4
MORGAN GROUP HOLDING CO. AND SUBSIDIARIES
Morgan Group Holding Co.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSCondensed Statement of Shareholders’ EquityMarch 31, 2020
(Unaudited)
Three Months Ended September 30, 2019, June 30, 2019, March 31, 2019,
December 31, 2018, September 30, 2018, June 30, 2018,Organization and March 31, 2018.
| | | Common Stock | | | Additional | | | | | | | |
| | | Shares | | | Par Value | | | Paid in Capital | | | Accumulated Deficit | | | Total | |
| Shareholders’ equity, December 31, 2017 | | | 3,359,055 | | | $ | 33,591 | | | $ | 5,772,368 | | | $ | (5,793,352 | ) | | $ | 12,607 | |
| Sale of common stock | | | 1,500,000 | | | | 15,000 | | | | 165,000 | | | | - | | | | 180,000 | |
| Net loss for three months ended March 31, 2018 | | | -- | | | | -- | | | | -- | | | | (26,976 | ) | | | (26,976 | ) |
| Shareholders’ equity, March 31, 2018 | | | 4,859,055 | | | | 48,591 | | | | 5,937,368 | | | | (5,820,328 | ) | | | 165,631 | |
| Net loss for three months ended June 30, 2018 | | | -- | | | | -- | | | | -- | | | | (11,123 | ) | | | (11,123 | ) |
| Shareholders’ equity. June 30, 2018 | | | 4,859,055 | | | | 48,591 | | | | 5,937,368 | | | | (5,831,451 | ) | | | 154,508 | |
| Net loss for three months ended September 30, 2018 | | | -- | | | | -- | | | | -- | | | | (8,965 | ) | | | (8,965 | ) |
| Shareholders’ equity. September 30, 2018 | | | 4,859.055 | | | | 48,591 | | | | 5,937,368 | | | | (5,840,416 | ) | | | 145,543 | |
| Net loss for three months ended December 31, 2018 | | | -- | | | | -- | | | | -- | | | | (8,676 | ) | | | (8,676 | ) |
| Shareholders’ equity. December 31, 2018 | | | 4,859,055 | | | | 48,591 | | | | 5,937,368 | | | | (5,849,092 | ) | | | 136,867 | |
| Net loss for three months ended March 31, 2019 | | | -- | | | | -- | | | | -- | | | | (22,684 | ) | | | (22,684 | ) |
| Shareholders’ equity. March 31, 2019 | | | 4,859,055 | | | | 48,591 | | | | 5,937,368 | | | | (5.871,776 | ) | | | 114,183 | |
| Net loss for three months ended June 30, 2019 | | | -- | | | | -- | | | | -- | | | | (11,079 | ) | | | (11,079 | ) |
| Shareholders’ equity. June 30, 2019 | | | 4,859,055 | | | | 48,591 | | | | 5,937,368 | | | | (5,882,855 | ) | | | 103,104 | |
| Net loss for three months ended September 30, 2019 | | | -- | | | | -- | | | | -- | | | | (32,348 | ) | | | (32,348 | ) |
| Shareholders’ equity. September 30, 2019 | | | 4,859,055 | | | $ | 48,591 | | | $ | 5,937,368 | | | $ | (5,915,203 | ) | | $ | 70,756 | |
See accompanying notes to condensed financial statements.
Morgan Group Holding Co.
Notes to Condensed Financial Statements
Note 1. | Basis of Presentation
|
Business Description
Morgan Group Holding Co. (“Morgan”(the “Company,” “Morgan Group,” or “the Company”“Morgan”) was incorporated in November 2001 as a wholly-owned subsidiary of LICT Corporation (“LICT”)Delaware corporation to serve among other business purposes, as a holding company for LICT’s controlling interest in Thewhich seeks acquisitions as part of its strategic alternatives. Prior to the October 31, 2019 merger with G.research, LLC (“G.research”), discussed below, Morgan Group had no operating companies.
The Company acquired G.research from Associated Capital Group, Inc. On January 24, 2002, LICT spun off 2,820,051(“AC”), an affiliate of the Company, on October 31, 2019, in exchange for issuing 50,000,000 shares of the Company’s common stock throughto AC (the “Merger”). Accordingly, G.research became a wholly owned subsidiary of the Company. Prior to the transaction, G.research was a wholly-owned subsidiary of Institutional Services holdings, LLC, which, in turn, is a wholly-owned subsidiary of AC. After the transaction, AC has an 83.3% ownership interest in the Company. As a result of this common ownership, the transaction was treated as a combination between entities under common control that led to a change in the reporting entity. The recognized assets and liabilities were transferred at their carrying amounts at the date of the transaction. Further, the companies were also combined retrospectively for prior year comparative information in the financial statements of the Company issued after the Merger, including for the three months ended March 31, 2019 in these condensed consolidated financial statements. Consistent with our financial statements as of December 31, 2019 in our Form 10K, the common stock, additional paid in capital, and accumulated deficit amounts in these condensed consolidated financial statements have been restated as of December 31, 2018 to reflect the recapitalization in accordance with the shares issued as a result of the Merger.
On March 16, 2020, AC’s Board of Directors approved the spin-off of the Company to AC’s shareholders. Upon execution of the spin-off, AC will distribute to its shareholders on a pro rata distributionbasis the 50,000,000 shares of Morgan that AC owns.
G.research is a broker-dealer registered with the Securities and Exchange Commission (the “SEC”) and is regulated by the Financial Industry Regulatory Authority (“Spin-Off”FINRA”) to its stockholders and retained 235,294 shares..
The Company provides institutional investors and investment partnerships with investment research with a particular focus on small-cap and mid-cap companies. The team of sell-side analysts follows industry sectors on a global basis and performs fundamental security analysis using a Private Market Value (“PMV”) framework. PMV investing is a disciplined, research-driven approach based on security analysis. In this process, the analyst selects stocks whose intrinsic value, based on the analyst’s estimate of current asset value and future growth and earnings power, is significantly different from the public market value as reflected in the public market. PMV is defined as the price an informed industrial buyer would be likely to pay to acquire the business. The research focuses on company fundamentals, cash flow statistics, and catalysts that will help realize returns.
The Company generates brokerage commission revenues from securities transactions executed on an agency basis on behalf of institutional clients and mutual funds, private wealth management clients, and retail customers of affiliated companies. The Company generates revenue from syndicated underwriting activities. It primarily participates in the offerings of certain closed-end funds advised by Gabelli Funds, LLC, a wholly-owned subsidiary of GAMCO Investors, Inc. (“GBL”), an affiliate. The Company also earns investment income generated from its proprietary trading activities.
The Company acts as an introducing broker, and all securities transactions for the Company and its customers are cleared through and carried by three New York Stock Exchange (“NYSE”) member firms on a fully disclosed basis. The Company has Proprietary Accounts of Introducing Brokers (“PAIB”) agreements with these firms. Accordingly, open customer transactions are not reflected in the accompanying Condensed Consolidated Statement of Financial Condition. The Company is exposed to credit losses on these open transactions in the event of nonperformance by its customers, pursuant to conditions of its clearing agreements with its clearing brokers. This exposure is mitigated by the clearing brokers’ policy of monitoring the collateral and credit of the counterparties until the transaction is completed.
The Company’s principal market is in the United States (“U.S”).
1. Significant Accounting Policies
Basis of Presentation
The unaudited interim condensed consolidated financial statements have been prepared in accordanceconformity with U.S. generally accepted accounting principles generally accepted in the United States(“GAAP”) for interim financial information and withpursuant to the instructions torequirements for reporting on Form 10-Q and Article 8Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United StatesU.S. GAAP for complete financial statements. In the opinion of management, the unaudited interim condensed consolidated financial statements reflect all adjustments, (consistingwhich are of a normal recurring accruals) considerednature, necessary for athe fair presentation have been included. Operatingof financial position, results of operations, and cash flows of Morgan for the threeinterim periods presented and nine months ended September 30, 2019 are not necessarily indicative of a full year’s results.
The interim condensed consolidated financial statements include the results that mayaccounts of the Company and its wholly-owned subsidiary, G.research, from the date of the Merger with retrospective application. Intercompany accounts and transactions have been eliminated.
These interim condensed consolidated financial statements should be expectedread in conjunction with the Company’s audited consolidated financial statements included in our annual report on Form 10-K for the year endingended December 31, 2019.
Use of Estimates
The preparation ofCompany’s financial statements are prepared in conformityaccordance with accounting principles generally accepted in the United StatesU.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts reported inof assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and accompanying notes.the reported amounts of revenues and expenses during that reporting period. Actual results could differ from those estimates.
Recent Accounting Developments
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), which amends the guidance in U.S. 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 statements of financial condition. The Company adopted this ASU effective January 1, 2019 with no material impact on its consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Accounting for Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”), which requires an organization to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Currently, U.S. GAAP requires an “incurred loss” methodology that delays recognition until it is probable a loss has been incurred. Under ASU 2016-13, the allowance for credit losses must be deducted from the amortized cost of the financial asset to present the net amount expected to be collected. The consolidated statements of operations will reflect the measurement of credit losses for newly recognized financial assets as well as the expected increases or decreases of expected credit losses that have taken place during the period. In November 2019, the FASB issued ASU 2019-10, 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.
2. Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when the Company satisfies a performance obligation.
Significant judgments that affect the amounts and timing of revenue recognition:
The Company’s analysis of the timing of revenue recognition of each revenue stream is based on the provisions of each respective contract. Performance obligations could, however, change from time to time if and when existing contracts are modified or new contracts are entered into. These changes could potentially affect the timing of satisfaction of performance obligations, the determination of the transaction price, and the allocation of the price to performance obligations. In the case of the revenue streams discussed below, the performance obligation is satisfied either at a point in time or over time. The judgments outlined below, where the determination as to these estimates.factors is discussed in detail, are continually reviewed and monitored by the Company when new contracts or contract modifications occur. Transaction price is in all instances formulaic and not subject to significant (or any) judgment at the current time.
The Company’s assessment of the recognition of these revenues is as follows:
Revenue from contracts with customers includes commissions, fees earned from affiliated entities pursuant to research services agreements, underwriting fees, and sales manager fees.
Commissions
Brokerage commissions. Acting as agent, the Company buys and sells securities on behalf of its customers. Commissions are charged on the execution of these securities transactions made on behalf of client accounts and are negotiated. The Company recognizes commission revenue when the related securities transactions are executed on the trade date. The Company believes that the performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon, and the risks and rewards of ownership have been transferred to/from the customer. Commissions earned are typically collected from the clearing brokers utilized by the Company on a daily or weekly basis.
Hard dollar payments. The Company provides research services to unrelated parties, for which direct payment is received. The company may, or may not, have contracts for such services. Where a contract for such services is in place, the contractual fee for the period is recognized ratably over the contract period, which is considered the period over which the Company satisfies its performance obligation. For payments where no research contract exists, revenue is not recognized until agreement is reached with the client at which time the performance obligation is considered to have been met and revenue is recognized.
Commission revenues are impacted by the perceived value of the research product provided to clients, the volume of securities transactions, and the acquisition or loss of new client relationships.
Fees earned from affiliated entities pursuant to research services agreements
The Company receives direct payments for research services provided to related parties pursuant to contracts. The contractual fee for the period is fixed and recognized ratably over the contract period, typically a calendar year, which is considered the period over which the Company satisfies its performance obligation. Payments for contracts with affiliated parties are collected monthly.
Underwriting fees
Underwriting fees. The Company acts as underwriter in an agent capacity. Revenues are earned from fees arising from these offerings and the terms are set forth in contracts between the underwriters and the issuer. The Company’s underwriting revenue is considered to be conditional revenue because it is subject to reduction to zero once the offsetting syndicate expenses have been quantified by the syndicate manager (i.e., lead underwriter) and allocated to each underwriter in proportion to their participation in the offering. Revenue recognition is therefore delayed until it is probable that a significant reversal in the amount of revenue recognized will not occur. That is, it is recognized only when uncertainty associated with the syndicate expenses is subsequently resolved and final settlement of syndicate accounts is affected by the syndicate manager. Payment is typically received from the syndicate manager within ninety days after settlement date.
Selling concessions. The Company participates as a member of the selling group of underwritten equity offerings and receives compensation based on the difference between what its customers pay for the securities sold to its institutional clients and what the issuer receives. The terms of the selling concessions are set forth in contracts between the Company and the underwriter. Revenue is recognized on the trade date (the date on which the Company purchases the securities from the issuer) for the portion the Company is contracted to buy. The Company believes that the trade date is the appropriate point in time to recognize revenue for securities underwriting transactions as there are no significant actions the Company needs to take subsequent to this date, and the issuer obtains the control and benefit of the capital markets offering at this point. Selling concessions earned are typically collected from the clearing brokers utilized by the Company on a daily or weekly basis.
Sales manager fees
The Company participates as sales manager of at-the-market offerings of certain affiliated closed-end funds and receives a tiered percentage of proceeds as stipulated in agreements between the Company, the funds and the funds’ investment adviser. The Company recognizes sales manager fees upon sale of the related closed-end funds. Sales manager fees earned are fixed and typically collected from the clearing brokers utilized by the Company on a daily or weekly basis.
Revenue Disaggregated
Total revenues from contracts with customers by type were as follows for the three months ended March 31, 2020 and 2019:
Note 2. | Acquisition of G.Research, LLC
|
| | | Three months ended March 31, | |
| | | 2020 | | | 2019 | |
| Commissions | | $ | 936,784 | | | $ | 1,426,235 | |
| Hard dollar payments | | | 102,159 | | | | 109,010 | |
| | | | 1,038,943 | | | | 1,535,245 | |
| Research services | | | - | | | | 377,500 | |
| Underwriting fees | | | 30,488 | | | | - | |
| Sales manager fees | | | 334,825 | | | | - | |
| | | $ | 1,404,256 | | | $ | 1,912,745 | |
On June 18,3. Related Party Transactions
At March 31, 2020 and December 31, 2019, the Company announcedhad an agreementinvestment of $5,661,750 and $6,579,577, respectively, in principle with Associated Capital GroupThe Gabelli U.S. Treasury Money Market Fund advised by Gabelli Funds, LLC, which is an affiliate of the Company. The amount is recorded in cash and cash equivalents in the Condensed Consolidated Statements of Financial Condition. Income earned from this investment totaled $29,550 and $59,035 for the three months ended March 31, 2020 and 2019, respectively, and is included in dividends and interest revenues in the Condensed Consolidated Statements of Operations.
For the three months ended March 31, 2020 and 2019, the Company earned $691,784 and $1,132,845, or approximately 67% and 74%, respectively, of its commission revenue from transactions executed on behalf of funds advised by Gabelli Funds, LLC. (“AC,” NYSE:AC)Gabelli Funds”) and private wealth management clients advised by GAMCO Asset Management Inc., to acquire(“GAMCO Asset”), each affiliates of the Company. GAMCO Asset and Gabelli Funds paid a subsidiarytotal of AC, G.Research, LLC (“G.Research”). Under the proposed terms, Morgan will acquire G.Research for 50,000,000 shares of Morgan’s common stock. The transaction is subject$377,500 to the executionCompany pursuant to research services agreements (see Note 2) for the three months ended March 31, 2019. No amounts for such services were paid during the three months ended March 31, 2020. These agreements were terminated effective January 1, 2020.
The Company participated as agent in the secondary offerings of definitive documentsthe GAMCO Global Gold, Natural Resources & Income Trust (“GGN”). Pursuant to sales agreements between the parties, the Company earned sales manager fees related to this offering of $334,825 and $0 during the satisfactionthree months ended March 31, 2020 and 2019, respectively. Sales manager fees are separately disclosed in the Condensed Consolidated Statements of customary closing conditionsOperations.
The Company participated in the secondary offerings of the preferred stock of affiliated closed end funds in December 2019. The final settlements were received during March 2020 resulting in additional underwriting profit of $30,488.
The Company pays AC a management fee equal to 20% of the Company’s year-to-date pretax profits before consideration of this fee. In the three months ended March 31, 2020 and regulatory approvals. Accordingly,2019, the Company did not pay a management fee to AC as there were no assurances can be givenpretax profits.
AC has a sublease agreement with GBL that expired on April 1, 2020 and continues on a binding agreement will be entered into, thatmonth to month basis. AC allocates this expense to the proposed transaction will be consummated orCompany based on the timing thereof. Ifpercentage of square footage occupied by the transaction is completed, AC will hold approximately 91%Company’s employees (including pro rata allocation of Morgan’s outstanding common stock.space). For the three months ended March 31, 2020 and 2019, the Company paid $27,113 and $82,913, respectively, to AC. These amounts are included within occupancy and equipment expenses on the Condensed Consolidated Statements of Operations.
4. Fair Value
The carrying amounts of all financial instruments in the Condensed Consolidated Statements of Financial Condition approximate their fair values.
The Company’s financial instruments have been categorized based upon a fair value hierarchy:
| - | Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 1 assets include cash equivalents. |
| - | Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. |
| - | Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. These assets include infrequently traded common stocks. |
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 March 31, 2020 and December 31, 2019 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:
Assets Measured at Fair Value on a Recurring Basis as of March 31, 2020:
Note 3. | Significant Accounting Policies Assets | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | | | Cash equivalents | | $ | 5,661,750 | | | $ | - | | | $ | - | | | $ | | | | Total assets at fair value | | $ | 5,661,750 | | | $ | - | | | $ | - | | | $ | | |
There were no transfers between any Levels during the three months ended March 31, 2020.
Assets Measured at Fair Value on a Recurring Basis as of December 31, 2019: |
All highly liquid investments with maturity Assets | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Total | |
| Cash equivalents | | $ | 6,579,577 | | | $ | - | | | $ | - | | | $ | | |
| Total assets at fair value | | $ | | | | $ | - | | | $ | - | | | $ | | |
There were no transfers between any Levels during the year ended December 31, 2019.
Cash equivalents primarily consist of three months or less when purchased are considered to be cash equivalents. an affiliated money market mutual fund which is invested solely in U.S. Treasuries and valued based on the net asset value of the fund.
Financial assets disclosed but not carried at fair value
The carrying value of a cash equivalentother financial assets and liabilities approximates itstheir fair value based on its nature.the short term nature of these items.
At September 30, 2019, December 31, 2018, and September 30, 2018, all cash and cash equivalents were invested in a United States Treasury money market fund, of which an affiliate of the Company serves as the investment manager.5. Retirement Plan
The Company participates in Associated Capital’s incentive savings plan (the “Plan”), covering substantially all employees. Company contributions to the Plan are determined annually by management of the Company and AC’s Board of Directors but may from timenot exceed the amount permitted as a deductible expense under the Internal Revenue Code. Amounts expensed for allocated contributions to time invest in marketable securities that are boughtthis Plan amounted to approximately $4,436 and held principally$4,436 for the purpose of selling themthree months ended March 31, 2020 and 2019, respectively, and were recorded as compensation and related costs in the near termCondensed Consolidated Statements of Operations.
6. Income Taxes
The effective tax rate for the three months ended March 31, 2020 and are classified as trading securities. Trading securities are recorded2019 was 32.6% and 20.4%, respectively. For the three months ended March 31, 2020 the rate impact was related to a net operating loss carryback at fair value on the balance sheet in current assets, with the change in fair value during the period included in earnings.higher federal rates.
7. Earnings per Share
Basic earnings per share is based oncomputed by dividing net income / (loss) attributable to shareholders by the weighted-averageweighted average number of common shares outstanding during eachthe period. DilutedThere were no dilutive shares outstanding during the periods.
The computations of basic and diluted net loss per share are as follows:
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
| Basic and diluted: | | | | | | |
| Net loss attributable to shareholders | | $ | (282,454 | ) | | $ | (1,040,642 | ) |
| Weighted average shares outstanding | | | 60,009,005 | | | | 54,859,055 | |
| Basic and diluted net loss per share | | $ | (0.00 | ) | | $ | (0.02 | ) |
8. Equity
In conjunction with the Merger on October 31, 2019, the Company issued 50,000,000 shares of common stock to AC. The common stock, additional paid in capital, earnings per share, is based on basicand accumulated deficit amounts in these consolidated financial statements for the period prior to the Merger have been restated to reflect the recapitalization in accordance with the shares plusissued as a result of the incremental shares that would be issued upon the assumed exercise of in-the-money stock options and unvested restricted stock using the treasury stock method, and if dilutive.Merger.
Note 4. | Fair Value of Financial Instruments
|
See the Organization and Business Description Note above for detail.
9. Guarantees, Contingencies, and Commitments
The Company measures fair value ashas agreed to indemnify its clearing brokers for losses they may sustain from the selling pricecustomer accounts that would be received for an asset, or paid to transfer a liability, in the principal markettrade on the measurement date. The hierarchy establishedmargin introduced by the FASB prioritizes fair value measurements based onCompany. At March 31, 2020 and December 31, 2019, the typestotal amount of inputs used incustomer balances subject to indemnification (i.e., unsecured margin debits) was immaterial. The Company also has entered into arrangements with various other third parties, many of which provide for indemnification of the valuation technique. The inputs are categorized into the following levels:
Level 1 – Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices that are observable, either directly or indirectly, for identical or similar assetsthird parties against losses, costs, claims, and liabilities in active or non-active markets; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantiallyarising from the full termperformance of the assets or liability.
Level 3 – Unobservable inputs not corroborated by market data, therefore requiringCompany’s obligations under the entity to use the best available information, including management assumptions.
At September 30, 2019, December 31, 2018, and September 30, 2018, the Company’s cash equivalents included money market securities. These securities are valued utilizing quoted market prices from identical instruments and are categorized in Level 1 of the fair value hierarchy.
At September 30, 2019, December 31, 2018, and September 30, 2018, there were no gross unrealized gains or losses.
The Company is a “C” corporation for Federal tax purposes, and has provided for deferred income taxes for temporary differences between the financial statement and tax bases of its assets and liabilities.agreements. The Company has recordedhad no claims or payments pursuant to these or prior agreements, and management believes the likelihood of a full valuation allowance against its deferred tax asset of approximately $213,321 arising from its temporary basis differencesclaim being made is remote, and tax loss carryforward, as its realization is dependent upontherefore, an accrual has not been made in the generation of future taxable income during the period when such losses would be deductible.
Pursuant to Sections 382 and 383 of the Internal Revenue Code, annual use of any of the Company’s net operating loss carry forwards may be limited if cumulative changes in ownership of more than 50% occur during any three year period.
Note 6. | Commitments and Contingencies
|
consolidated financial statements.
From time to time, the Company is named in legal actions and proceedings. These actions may seek substantial or indeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject to governmental or regulatory examinations or investigations. The examinations or investigations could result in adverse judgments, settlements, fines, injunctions, restitutions, or other relief. The Company cannot predict the ultimate outcome of such matters. The consolidated financial statements include the necessary provisions for losses that the Company believes are probable and estimable, if any. Furthermore, the Company evaluates whether losses exist which may be reasonably possible and, if material, makes the necessary disclosures. Such amounts, both those that are probable and those that are reasonably possible, are not considered material to the Company’s financial condition, operations, or cash flows.
10. Net Capital Requirements
As a registered broker-dealer, G.research is subject to the SEC Uniform Net Capital Rule 15c3-1 (the “Rule”), which specifies, among other requirements, minimum net capital requirements for registered broker-dealers. G.research computes its net capital under the alternative method as permitted by the Rule, which requires that minimum net capital be the greater of $250,000 or 2% of the aggregate debit items in the reserve formula for those broker-dealers subject to Rule 15c3-3. G.research is exempt from Rule 15c3-3 pursuant to paragraph (k)(2)(ii) of that rule which exempts all customer transactions cleared through another broker-dealer on a fully disclosed basis. In addition, our assets at the clearing broker-dealer are treated as allowable assets for net capital purposes as we have in place PAIB agreements pursuant to Rule 15c3-3. These requirements also provide that equity capital may not be withdrawn, advances to affiliates may not be made, or cash dividends paid if certain assertedminimum net capital requirements are not met. G.research had net capital, as defined, of $4,347,017 and unasserted claims. It is$4,618,033, exceeding the Company’s belief that the resolutionrequired amount of these matters will not have a material adverse effect on its financial position.$250,000 by $4,097,017 and $4,368,033 at March 31, 2020 and December 31, 2019, respectively.
Note 7. | Shareholders’ Equity
|
11. Subsequent Events
On March 19, 2018, the Company sold in a private placement to LICT, 1,500,000 of its shares common stock for $180,000, or $0.12 per share. These funds were intended to be used to pay administrative costs for the subsequent three years, until an acquisition candidate could be found, and appropriate financing obtained. The funds from the sale were received on April 3, 2018.
AtMay 4, 2020, the Company’s Annual MeetingBoard of Stockholders on May 8, 2014, its stockholders voted to amendDirectors approved a 1-for-100 reverse split of the Company’s Certificate of Incorporation (the “Charter Amendment”) to increase the number of authorized, issued, and outstanding shares of common stock, par value $0.01, per share, from 10,000,000subject to 100,000,000. In connection with the proposed acquisition of G.Research, as further described in Note 2, and in order to effectuate this increase in authorized capital, on July 15, 2019, the Company filed the Charter Amendment with the State of Delaware.shareholder approval.
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of OperationsITEM 2: | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Unless indicated otherwise, or the context otherwise requires, references in this report to the “Company,” “Morgan Group,” “Morgan,” “we,” “us,” and “our” or similar terms are to Morgan Group Holding Co. and its subsidiary.
OverviewCAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this Form 10-Q contains 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,” “will,” “should,” “may,” 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. 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.
OVERVIEW
The Company currently has no operating businessesfollowing discussion and is seeking acquisitionsanalysis of our financial condition and results of operations should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included in Part I, Item 1 of this Form 10-Q. This discussion contains forward-looking statements and involves numerous risks and uncertainties. Our actual results could differ materially from those anticipated by such forward-looking statements as partdiscussed under “Cautionary Statement Regarding Forward-Looking Statements” appearing elsewhere in this Form 10-Q.
Morgan Group (OTC Pink®: MGHL), through G.research, acts as an underwriter and provides institutional research services. Institutional research services revenues consist of its strategic alternatives. Its only costs arebrokerage commissions derived from securities transactions executed on an agency basis or direct payments from institutional clients as well as underwriting profits, selling concessions and management fees associated with underwriting activities. Commission revenues vary directly with the expenses required to makeperceived value of the regulatory filings needed to maintain its public statusresearch provided, as well as account activity and to find and evaluate potential acquisitions. These costs are estimated at $50,000 per year.new account generation.
In light of the dynamics created by COVID-19, its impact on the global supply chain and economy, including government imposed restrictions on travel and the temporary closure of businesses deemed non-essential across the United States, we anticipate lower transaction volumes from our institutional clients. As a result of this pandemic, the majority of our employees are working remotely, including our order execution services. However, there has been no material impact of remote work arrangements on our operations, including our financial reporting systems, internal control over financial reporting, and disclosure controls and procedures, and there has been no material challenge in implementing our business continuity plan. The sponsored conferences are taking place as planned using virtual service providers. While at the present time, the Company is unable to estimate the potential impact of COVID-19 on its financial condition, a significant prolonged disruption in the financial markets leading to materially lower trading activity of the Company’s clients would have a material adverse effect on the Company’s revenue, operating results and financial position. Any potential impact to our results of operations and financial condition will depend to a large extent on future developments and new information that could emerge regarding the duration and severity of COVID-19 and the actions taken by authorities and other entities to contain COVID-19 or treat its impact, all of which are beyond our control. We will continue to monitor the virus’ impact on our customers, clients, and financial results.
Recent DevelopmentsRESULTS OF OPERATIONS
On June 18, 2019,The following table (in thousands, except per share data) and discussion of our results of operations are based upon data derived from the Company announced an agreementCondensed Consolidated Statements of Income contained in principleour condensed consolidated financial statements and should be read in conjunction with AC, to acquire a subsidiarythose statements included in Part I, Item 1 of AC, G.Research. Under the proposed terms, Morgan will acquire G.Research for 50,000,000 shares of Morgan’s common stock. The transaction is subject to the execution of definitive documents and the satisfaction of customary closing conditions and regulatory approvals. Accordingly, no assurances can be given that a binding agreement will be entered into, that the proposed transaction will be consummated or the timing thereof. If the transaction is completed, AC will hold approximately 91% of Morgan’s outstanding common stock.this Form 10-Q:
Results of Operations
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
| Revenues | | | | | | |
| Commissions | | $ | 1,039 | | | $ | 1,535 | |
| Fees earned from affiliated entities pursuant to research services agreements | | | - | | | | 378 | |
| Principal transactions | | | (1 | ) | | | (0 | ) |
| Dividends and interest | | | 36 | | | | 64 | |
| Underwriting fees | | | 30 | | | | - | |
| Sales manager fees | | | 335 | | | | - | |
| Other revenues | | | 3 | | | | 6 | |
| Total revenues | | | 1,443 | | | | 1,982 | |
| Expenses | | | | | | | | |
| Compensation and related costs | | | 1,143 | | | | 2,479 | |
| Clearing charges | | | 303 | | | | 290 | |
| General and administrative | | | 311 | | | | 325 | |
| Occupancy and equipment | | | 104 | | | | 196 | |
| Total expenses | | | 1,862 | | | | 3,290 | |
| Loss before income tax benefit | | | (419 | ) | | | (1,308 | ) |
| Income tax benefit | | | (137 | ) | | | (267 | ) |
| Net loss | | $ | (282 | ) | | $ | (1,041 | ) |
| | | | | | | | | |
| Net loss per share | | | | | | | | |
| Basic and diluted | | $ | (0.00 | ) | | $ | (0.02 | ) |
Three Months Ended September 30,March 31, 2020 as Compared to the Three Months Ended March 31, 2019 and 2018
Revenues
Institutional research service revenues were $1.4 million for three months ended March 31, 2020, $0.5 million, or 26.6%, lower than total revenues of $2.0 million for the three months ended March 31, 2019. Institutional research services revenues by revenue component, excluding principal transactions and dividends and interest, were as follows (dollars in thousands):
| | | Three Months Ended March 31, | | | Increase (Decrease) | |
| | | 2020 | | | 2019 | | | $ | | |
| % | |
| Commissions | | $ | 937 | | | $ | 1,426 | | | $ | (489 | ) | | | -34.3 | % |
| Hard dollar payments | | | 102 | | | | 109 | | | | (7 | ) | | | -6.4 | % |
| | | | 1,039 | | | | 1,535 | | | $ | (496 | ) | | | -32.3 | % |
| Research services | | | - | | | | 378 | | | | (378 | ) | | | -100.0 | % |
| Underwriting fees | | | 30 | | | | - | | | | 30 | | | | n/a | |
| Sales manager fees | | | 335 | | | | - | | | | 335 | | | | n/a | |
| Total | | $ | 1,404 | | | $ | 1,913 | | | $ | (509 | ) | | | -26.6 | % |
Commissions and hard dollar payments in the 2020 period were $1.0 million, a $0.5 million, or 32.3%, decrease from $1.5 million in the 2019 period. The decrease was primarily due to lower brokerage commissions from fewer securities transactions executed on an agency basis. For the three months ended September 30,March 31, 2020 and 2019, the Company incurred $32,809respectively, G.research earned $0.7 million and $1.1 million, or approximately 62% and 74%, of administrative expenses, an increaseits commission revenue from transactions executed on behalf of $23,193 from the administrative expensesfunds advised by Gabelli Funds, LLC (“Gabelli Funds”) and clients advised by GAMCO Asset Management Inc. (“GAMCO Asset”).
The agreements between G.research and Gabelli Funds and GAMCO Asset to provide institutional research services were terminated effective January 1, 2020. Amounts earned for the three months ended September 30, 2018 of $9,616. $22,419 of legal feesMarch 31, 2019 were $0.4 million.
The Company participated as agent in 2019 associated with the proposed acquisition of G.Research was the primary causesecondary offerings of the variance.GAMCO Global Gold, Natural Resources & Income Trust (“GGN”). Pursuant to sales agreements between the parties, the Company earned sales manager fees related to this offering of $0.3 million and $0 for the three months ended March 31, 2020 and 2019, respectively.
Principal Transactions
During the third fiscal quarter ofthree months ended March 31, 2020 and 2019, the Company earned $461net losses from its investmentprincipal transactions were negligible.
Interest and dividend income declined $0.03 million to $0.03 million in a United States Treasury money market fund, as compared to $6512020 from $0.06 million in the third quarter of 20182019 primarily due to lower average investment balances in 2018.cash and cash equivalents balances.
Nine Months Ended September 30,Expenses
Total expenses were $1.9 million for the three months ended March 31, 2020, a decrease of $1.4 million, or 43.4%, from $3.3 million in the 2019 period. The decrease results primarily from lower compensation costs and a reduction of expenses across all categories.
Compensation costs, which includes salaries, bonuses, and benefits, were $1.1 million for the three months ended March 31, 2020, a decrease of $1.4 million from $2.5 million for the three months ended March 31, 2019 and 2018was due to headcount reductions.
ForIncome Tax Benefit
We recorded income tax benefits of $0.1 million and $0.3 million for the ninethree months ended September 30,March 31, 2020 and 2019, the Company incurred $67,819 of administrative expenses, $19,438 more than the $48,381 of administrative expenses incurredrespectively. The ETR was 32.6% and 20.4% for the nineperiods ended March 31, 2020 and 2019, respectively.
Net Loss
Net loss for the three months ended September 30, 2018. The increaseMarch 31, 2020 was primarily due to increased legal fees in 2019. The $22,419 of legal fees in 2019 associated with$0.3 million versus $1.0 million for the proposed acquisition of G.Research was the primary cause of the variance, offset by lower legal fees in the first half of 2019 as compared to the first half of 2018.
During the first three quarters of 2019, the Company earned $1,708 from its investment in a United States Treasury money market fund, as compared to $1,317 in the first three quarters of 2018 due to higher average investment balances inmonths ended March 31, 2019.
Liquidity and Capital ResourcesLIQUIDITY AND CAPITAL RESOURCES
At September 30, 2019, the Company’sOur principal assets consistedare highly liquid in nature and consist of cash and cash equivalents, comprised primarily of $79,074a 100% U.S. Treasury money market fund, The Gabelli U.S. Treasury Money Market Fund, advised by Gabelli Funds, LLC, which is an affiliate of the Company. Summary cash flow data for the first three months of 2020 and 2019 was as compared to $129,685 at December 31, 2018.follows (in thousands):
On March 19, 2018 the Company sold in a private placement to LICT Corporation 1,500,000 shares of its common stock for $180,000, or $0.12 per share. These funds were intended to be15
| | | Three Months Ended March 31, | |
| | | 2020 | | | 2019 | |
Cash flows provided by (used in):
| |
|
|
| |
|
|
|
| Operating activities | | $ | (918 | ) | | $ | (1,824 | ) |
| Net decrease in cash and cash equivalents | | | (918 | ) | | | (1,824 | ) |
| Cash and cash equivalents at beginning of period | | | 6,587 | | | | 11,331 | |
| Cash and cash equivalents at end of period | | $ | 5,669 | | | $ | 9,507 | |
Net cash used to pay administrative costsby operating activities was $0.9 million for the subsequent three years, untilmonths ended March 31, 2020, resulting from a net loss of $0.3 million and net decrease in operating liabilities of $0.9 million offset by an acquisition candidateincrease in operating assets of $0.4. Net cash used by operating activities was $1.8 million for the three months ended March 31, 2019, primarily as a result of a net loss of $1.0 million and a decrease in operating liabilities of $0.8 million.
Critical Accounting Policies
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could be found,differ significantly from those estimates. See Note B in Part II, Item 8, Financial Statements and appropriate financing obtained. The funds from this sale were receivedSupplementary Data, and the Company’s Critical Accounting Policies in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Morgan Group’s 2019 annual report on Form 10-K filed with the SEC on April 3, 2018.2, 2020 for details on Critical Accounting Policies.
Off Balance Sheet Arrangements
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
None.
Item 3. | Quantitative and Qualitative Analysis of Market Risk |
The Company is a smallerSmaller reporting company as defined in Item 10(f)(1) of Regulation S-K and thus iscompanies are not required to reportprovide the Quantitativeinformation required by this item.
| ITEM 4. | CONTROLS AND PROCEDURES |
The Company maintains a system of disclosure controls and Qualitative Analysis of Market Riskprocedures that is designed to provide reasonable assurance that information, which is required to be timely disclosed, is recorded, processed, summarized, and reported to management within the time periods specified in Item 305Rules 13a-15(e) and 15d-15(e) of Regulation S-K.
Item 4. | Controls and Procedures
|
(a) | Evaluation of Disclosure Controls and Procedures
|
Our Acting Chief Executive Officer/Chief Financial Officer has evaluatedthe Exchange Act. The Company’s principal executive officer and principal financial officer, after evaluating the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Act”) as of the end of the period covered by this report. Based on that evaluation, the Acting Chief Executive Officer/Chief Financial Officer has concluded that the Company’s disclosure controls and proceduresAct) as of the end of the period covered by this report, were designedhave concluded that the Company’s disclosure controls and were functioning effectivelyprocedures are effective to provide reasonable assurance that the information required to be disclosed by the Company in the reports filedthat it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms of the Securities and Exchange Commission. The Company believes that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b) | Changes in Internal Controls
|
forms.
During the period covered by this report, thereThere 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 statements.reporting.
Forward Looking Discussion16
PART II: OTHER INFORMATION
This report contains a number of forward-looking statements, including but not limited to statements regarding the prospective adequacy of the Company’s liquidity and capital resources in the near term.
From time to time, the Company may make other oralbe named in legal actions and proceedings. These actions may seek substantial or written forward-looking statements regarding its anticipated operating revenues, costs and expenses, earnings and other matters affecting its operations and condition. Such forward-looking statements areindeterminate compensatory as well as punitive damages or injunctive relief. The Company is also subject to a number of material factors, whichgovernmental or regulatory examinations or investigations. The examinations or investigations could causeresult in adverse judgments, settlements, fines, injunctions, restitutions or other relief. For any such matters, the condensed consolidated financial statements or projections contained therein to be materially inaccurate. Such factors include the estimated administrative expenses ofnecessary provisions for losses that the Company on a going-forward basis.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 are probable and those that are reasonably possible, are not material to the Company’s financial condition, results of operations, or cash flows at March 31, 2020. See also Note 9, Guarantees, Contingencies, and Commitments, to the condensed consolidated financial statements in Part I, Item I of this Form 10-Q.
PART II - OTHER INFORMATIONSmaller reporting companies are not required to provide the information required by this item.
Item 1. | Legal Proceedings.
EXHIBITS |
The Company is not a party to any legal proceedings.
Not applicable
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|
None
Item 3. | Defaults upon Senior Securities.
|
None
Item 4. | Mine Safety Disclosures.
|
Not applicable
Item 5. | Other Information.
|
None
| | | Acting Chief Executive Officer and Chief Financial OfficerCertification of CEO pursuant to Rule 15d-14(a) Certification.13a-14(a).
|
| | | |
| | Exhibit 32.1Certification of CAO pursuant to Rule 13a-14(a). | Acting Chief Executive Officer and Chief Financial Officer Section 1350 Certification.
|
| | | |
| | EX-101.INSCertification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | XBRL INSTANCE DOCUMENT
|
| | | |
| | EX-101.SCHCertification of CAO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. | XBRL TAXONOMY EXTENSION SCHEMA
|
| | | |
| 101.INS |
| EX-101.PRE
| XBRL TAXONOMY EXTENSION PRESENTATION LINKBASEInstance Document |
| | | |
| 101.SCH | | EX-101.LAB
| XBRL TAXONOMY LABEL LINKBASETaxonomy Extension Schema Document |
| | | |
| 101.CAL | | EX-101.CAL
| XBRL TAXONOMY EXTENSION CALCULATIONTaxonomy Extension Calculation Linkbase Document |
| | | |
| 101.DEF | | EX-101.DEFXBRL Taxonomy Extension Definition Linkbase Document |
| | |
| 101.LAB | | XBRL TAXONOMY EXTENSION DEFINITION LINKBASETaxonomy Extension Label Linkbase Document |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrantregistrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| |
By: | /s/ Robert E. Dolan
(Registrant) By: /s/ Joseph L. Fernandez Name:��Joseph L. Fernandez Title: Executive Vice President - Finance |
| ROBERT E. DOLAN |
| Acting Chief Executive Officer/Chief Financial Officer |
OctoberDate: May 15, 20192020