Unless indicated otherwise, or the context otherwise requires, references in this report to “GAMCO Investors, Inc.,” “GAMCO,” “the Company,” “the Firm,” and “GBL” or similar terms are to GAMCO Investors, Inc., its predecessors, and its subsidiaries.

 

GAMCO (New York Stock Exchange (“NYSE”): GBL), a company incorporated under the laws of Delaware, is known for its research-driven approach to equity investing. GAMCO conducts itsa widely-recognized provider of investment advisory business principally through two subsidiaries: GAMCO Asset Management Inc. (“GAMCO Asset”) (approximately 1,500 institutional and private wealth separate accounts (“Institutional and PWM”), principally in the U.S.) and Gabelli Funds, LLC (“Gabelli Funds”) (24services to 24 open-end funds, 16 closed-end funds, 2 actively managed semi-transparent exchange traded funds (“ETFs”), 1 société d’investissement à capital variable (“SICAV”), and 16 closed-end funds). GAMCO serves a broad client base including institutions, intermediaries, offshore investors,approximately 1,400 institutional and private wealth management (“Institutional and direct retail investors. PWM”) investors principally in the United States (U.S.). The distributionCompany generally manages assets on a fully discretionary basis and invests in a variety of mutual funds is conductedU.S. and international securities through G.distributors, LLCvarious investment styles including value, growth, gold, non-market correlated, and convertible securities. The Company’s revenues are based primarily on the levels of assets under management (“G.distributors”AUM”), and fees associated with the Company’s broker-dealer subsidiary.various investment products.

GAMCO offers a wide range of solutions for clients across Value, and Growth Equity, ESG-SRI,ESG, Convertibles, actively managed semi-transparent ETFs, sector-focused strategies including Gold and Utilities, Merger Arbitrage, and Fixed Income. In 1977, GAMCO launchedstarted its flagshipwell-known All Cap Value strategy, Gabelli Value, and in 1986 launched itsentered the mutual fund business. In addition to its Value strategies, for over 30 years

The investment advisory business is conducted principally through the firm hasfollowing subsidiaries: Gabelli Funds, LLC (open-end funds, closed-end funds, and actively managed solutions in Growth Equity, Convertibles, SRI,semi-transparent ETFs) (“Gabelli Funds”) and Merger Arbitrage.GAMCO Asset Management Inc. (Institutional and PWM) (“GAMCO Asset”). The distribution of open-end funds and actively managed semi-transparent ETFs are conducted through G.distributors, LLC (“G.distributors”), the Company’s broker-dealer subsidiary.

The unaudited interim condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP 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 the fair presentation of financial position, results of operations, and cash flows of GAMCO 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 the Company and its wholly-owned subsidiaries:subsidiaries including: Gabelli Funds, GAMCO Asset, Distributors Holdings, Inc., G.distributors, and GAMCO Asset Management (UK) Limited, Gabelli Fixed Income, Inc., Gabelli Fixed Income L.L.C., GAMCO International Partners LLC, GAMCO Acquisition LLC, and Nevada NJ Lat, LLC.Limited. Intercompany accounts and transactions have been eliminated. Subsidiaries are fully consolidated from the date of acquisition, being the date on which GBL obtains control, and continue to be consolidated until the date that such control ceases.

The preparation of the interim condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In June 2016, the FASB Financial Accounting Standards Board (“FASB”) issued ASU Accounting Standards Update (“ASU”) 2016-13, Accounting for Financial Instruments - Credit Losses (Topic 326) (“(“ASU 2016-13”2016-13”), which requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Currently, U.S. GAAP requires an “incurred loss” methodology that delays recognition until it is probable a loss has been incurred. Under ASU 2016-13, the allowance for credit losses must be deducted from the amortized cost of the financial asset to present the net amount expected to be collected. The consolidated statement of income will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), Leases (Topic 842): Effective Dates (ASU 2019-10), which deferred the effective date of this guidance for smaller reporting companies for three years. This guidance is effective for the Company on January 1, 2023 and requires a modified retrospective transition method, which will result in a cumulative-effect adjustment in retained earnings upon adoption. Early adoption is permitted. The Company is currently assessing the potential impact of this new guidance on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which simplifies the process used to test for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill, and instead any goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. In November 2019, the FASB issued ASU 2019-10, which deferred the effective date of this guidance for smaller reporting companies for three years. This guidance will be effective for the Company on January 1, 2023 using a prospective transition method and early adoption is permitted. The Company is currently evaluating the potential effect of this new guidance on the Company’s consolidated financial statements.

The discussion below includes all material revenue streams that are within the scope of ASU 2014-09, Revenue From Contracts With Customers (Topic 606) (“ASU 2014-09”). In all cases for all revenue streams discussed below, the revenue generated is from a single transaction price and there is no need to allocate the amounts across more than a single revenue stream. The customer for all revenues derived from mutual andfunds, closed-end funds, and ETFs (collectively, the “Funds”) described in detail below has been determined to be each Fund itself and not the ultimate underlying investor in each Fund.

Significant judgments that affect the amounts and timing of revenue recognition:

The Company’s analysis of the timing of revenue recognition for each revenue stream is based upon an analysis of the current terms of each contract.  Performance obligations could, however, change from time to time if and when existing contracts are modified or new contracts are entered into. These changes could potentially affect the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the price to performance obligations.  In the case of the revenue streams discussed below, the performance obligation is satisfied either at a point in time or over time. For incentive fee revenues, the performance obligation (advising a client portfolio) is satisfied over time, while the recognition of revenues effectively occurs at the end of the measurement period as defined within the contract, as such amounts are subject to reduction to 0 on the date where the measurement period ends even if the performance benchmarks were exceeded during the intervening period. The judgments outlined below, where the determination as to these factors is discussed in detail, are continually reviewed and monitored by the Company when new contracts or contract modifications occur. Transaction price is in all instances formulaic and not subject to significant (or any) judgment at the current time. The allowance for doubtful accounts is subject to judgment.

Advisory fees for Funds, sub-advisory accounts, and the SICAV are earned based on predetermined percentages of the average net assets of the individual Funds and are recognized as revenues as the related services are performed. Fees for mutual Funds, 1 non-U.S. closed-end Fund, ETFs, sub-advisory accounts, and the SICAV are computed on a daily basis based on average daily net AUM. Fees for U.S. closed-end Funds are computed on average weekly net AUM and fees for 1 non-U.S. closed-end Fund are computed on a daily basis based on daily market value. These fees are received in cash after the end of each monthly period within 30 days. The revenue recognition occurs ratably as the performance obligation (advising the Fund) is met continuously over time. There is a risk of non-payment and, therefore, an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the periods presented.

Advisory fees for Institutional and PWM accounts are earned based on predetermined percentages of the AUM and are generally computed quarterly based on account values at the end of the preceding quarter. The revenue recognition occurs daily as the performance obligation (advising the client portfolio) is met continuously. These fees are received in cash, typically within 60 days of the client being billed. There is a risk of non-payment and, therefore, an impairment loss on these receivables is possible at each reporting date.  There were no such impairment losses for the periods presented.

Investment advisory fees are earned on a portion of some closed-end Funds’ preferred shares at year-end if the total return to common shareholders of the respective closed-end Fund for the year exceeds the dividend rate of the preferred shares. These fees are recognized at the end of the measurement period, which coincides with the calendar year.  These fees would also be earned and the contract period ended at any interim point in time that the respective preferred shares are redeemed. These fees are received in cash after the end of each annual measurement period, within 30 days.

The Company earns an incentive fee from 2 closed-end Funds. For The GDL Fund (GDL), there is an incentive fee, which is earned and recognized as of the end of each calendar year and varies to the extent the total return of the Fund is in excess of the ICE Bank of America Merrill Lynch 3-month U.S. Treasury Bill Index total return. For the Gabelli Merger Plus+ Trust Plc (GMP), there is an incentive fee, which is earned and recognized as of the end of each annual measurement period, June 30^th, and varies to the extent the total return of the Fund is in excess of twice the rate of return of the 13-week Treasury Bills over the performance period.

The Company earns a performance fee from a SICAV sub-fund, the GAMCO Merger Arbitrage SICAV. This fee is recognized at the end of the measurement period, which coincides with the calendar year. The fee would also be earned and the measurement period ended at any interim point in time that a client redeemed their respective shares. This fee is received in cash after the end of the measurement period, within 30 days.

The Company also may receive incentive fees from institutional clients, which are based upon exceeding either a specific benchmark index or a defined return for these accounts.  These fees are recognized at the end of the stipulated contract period, which is generally annually, for each respective account. These fees would also be earned and the contract period ended at any interim point in time that the client terminated its relationship with the Company. These fees are received in cash after the end of the measurement period, typically within 60 days.

In all cases of the incentive fees and performance fees, because of the variable nature of the consideration, revenue recognition is delayed until it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur, which is generally when the uncertainty associated with the variable consideration is subsequently resolved (for example, the measurement period has concluded and the hurdle rate has been exceeded). There is a risk of non-payment and, therefore, an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the periods presented.

Distribution fees and other income primarily includes distribution fee revenue earned in accordance with Rule 12b-1 of the Company Act of 1940, as amended, along with sales charges and underwriting fees associated with the sale of the class A shares of mutual funds. Distribution fees are computed based on average daily net assets of certain classes of each Fund and are accrued during the period in which they are earned. These fees are received in cash after the end of each monthly period within 30 days. In evaluating the appropriate timing of the recognition of these fees, the Company applied the guidance on up-front fees to determine whether such fees are related to the transfer of a promised service (a distinct performance obligation). The Company’s conclusion is that the service being provided by G.distributors to the customer in exchange for the fee is for the initial distribution of certain classes of the mutual funds and is completed at the time of each respective sale. Any fixed amounts are recognized on the trade date and variable amounts are recognized to the extent it is probable that a significant revenue reversal will not occur once the uncertainty is resolved. For variable amounts, as the uncertainty is dependent on the value of the shares at future points in time as well as the length of time the investor remains in the fund, both of which are highly susceptible to factors outside the Company’s influence, the Company does not believe that it can overcome this constraint until the market value of the Fund and the investor activities are known, which are generally monthly. Sales charges and underwriting fees associated with the sale of certain classes of the mutual funds are recognized on the trade date of the sale of the respective shares. There is a risk of non-payment and, therefore, an impairment loss on these receivables is possible at each reporting date. There were no such impairment losses for the periods presented.

There were 0 investments in debt securities at June 30, 2021. Investments in debt securities at September 30, 2020 and December 31, 20192020 consisted of the following (in thousands):

The effective tax rate (“ETR”) for the three months ended SeptemberJune 30, 20202021 and 20192020 was 27.4%37.4% and 27.1%39.1%, respectively. The effective tax rate (“ETR”)for the ninesix months ended SeptemberJune 30, 20202021 and 20192020 was 30.6%33.9% and 25.8%32.8%, respectively.The ETR for the first nine months of 2020 was higher by 4.8%, primarily as a result of higher non-deductibility of certain expenses as a result of the 2017 Tax Cuts and Jobs Act.