended September 30, 2017. For the nine months ended September 30, 2017, proceeds and gross gains from the sales of AFS investments were approximately $0.3 million and $0.2 million, respectively.

Index

The Company determines the cost of a security sold by using specific identification.

Investments classified as available for sale that were in an unrealized loss position for which other-than-temporary impairment has not been recognized consisted of the following (in thousands):

	December 31, 2017
	Cost		Unrealized Losses			Fair Value
	Cost		Unrealized Losses			Fair Value

Common stocks	$	65,331	$	(307	)	$	65,024
Total available for sale securities in unrealized loss position	$	65,331	$	(307	)	$	65,024

For the nine months ended September 30, 2017, AC recognized a $19.1 million OTT impairment on the GBL shares due to the magnitude and persistence of the unrealized loss.

D.	Investment Partnerships and Variable Interest Entities

The Company is general partner or co-general partner of various affiliated entities in which the Company had investments totaling $122.1 million and $124.5 million at September 30, 2018 and December 31, 2017, respectively, and whose underlying assets consist primarily of marketable securities (“Affiliated Entities”). We also had investments in unaffiliated partnerships, offshore funds and other entities of $20.2 million and $21.1 million at September 30, 2018 and December 31, 2017, respectively (“Unaffiliated Entities”). We evaluate each entity for the appropriate accounting treatment and disclosure. Certain of the Affiliated Entities, and none of the Unaffiliated Entities, are consolidated.

For those entities where consolidation is not deemed appropriate, we report them in our condensed consolidated statements of financial condition under the caption “Investments in partnerships.” The caption includes investments in both Affiliated Entities and Unaffiliated Entities. The Company reflects its equity in earnings or the change in fair value of these entities under the caption “net gain/(loss) from investments” on the condensed consolidated statements of income.

The following table highlights the number of entities that we consolidate as well as the basis under which they are consolidated:

Entities consolidated

	VIEs		VOEs
Entities consolidated at December 31, 2016		1		1
Additional consolidated entities		-		1
Deconsolidated entities		-		-
Entities consolidated at September 30, 2017		1		2
Additional consolidated entities		-		1
Deconsolidated entities		-		-
Entities consolidated at December 31, 2017		1		3
Additional consolidated entities		-		2
Deconsolidated entities		-		-
Entities consolidated at September 30, 2018		1		5

Index

The following table provides details regarding the investments in partnerships by accounting method used (in thousands):

	September 30, 2018
Accounting method	Affiliated		Unaffiliated		Total

Fair Value	$	9,507	$	-	$	9,507
Equity Method		112,567		20,209		132,776

Total	$	122,074	$	20,209	$	142,283

	December 31, 2017
Accounting method	Affiliated		Unaffiliated		Total

Fair Value	$	9,442	$	-	$	9,442
Equity Method		115,046		21,103		136,149

Total	$	124,488	$	21,103	$	145,591

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, 2018
	Prior to Consolidation		Consolidated Entities			As Reported
Assets
Cash and cash equivalents	$	351,253	$	(2,366	)	$	348,887
Investments in securities (including GBL stock)		226,918		128,765			355,683
Investments in affiliated investment companies		197,791		(51,345	)		146,446
Investments in partnerships		163,141		(20,858	)		142,283
Receivable from brokers		6,318		12,034			18,352
Investment advisory fees receivable		1,389		(22	)		1,367
Other assets		7,664		307			7,971
Total assets	$	954,474	$	66,515		$	1,020,989
Liabilities and equity
Securities sold, not yet purchased	$	11,257	$	11,096		$	22,353
Accrued expenses and other liabilities		19,392		4,300			23,692
Redeemable noncontrolling interests		-		51,119			51,119
Total equity		923,825		-			923,825
Total liabilities and equity	$	954,474	$	66,515		$	1,020,989

	December 31, 2017
	Prior to Consolidation		Consolidated Entities			As Reported
Assets
Cash and cash equivalents	$	287,963	$	5,149		$	293,112
Investments in securities (including GBL stock)		255,252		97,385			352,637
Investments in affiliated investment companies		198,469		(52,555	)		145,914
Investments in partnerships		160,456		(14,865	)		145,591
Receivable from brokers		11,722		23,159			34,881
Investment advisory fees receivable		5,749		(10	)		5,739
Other assets		28,865		176			29,041
Total assets	$	948,476	$	58,439		$	1,006,915
Liabilities and equity
Securities sold, not yet purchased	$	5,405	$	326		$	5,731
Accrued expenses and other liabilities		24,924		11,883			36,807
Redeemable noncontrolling interests		-		46,230			46,230
Total equity		918,147		-			918,147
Total liabilities and equity	$	948,476	$	58,439		$	1,006,915

Index

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

	Three Months Ended September 30, 2018
	Prior to Consolidation			Consolidated Entities			As Reported
Total revenues	$	4,683		$	(17	)	$	4,666
Total expenses		7,698			467			8,165
Operating loss		(3,015	)		(484	)		(3,499	)
Total other income/(expense), net		(5,222	)		641			(4,581	)
Loss/(income) before income taxes		(8,237	)		157			(8,080	)
Income tax benefit		(858	)		-			(858	)
Net income/(loss) before NCI		(7,379	)		157			(7,222	)
Net income attributable to noncontrolling interests		-			157			157
Net loss	$	(7,379	)	$	-		$	(7,379	)

	Three Months Ended September 30, 2017
	Prior to Consolidation			Consolidated Entities			As Reported
Total revenues	$	5,252		$	(4	)	$	5,248
Total expenses		10,188			1,172			11,360
Operating loss		(4,936	)		(1,176	)		(6,112	)
Total other income, net		6,522			990			7,512
Income/(loss) before income taxes		1,586			(186	)		1,400
Income tax expense		67			-			67
Net income/(loss) before NCI		1,519			(186	)		1,333
Net loss attributable to noncontrolling interests		-			(186	)		(186	)
Net income	$	1,519		$	-		$	1,519


	Nine Months Ended September 30, 2018
	Prior to Consolidation			Consolidated Entities			As Reported
Total revenues	$	14,215		$	(50	)	$	14,165
Total expenses		23,913			1,447			25,360
Operating loss		(9,698	)		(1,497	)		(11,195	)
Total other income/(expense), net		(12,290	)		2,550			(9,740	)
Loss before income taxes		(21,988	)		1,053			(20,935	)
Income tax benefit		(4,204	)		-			(4,204	)
Net income/(loss) before NCI		(17,784	)		1,053			(16,731	)
Net income attributable to noncontrolling interests		-			1,053			1,053
Net loss	$	(17,784	)	$	-		$	(17,784	)

	Nine Months Ended September 30, 2017
	Prior to Consolidation			Consolidated Entities			As Reported
Total revenues	$	15,345		$	(15	)	$	15,330
Total expenses		30,959			1,268			32,227
Operating loss		(15,614	)		(1,283	)		(16,897	)
Total other income/(expense), net		(16	)		1,188			1,172
Loss before income taxes		(15,630	)		(95	)		(15,725	)
Income tax benefit		(8,667	)		-			(8,667	)
Net loss before NCI		(6,963	)		(95	)		(7,058	)
Net loss attributable to noncontrolling interests		-			(95	)		(95	)
Net loss	$	(6,963	)	$	-		$	(6,963	)

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 these VIEs have no recourse to the Company’s general assets. In addition, the Company neither benefits from the 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, 2018			December 31, 2017

Cash and cash equivalents	$	2,546		$	120
Investments in securities		8,177			8,757
Receivable from brokers		364			1,657
Other assets		(2	)		(19	)
Accrued expenses and other liabilities		(27	)		(29	)
Redeemable noncontrolling interests		(420	)		(284	)
AC Group’s net interests in consolidated VIE	$	10,638		$	10,202

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, 2018 and December 31, 2017 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. Investments in certain entities that calculate net asset value per share and other investments that are not held at fair value are provided as separate items to permit reconciliation of the fair value of investments included in the fair value hierarchy to the total amounts presented in the condensed consolidated statements of financial condition.

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of September 30, 2018 (in thousands)

Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Investments Measured at NAV (a)		Other Assets Not Held at Fair Value (b)		Balance as of September 30, 2018
Cash equivalents	$	353,402	$	-	$	-	$	-	$	-	$	353,402
Investments in partnerships		-		-		-		137,887		4,396		142,283
Investments in securities (including GBL stock):
Gov’t obligations		35,256		-		-		-		-		35,256
Common stocks		306,127		7,603		12		-		-		313,742
Mutual funds		1,553		-		-		-		-		1,553
Other		172		425		4,535		-		-		5,132
Total investments in securities		343,108		8,028		4,547		-		-		355,683
Investments in affiliated registered investment companies:
Closed-end funds		90,610		-		-		-		-		90,610
Mutual funds		55,836		-		-		-		-		55,836
Total investments in affiliated registered investment companies		146,446		-		-		-		-		146,446
Total investments		489,554		8,028		4,547		137,887		4,396		644,412
Total assets at fair value	$	842,956	$	8,028	$	4,547	$	137,887	$	4,396	$	997,814
Liabilities
Securities sold, not yet purchased
Common stocks	$	22,093	$	-	$	-	$	-	$	-	$	22,093
Other		-		260		-		-		-		260
Total liabilities at fair value	$	22,093	$	260	$	-	$	-	$	-	$	22,353

Index

Assets and Liabilities Measured at Fair Value on a Recurring Basis as of December 31, 2017 (in thousands)

Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Investments Measured at NAV (a)		Other Assets Not Held at Fair Value (b)		Balance as of December 31, 2017
Cash equivalents	$	290,043	$	-	$	-	$	-	$	-	$	290,043
Investments in partnerships		-		-		-		140,617		4,974		145,591
Investments in securities (including GBL stock):
AFS - Common stocks		65,024		-		-		-		-		65,024
AFS - Mutual funds		271		-		-		-		-		271
Trading - Gov’t obligations		53,804		-		-		-		-		53,804
Trading - Common stocks		227,938		1		618		-		-		228,557
Trading - Mutual funds		3,157		-		-		-		-		3,157
Trading - Other		426		229		1,169		-		-		1,824
Total investments in securities		350,620		230		1,787		-		-		352,637
Investments in affiliated registered investment companies:
AFS - Closed-end funds		66,218		-		-		-		-		66,218
AFS - Mutual funds		4,439		-		-		-		-		4,439
Trading - Closed-end funds		26,929		-		-		-		-		26,929
Trading - Mutual funds		48,328		-		-		-		-		48,328
Total investments in affiliated registered investment companies		145,914		-		-		-		-		145,914
Total investments		496,534		230		1,787		140,617		4,974		644,142
Total assets at fair value	$	786,577	$	230	$	1,787	$	140,617	$	4,974	$	934,185
Liabilities
Securities sold, not yet purchased
Trading - Common stocks	$	5,396	$	-	$	-	$	-	$	-	$	5,396
Trading - Other		-		335		-		-		-		335
Total liabilities at fair value	$	5,396	$	335	$	-	$	-	$	-	$	5,731

(a)

Amounts include certain investments measured at fair value using NAV or its equivalent as a practical expedient. At September 30, 2018 and December 31, 2017, these amounts were $9,507 and $9,442, respectively. Amounts also include certain equity method investments which account for their financial assets and most financial liabilities under fair value measures and therefore the Company’s investment approximates fair value. At September 30, 2018 and December 31, 2017, these amounts were $128,380 and $131,175, respectively. These investments have not been classified in the fair value hierarchy.

(b)

Amounts include certain equity method investments which are not accounted for under a fair value measure. In accordance with GAAP, certain equity method investees do not account for both their financial assets and liabilities under fair value measures; therefore, the Company’s investment in such equity method investees may not represent fair value.

Investments measured at NAV shown in the above tables include investments in Affiliated and Unaffiliated Entities. Capital may generally be redeemed from Affiliated Entities on a monthly basis upon adequate notice as determined in the sole discretion of each entity’s investment manager. Capital invested in Unaffiliated Entities may generally be redeemed at various intervals ranging from monthly to annually upon notice of 30 to 95 days. Certain Unaffiliated Entities may require a minimum investment period before capital can be voluntarily redeemed (a “Lockup Period”). No investment in an Unaffiliated Entity has an unexpired Lockup Period. The Company has no outstanding capital commitments to any Affiliated or Unaffiliated Entity.

Index

The following tables summarize changes in assets reported at fair value for which level 3 inputs have been used to determine fair value for the three and nine months ended September 30, 2018 and 2017, respectively (in thousands):

	Three months ended September 30, 2018								Three months ended September 30, 2017
	Common Stocks			Other		Total			Common Stocks			Other			Total

Beginning balance	$	590		$	4,465	$	5,055		$	510		$	449		$	959
Total gains/(losses)		2			2		4			2			39			41
Purchases		-			15		15			-			-			-
Sales		-			-		-			-			(142	)		(142	)
Transfers		(580	)		53		(527	)		(36	)		-			(36	)
Ending balance	$	12		$	4,535	$	4,547		$	476		$	346		$	822
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	$	2		$	2	$	4		$	2		$	1		$	3

	Nine months ended September 30, 2018									Nine months ended September 30, 2017
	Common Stocks			Other			Total			Common Stocks			Other			Total

Beginning balance	$	618		$	1,169		$	1,787		$	461		$	283		$	744
Consolidated fund		-			984			984			-			-			-
Total gains/(losses)		(1	)		(2,413	)		(2,414	)		51			46			97
Purchases		-			4,773			4,773			-			167			167
Sales		-			(31	)		(31	)		-			(150	)		(150	)
Transfers		(605	)		53			(552	)		(36	)		-			(36	)
Ending balance	$	12		$	4,535		$	4,547		$	476		$	346		$	822
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	$	-		$	(2,429	)	$	(2,429	)	$	42		$	3		$	45

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.

During the three months ended September 30, 2018 and September 30, 2017, the Company transferred investments with values of approximately $580,000 and $36,000, respectively, from level 3 to level 1 due to increased availability of market price quotations. During the nine months ended September 30, 2018 and September 30, 2017, the Company transferred investments with values of approximately $605,000 and $36,000, respectively, from level 3 to level 1 due to increased availability of market price quotations. During the three and nine months ended September 30, 2018, the Company transferred investments with a value of approximately $53,000 from level 1 to level 3 due to the unavailability of observable inputs.

F.	Income Taxes

The effective tax rate (“ETR”) for the three months ended September 30, 2018 and September 30, 2017 was 10.6% and 4.8%, respectively. The ETR in the third quarter of 2018 differs from the standard corporate tax rate of 21% primarily due to state and local taxes (net of federal benefit) and the impact of (a) income attributable to noncontrolling interests, (b) capital losses for which the Company does not expect to realize a tax benefit, and (c) the dividends received deduction. The ETR in the third quarter of 2017 differs from the standard corporate tax rate of 34% primarily due to the benefit of (x) the dividends received deduction, and (y) the acceleration of restricted stock awards (“RSAs”).

Index

The ETR for the nine months ended September 30, 2018 and September 30, 2017 was 20.1% and 55.1%, respectively. The 2018 year-to-date ETR differs from the standard corporate tax rate of 21% primarily due to state and local taxes (net of federal benefit) and the impact of (a) income attributable to noncontrolling interests, (b) capital losses for which the Company does not expect to realize a tax benefit, and (c) the dividends received deduction. The 2017 year-to-date ETR differs from the standard corporate tax rate of 34% primarily due to state and local taxes (net of federal benefit) and the benefit of (x) the donation of appreciated securities, (y) the dividends received deduction, and (z) the acceleration of RSAs.

G.	Earnings Per Share

Basic earnings per share is computed by dividing net income/(loss) per share 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) per share attributable to our shareholders by the weighted average number of shares outstanding during the period, adjusted for the dilutive effect of outstanding RSAs.

The computations of basic and diluted net income/(loss) per share are as follows:

	Three Months Ended September 30,
(amounts in thousands, except per share amounts)	2018			2017
Basic:
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders	$	(7,379	)	$	1,519
Weighted average shares outstanding		22,979			23,841
Basic net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders per share	$	(0.32	)	$	0.06

Diluted:
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders	$	(7,379	)	$	1,519

Weighted average share outstanding		22,979			23,841
Dilutive restricted stock awards		-			-
Total		22,979			23,841
Diluted net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders per share	$	(0.32	)	$	0.06

	Nine Months Ended September 30,
(amounts in thousands, except per share amounts)	2018			2017
Basic:
Net loss attributable to Associated Capital Group, Inc.’s shareholders	$	(17,784	)	$	(6,963	)
Weighted average shares outstanding		23,187			23,826
Basic net loss attributable to Associated Capital Group, Inc.’s shareholders per share	$	(0.77	)	$	(0.29	)

Diluted:
Net loss attributable to Associated Capital Group, Inc.’s shareholders	$	(17,784	)	$	(6,963	)

Weighted average share outstanding		23,187			23,826
Dilutive restricted stock awards		-			-
Total		23,187			23,826
Diluted net loss attributable to Associated Capital Group, Inc.’s shareholders per share	$	(0.77	)	$	(0.29	)

Index

Diluted weighted average shares outstanding for the nine months ended September 30, 2017 exclude outstanding RSAs as we have a net loss for this period and their inclusion would be anti-dilutive. There were no outstanding RSAs during the nine months ended September 30, 2018.

H.	Stockholders’ Equity

Shares outstanding were 23.0 million and 23.6 million on September 30, 2018 and December 31, 2017, respectively.

Dividends

During the nine months ended September 30, 2018 and 2017, the Company declared dividends of $0.10 per share to class A and class B shareholders.

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 (a) 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, and (b) holders of each share class are not eligible to vote on matters relating exclusively to the other share class.

Stock Award and Incentive Plan

There were no RSAs issued by AC during the three and nine months ended September 30, 2018 or 2017.

On November 30, 2015, in connection with the spin-off, the Company issued 554,100 AC RSA shares to GAMCO employees (including GAMCO employees who became AC employees) who held 554,100 GAMCO RSA shares at that date. The purpose of the issuance was to ensure that any employee who had GAMCO RSAs was granted an equal number of AC RSAs so that the total value of the RSAs post-spin-off was equivalent to the total value pre-spin-off. The value of the GAMCO RSAs held by AC employees is recognized as expense by the Company over the remaining vesting period because the employees’ services are for the benefit of the Company. In accordance with GAAP, we have allocated the stock compensation costs between GAMCO and AC based upon each employee’s individual allocation of their responsibilities between GAMCO and AC.

As of December 31, 2017, there were no AC RSA shares and 19,400 GAMCO RSA shares outstanding. During the first quarter of 2018, the compensation committee of GAMCO’s Board of Directors accelerated the vesting of the remaining 19,400 GAMCO RSA shares outstanding.

At its August 2018 meeting, the Company’s Board of Directors approved the grant of 171,800 shares of Phantom Restricted Stock awards (“Phantom RSAs”). Under the terms of the grants, which were effective August 8, 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. Based on the price of the Company’s stock, the total value of the Phantom RSAs was $6.1 million as of the grant date.

Pursuant to ASC 718, the Phantom RSAs will be 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 will remeasure the fair value of the liability at each reporting date taking into account the remaining vesting period attributable to each award and the current market value of the Company’s Class A stock. In making these determinations, the Company will consider the impact of Phantom RSAs that have been forfeited prior to vesting (e.g., due to an employee termination). The Company has elected to consider forfeitures as they occur.

The expense attributable to the Phantom RSAs is allocated solely to AC.

Index

As of September 30, 2018, there were 169,800 Phantom RSAs outstanding. The unrecognized compensation cost related to these was $6.9 million which is expected to be recognized over a weighted-average period of 2.6 years.

For the three months ended September 30, 2018 and 2017, the Company recorded approximately $0.3 million and $1.9 million in stock-based compensation expense, respectively. For the nine months ended September 30, 2018 and 2017, the Company recorded approximately $0.4 million and $5.2 million in stock-based compensation expense, respectively.

I.	Goodwill and Identifiable Intangible Assets

At September 30, 2018, 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 and nine months ended September 30, 2018 or September 30, 2017, 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. However, management believes 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, 2018.

G.research has agreed to indemnify the clearing brokers for losses they may sustain from customer accounts introduced by G.research that trade on margin. At each of September 30, 2018 and December 31, 2017, the total amount of customer balances subject to indemnification (i.e., unsecured margin debits) was immaterial.

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.	Shareholder-Designated Contribution Program

During the first quarter of 2017 each shareholder was eligible to designate a charity to which the Company would make a donation at a rate of $0.25 per share based upon the number of shares registered in the shareholder’s name under the Company’s Shareholder-Designated Charitable Contribution program. Shares held in nominee or street name were not eligible to participate. For the three and nine months ended September 30, 2017, the Company recorded a cost of $0.0 million and $4.9 million, respectively, related to this contribution which was included in shareholder-designated contribution in the condensed consolidated statements of income. There was no comparable expense in the current periods.

Index

L.	Contractual Obligations

In February 2018, the Company renewed its sublease agreement with GAMCO for an additional year ending March 31, 2019. Future minimum lease commitments under this operating lease as of September 30, 2018 are as follows (in thousands):

2018	$	121
2019		121
Total	$	242

M.	Subsequent Events

In September 2018, the Company commenced a tender offer for its Class A shares. Tendering shareholders received 1.9 GAMCO shares for each Class A share. Upon its expiration on October 29, the Company acquired approximately 370,000 shares in exchange for approximately 710,000 GAMCO shares with a value of approximately $14.6 million.

At its meeting on November 6, 2018, the Company’s Board of Directors declared a semi-annual dividend of $0.10 per share payable on January 9, 2019 to its Class A and Class B shareholders of record on December 26, 2018.

In addition, the Board approved a 2018 allocation to its Shareholder-Designated Contribution Program. Each shareholder of record on November 30, 2018 will be eligible to identify a qualified charity to which AC will make a twenty-five cent ($0.25) per share donation on the shareholder's behalf. As in the past, shares held in nominee or street name will not be eligible to participate.

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 8, 2018 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 conduct our investment management business through Gabelli & Company Investment Advisers, Inc. (“GCIA” f/k/a Gabelli Securities, Inc.). GCIA and its wholly-owned subsidiary, Gabelli & Partners, LLC, 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 assets under management. GCIA is an investment adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940, as amended.

In connection with the Spin-off, GAMCO issued a promissory note (the “GAMCO Note”) to AC Group in the original principal amount of $250 million bearing interest at 4% per annum and with an original maturity date of November 30, 2020. Under its terms, GAMCO could prepay the GAMCO Note prior to maturity without penalty. As of June 30, 2018, AC had received principal repayments totaling $230 million on the GAMCO Note and, during the third quarter, GBL repaid the outstanding $20 million balance. In addition, GCIA purchased 4,393,055 shares of GAMCO Class A common stock for $150 million.

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.

Index

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. We recognize incentive revenue only when the measurement period has been completed or at the time of an investor redemption.

Institutional research services revenues consist of brokerage commissions derived from securities transactions executed on an agency basis or direct payments on behalf of institutional clients. Commission revenues vary directly with the perceived value of the research, as well as account trading activity and new account generation.

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 generally represents 40% of revenues and is the largest component of total compensation costs.

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 operating expenses include general and administrative operating costs and clearing charges and fees incurred by the brokerage business.

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

Net income/(loss) attributable to noncontrolling interests represents the net income/(loss) 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 2018 with approximately $971 million in cash and investments, net of securities sold, not yet purchased of $22 million. This includes $384 million of cash and short term US treasuries; $298 million of securities, net, including 3.7 million shares of GAMCO stock; and $289 million invested in affiliated and third party funds and partnerships. Our liquid financial resources underpin our flexibility to pursue strategic objectives which 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.

Total shareholders’ equity was $924 million or $40.22 per share at September 30, 2018 compared to $918 million or $38.84 per share on December 31, 2017. The increase in equity from the end of 2017 is driven primarily by our $50 million principal prepayments of the GAMCO Note during the period partially offset by our net loss.

As discussed above, during the quarter, GAMCO repaid the outstanding balance of the GAMCO Note. Under GAAP, the balance of the GAMCO Note was treated as a reduction of equity. In prior periods, the Company reported adjusted economic book value (“AEBV”), a non-GAAP financial measure defined as total GAAP equity plus the outstanding balance of the GAMCO Note. This measure is no longer relevant.

Index

RESULTS OF OPERATIONS

(in thousands, except per share data)	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Revenues
Investment advisory and incentive fees	$	2,805		$	2,587		$	7,949		$	7,318
Institutional research services		1,855			2,584			6,179			7,917
Other		6			77			37			95
Total revenues		4,666			5,248			14,165			15,330
Expenses
Compensation		5,618			6,492			17,812			19,696
Stock-based compensation		289			1,862			361			5,226
Other operating expenses		2,258			3,006			7,187			7,305
Total expenses		8,165			11,360			25,360			32,227
Operating loss		(3,499	)		(6,112	)		(11,195	)		(16,897	)
Other income/(expense)
Net gain/(loss) from investments		(7,977	)		5,234			(18,936	)		(1,018	)
Interest and dividend income		3,466			2,347			9,338			7,295
Interest expense		(70	)		(69	)		(142	)		(210	)
Shareholder-designated contribution		-			-			-			(4,895	)
Total other income/(expense), net		(4,581	)		7,512			(9,740	)		1,172
Income/(loss) before income taxes		(8,080	)		1,400			(20,935	)		(15,725	)
Income tax expense/(benefit)		(858	)		67			(4,204	)		(8,667	)
Net income/(loss)		(7,222	)		1,333			(16,731	)		(7,058	)
Net income/(loss) attributable to noncontrolling interests		157			(186	)		1,053			(95	)
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders	$	(7,379	)	$	1,519		$	(17,784	)	$	(6,963	)

Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders per share:
Basic	$	(0.32	)	$	0.06		$	(0.77	)	$	(0.29	)
Diluted		(0.32	)		0.06			(0.77	)		(0.29	)

Three Months Ended September 30, 2018 Compared To Three Months Ended September 30, 2017

Overview

Our operating loss for the quarter was $3.5 million compared to $6.1 million for the comparable quarter of 2017. Lower revenue was offset by lower expenses, primarily stock-based compensation. Other income was a loss of $4.6 million in the 2018 quarter compared to a gain of $7.5 million in the prior year’s quarter primarily due to mark-to-market changes in the value of our investment portfolio. The Company recorded an income tax benefit in the current quarter of $0.9 million compared to an expense of $0.1 million in the year ago quarter. Consequently, our current quarter net loss was $7.4 million, or $(0.32) per diluted share, compared to a gain of $1.5 million, or $0.06 per diluted share, in the prior year’s comparable quarter.

In comparing the current quarter’s results with those of the year ago period, it is important to note the impact of a change in the accounting treatment of available for sale (“AFS”) equity securities resulting from the adoption of Accounting Standards Update (“ASU”) 2016-01 on January 1, 2018. In prior periods, the change in unrealized gains or losses attributable to AFS equity securities was reflected in equity and classified as other comprehensive income rather than net income. Beginning in 2018, however, the mark-to-market adjustments for the entire portfolio flow through net income. On a comparable basis, the third quarter 2017 investment and other non-operating income/(expense), net would have been a gain of $10.1 million. On a comparable basis of accounting for AFS securities, the year ago period would have reported a net gain of $3.2 million (i.e., the Company’s reported comprehensive income).

Revenues

Total revenues were $4.7 million for the quarter ended September 30, 2018 compared to $5.2 million for the quarter ended September 30, 2017.

Index

We earn advisory fees based on the average level of AUM in our products. Advisory fees were $2.8 million for the 2018 quarter compared to $2.6 million for the prior year quarter, an increase of $0.2 million. This increase is due to the increase in AUM to $1.6 billion in the third quarter of 2018 from $1.5 billion in the third quarter of 2017. Incentive fees are generally not recognized until the measurement period ends, typically annually on December 31. If the measurement period had instead ended on September 30, we would have recognized $0.7 million and $0.4 million of incentive fees for each of the quarters ended September 30, 2018 and 2017, respectively.

Institutional research services revenues in the current year’s first quarter decreased to $1.9 million, from the prior year’s period of $2.6 million due to a reduction in commissions and hard dollar payments generated by our institutional research operations.

Expenses

Compensation, which includes variable compensation, salaries, bonuses and benefits, was $5.6 million for the quarter ended September 30, 2018, compared to $6.5 million for the quarter ended September 30, 2017. Fixed compensation, which includes salaries and benefits, declined to $2.9 million for the third quarter 2018 from $3.8 million in the 2017 period. Discretionary bonus accruals were $1.0 million and $0.9 million in the third quarter of 2018 and 2017, 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 the three months ended September 30, 2018 and 2017, stock-based compensation was $0.3 million and $1.9 million, respectively. The 2017 period reflects the acceleration of GAMCO RSAs.

Management fee 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 no management fee expense in the third quarter of 2018 and 2017 due to the year to date pre-tax loss in both periods.

Other operating expenses were $2.3 million during the third quarter of 2018 compared to $3.0 million in the prior year quarter, a decrease of $0.7 million primarily due to initial offering costs relating to a consolidated fund the Company launched in July 2017 and recognized in the year-ago period.

Other

Net gain from investments is primarily related to the performance of our securities portfolio and investments in partnerships. Investment losses were $8.0 million in the 2018 quarter versus a gain of $5.2 million in the comparable 2017 quarter reflecting mark-to-market changes in the value of our investments.

Interest and dividend income increased to $3.5 million in the 2018 quarter from $2.3 million in the 2017 quarter primarily due to higher interest rates on our cash balances and US Treasuries offset by reduced interest earned on the GAMCO Note due to principal payments received.

Nine Months Ended September 30, 2018 Compared To Nine Months Ended September 30, 2017

Overview

Our operating loss for the year-to-date period was $11.2 million compared to $16.9 million for the comparable period of 2017. Lower revenue was offset by lower expenses, primarily stock-based and other compensation. Other income was a loss of $9.7 million in the 2018 period compared to a gain of $1.2 million in the prior year’s period primarily due to mark-to-market changes on our investment portfolio and the adoption of ASU 2016-01 on January 1, 2018. Stock-based compensation fell by $4.9 million year-over-year. The Company recorded an income tax benefit of $4.2 million in the current year compared to a benefit of $8.7 million in the year ago period. Consequently, our 2018 period net loss increased to $17.8 million, or $(0.77) per diluted share, from $7.0 million, or $(0.29) per diluted share, in the prior year’s comparable period.

Index

On a comparable basis of accounting for AFS equity securities, the 2017 period investment and other non-operating income/(expense), net would have been a gain of $23.4 million and net income would have been $7.2 million (i.e., the Company’s reported comprehensive income).

Revenues

Total revenues were $14.2 million for the nine months ended September 30, 2018 compared to $15.3 million for the nine months ended September 30, 2017.

Advisory fees were $7.9 million for the 2018 nine months compared to $7.3 million for the prior year nine months, an increase of $0.6 million. This increase is due to the increase in AUM over the period. Incentive fees are generally not recognized until the measurement period ends, typically annually on December 31. If the measurement period had instead ended on September 30, we would have recognized $3.0 million and $3.5 million of incentive fees for each of the nine months ended September 30, 2018 and 2017, respectively.

Institutional research services revenues in the current year’s first nine months decreased to $6.2 million, from the prior year’s period of $7.9 million due to a reduction in commissions and hard dollar payments generated by our institutional research operations.

Expenses

Compensation, which includes variable compensation, salaries, bonuses and benefits, was $17.8 million for the nine months ended September 30, 2018, compared to $19.7 million for the nine months ended September 30, 2017. Fixed compensation, which includes salaries and benefits, declined to $10.0 million for the 2018 period from $11.6 million in the prior year. Discretionary bonus accruals were $3.1 million and $2.6 million in the 2018 and 2017 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 the nine months ended September 30, 2018 and 2017, stock-based compensation was $0.4 million and $5.2 million, respectively. The 2017 period reflects the acceleration of AC and GAMCO RSAs.

Management fee 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 no management fee expense for these periods due to the year to date pre-tax loss.

Other operating expenses were $7.2 million during the first nine months of 2018 compared to $7.3 million in the prior year.

Other

Investment losses were $18.9 million in the 2018 nine month period compared to $1.0 million in the comparable 2017 period reflecting mark-to-market changes in the value of our investments.

Interest and dividend income increased to $9.3 million in the 2018 period from $7.3 million in 2017 primarily due to dividend income of a consolidated fund launched in July 2017 and higher interest rates on our cash balances and U.S. Treasuries offset by reduced interest earned on the GAMCO Note due to principal payments received.

The 2017 nine-month period included an expense of $4.9 million related to the Company’s shareholder-designated contribution program. There was no comparable expense in the 2018 period.

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 $1.6 billion as of September 30, 2018, an increase of 5.1% and 4.8% over the prior nine and twelve months, respectively. The increases were attributable to market appreciation and additional investor contributions, net of redemptions.

Assets Under Management (in millions)

							% Change From
	September 30, 2018		December 31, 2017		September 30, 2017		December 31, 2017			September 30, 2017

Event Merger Arbitrage	$	1,466	$	1,384	$	1,395		5.9			5.1
Event-Driven Value		89		91		85		(2.2	)		4.7
Other		64		66		65		(3.0	)		(1.5	)
Total AUM	$	1,619	$	1,541	$	1,545		5.1			4.8

Fund flows for the three months ended September 30, 2018 (in millions):

	June 30, 2018		Market appreciation/ (depreciation)		Net cash flows			September 30, 2018

Event Merger Arbitrage	$	1,480	$	6	$	(20	)	$	1,466
Event-Driven Value		87		2		-			89
Other		66		1		(3	)		64
Total AUM	$	1,633	$	9	$	(23	)	$	1,619

Fund flows for the nine months ended September 30, 2018 (in millions):

	December 31, 2017		Market appreciation/ (depreciation)		Net cash flows			September 30, 2018

Event Merger Arbitrage	$	1,384	$	12	$	70		$	1,466
Event-Driven Value		91		1		(3	)		89
Other		66		1		(3	)		64
Total AUM	$	1,541	$	14	$	64		$	1,619

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,
	2018		2017
Cash flows provided by (used in):
Operating activities	$	4,617	$	(119,520	)
Investing activities		15,000		(1,975	)
Financing activities		36,111		49,704
Net increase (decrease)		55,728		(71,791	)
Cash and cash equivalents at beginning of period		293,112		314,093
Increase in cash from consolidation		47		-
Cash and cash equivalents at end of period	$	348,887	$	242,302

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, 2018, we had total cash and cash equivalents of $349 million and $622 million in net investments. Of these amounts, $3 million and $127 million, respectively, were held by consolidated investment funds and may not be readily available for the Company to access.

Net cash provided by operating activities was $4.6 million for the nine months ended September 30, 2018 primarily due to our net loss increased by $5.5 million of net proceeds of trading securities and net distributions from investment partnerships and net changes of $19.4 million to accrued expenses and receivables reduced by non-cash items of $3.6 million. Net cash provided by investing activities was $15.0 million due to the repayment of a short-term note. Net cash provided by financing activities was $36.1 million for the quarter, largely resulting from the $50 million prepayment of the GAMCO Note offset by dividends and stock buyback payments of $11.2 million and redemptions of redeemable noncontrolling interests of $2.7 million.

For the nine months ended September 30, 2017, cash used in operating activities was $119.5 million, primarily due to the quarter’s loss adjusted for non-cash items and net changes to assets and liabilities. Cash used in investing activities, primarily related to transactions related to AFS securities, was $2.0 million in the first nine months of 2017. Cash provided by financing activities for the period was $49.7 million due to the principal repayment of the GAMCO Note and contributions from redeemable noncontrolling interests offset in part by purchases of treasury shares and dividends.

G.research is a registered broker-dealer, and 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 had net capital, as defined, of $37.1 million, exceeding the required amount of $250,000 by $36.9 million at September 30, 2018. G.research’s net capital requirements may increase to the extent it engages in other business activities in accordance with applicable rules and regulations.

Market Risk

Our primary market risk exposures are to changes in equity prices and interest rates. Since a majority of our AUM is invested in equities, our financial results are subject to equity market risk as revenues from our investment management services are sensitive to stock market dynamics. In addition, returns from our proprietary investment portfolio are exposed to interest rate and equity market risk.

The Company’s Executive Chairman oversees the proprietary investment portfolios and allocations of proprietary capital among the various strategies. The Executive Chairman and the Board of Directors review the proprietary investment portfolios throughout the year. Additionally, the Company monitors its proprietary investment portfolios to ensure that they are in compliance with the Company’s guidelines.

Index

Equity Price Risk

The Company earns a substantial portion of its revenue as advisory fees from investment partnership and separate account assets. Such fees represent a percentage of AUM, and the majority of these assets are in equities. Accordingly, since revenues are proportionate to the value of those investments, a substantial increase or decrease in overall equity markets will likely have a corresponding effect on the Company’s revenues.

Investments consisted of the following (in thousands):

	September 30, 2018			December 31, 2017

Investment in securities:
Government obligations	$	35,256		$	53,804
GBL stock		87,269			130,254
Common stocks		226,473			163,327
Mutual funds		1,553			3,428
Other investments		5,132			1,824
Total investments in securities		355,683			352,637

Investments in affiliated registered investment companies:
Closed-end funds		90,610			93,147
Mutual funds		55,836			52,767
Total investments in affiliated registered investment companies		146,446			145,914

Investments in partnerships:
Investments in partnerships		142,283			145,591
Total investments in partnerships		142,283			145,591

Securities sold, not yet purchased:
Common stocks		(22,093	)		(5,396	)
Other investments		(260	)		(335	)
Total securities sold, not yet purchased		(22,353	)		(5,731	)

Total investments net of securities sold, not yet purchased	$	622,059		$	638,411

We may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. Of the approximately $313.7 million and $293.6 million invested in common stocks at September 30, 2018 and December 31, 2017, respectively, $155.5 million and $108.7 million was invested by the Company in arbitrage opportunities in connection with mergers, consolidations, acquisitions, tender offers or other similar transactions. Risk arbitrage generally involves investing in securities of companies that have announced corporate transactions with agreed upon terms and conditions, including pricing, and typically involves less market risk than holding common stocks in a trading portfolio. The principal risk associated with merger arbitrage transactions is the inability of the companies involved to complete the transaction.

Of the investments in affiliated registered investment companies at September 30, 2018 and December 31, 2017, $58.0 million and $57.8 million, respectively, consisted of investment companies which invest in merger arbitrage opportunities. Securities sold, not yet purchased are stated at fair value and are subject to market risks resulting from changes in price and volatility. At September 30, 2018 and December 31, 2017, the fair value of securities sold, not yet purchased was $22.4 million and $5.7 million, respectively. Investments in partnerships totaled $142.3 million and $145.6 million at September 30, 2018 and December 31, 2017, respectively, $105.3 million and $102.3 million of which consisted of investment partnerships and offshore funds which invest in risk arbitrage opportunities.

Index

The following table provides a sensitivity analysis for our investments in equity securities and partnerships and affiliated registered investment companies which invest primarily in equity securities, excluding arbitrage products for which the principal exposure is to deal closure and not overall market conditions, as of September 30, 2018 and December 31, 2017. The sensitivity analysis assumes a 10% increase or decrease in the value of these investments (in thousands):

	Fair Value		Fair Value assuming 10% decrease in equity prices		Fair Value assuming 10% increase in equity prices
At September 30, 2018:
Equity price sensitive investments, at fair value	$	360,542	$	324,488	$	396,596
At December 31, 2017:
Equity price sensitive investments, at fair value	$	321,550	$	289,395	$	353,705

Interest Rate Risk

Our exposure to interest rate risk principally results from our investment of excess cash in a related money market fund that holds U.S. government securities. These investments are primarily short term in nature, and the carrying value of these investments generally approximates fair value. Based on the September 30, 2018 cash and cash equivalent balance of $349 million, a 1% change in interest rates would increase or decrease our interest income by $3.5 million annually.

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 2017 Annual Report on Form 10-K filed with the SEC on March 8, 2018 for details on Critical Accounting Policies.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

In the normal course of its business, AC is exposed to risk of loss due to fluctuations in the securities market and general economy. Management is responsible for identifying, assessing and managing market and other risks.

Our exposure to pricing risk in equity securities is directly related to our role as financial intermediary and advisor for AUM in our investment partnerships and separate accounts as well as our proprietary investment and trading activities. At September 30, 2018, we had equity investments, including open-end funds and closed-end funds largely invested in equity products, of $461.7 million. Included in this total are investments in open-end funds and closed-end funds of $148.0 million which seek to reduce market risk through the diversification of financial instruments within their portfolios. In addition, we may alter our investment holdings from time to time in response to changes in market risks and other factors considered appropriate by management. We also hold investments in partnerships which invest primarily in equity securities and which are subject to changes in equity prices. These investments totaled $142.3 million at September 30, 2018, $105.3 million of which comprised partnerships which invest in risk arbitrage. Risk arbitrage is primarily dependent upon deal closure rather than the overall market environment. The equity investment portfolio is recorded at fair value and will generally move in line with the equity markets. The portfolio changes are recorded as net gain/(loss) from investments in the condensed consolidated statements of income.

Index

Item 4.

Controls and Procedures

We evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018. Disclosure controls and procedures, as defined under the Exchange Act Rule 13a-15(e), are designed to ensure that the information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified in SEC rules and regulations. Disclosure controls and procedures include, without limitation, controls and procedures accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), to allow timely decisions regarding required disclosure. Our CEO and CFO participated in this evaluation and concluded that our disclosure controls and procedures were effective as of September 30, 2018.

There have been no changes in our internal control over financial reporting, as defined by Rule 13a-15(f), that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2018.

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, 2018:

	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
July 2018		-	$	-		-		1,236,850
August 2018		20,155		36.27		20,155		1,216,695
September 2018		-		-		-		1,216,695
Total		20,155	$	36.27		20,155

Item 6.	(a) Exhibits

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

31.2	Certification of CFO 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 CFO 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

Index

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/ Francis J. Conroy

Name: Francis J. Conroy

Title: Interim Chief Financial Officer

Date: November 6, 2018