ITEM 2:
|
MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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 24, 2021 to help provide an understanding of our financial condition, changes in financial
condition and results of operations. Unless the context otherwise requires, all references to “we,” “us,” “our,” “AC Group” or the “Company” refer collectively to Associated Capital Group, Inc., a holding company, and its subsidiaries through
which our operations are actually conducted.
Overview
We are a Delaware corporation, incorporated in 2015, that provides alternative investment management services and operates a direct investment business that invests in new and existing
businesses. We derive a significant amount of investment income/(loss) from proprietary investments in funds that we manage.
Alternative Investment Management
We conduct our investment management activities through our wholly-owned subsidiary Gabelli & Company Investment Advisers, Inc. (“GCIA”) and its wholly-owned subsidiary, Gabelli &
Partners, LLC (“Gabelli & Partners”). GCIA is an investment adviser registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). GCIA and Gabelli & Partners
together 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 and across a range of risk and event arbitrage portfolios. The business earns management and incentive fees from its advisory activities. Management fees are largely based on a percentage of assets under management
(“AUM”). Incentive fees are based on the percentage of the investment returns of certain client portfolios.
We manage assets on a discretionary basis and invest in a variety of U.S. and foreign securities. We primarily employ absolute return strategies with the objective of generating positive
returns. We serve a wide variety of investors including private wealth management clients, corporations, corporate pension and profit-sharing plans, foundations and endowments, as well as serving as sub-advisor to certain third-party investment
funds.
In event merger arbitrage, the goal is to earn absolute positive returns. We introduced our first alternative fund, Gabelli Arbitrage (renamed Gabelli Associates), in February 1985. Our typical
investment process involves buying shares of the target at a discount, earning the spread to the deal price when the deal closes, and reinvesting the profits in new deals in a similar manner. By owning a diversified portfolio of deals, we
mitigate the adverse impact of deal-specific risks.
An offshore version of the event merger arbitrage strategy was added in 1989. Building on our strengths in global event-driven value investing, several new investment funds have been added to
balance investors’ geographic, strategy and sector needs. Today, we manage Investment Partnerships in multiple categories, including event merger arbitrage, event-driven value and other strategies.
Proprietary Capital
The proprietary capital is earmarked for our direct investment business that invests in new and existing businesses, using a variety of techniques and structures. The direct investment business
is developing along three core pillars; Gabelli Private Equity Partners, LLC (“GPEP”), formed in August 2017 with $150 million of authorized capital as a “fund-less” sponsor; the SPAC business (Gabelli special purpose acquisition vehicles),
launched in April 2018 when the Company sponsored a €110 million initial public offering of its first special purpose acquisition corporation, the Gabelli Value for Italy S.p.a., which was subsequently liquidated on July 8, 2020 at the apex of
the pandemic in Italy. Finally, Gabelli Principal Strategies Group, LLC (“GPS”) was created to pursue strategic operating initiatives.
On September 22, 2020, Associated Capital announced the $175 million initial public offering of its special purpose acquisition corporation (“SPAC”), PMV Consumer Acquisition Corp. (NYSE:PMVC).
PMV Consumer Acquisition Corp. (“PMV”) was created to pursue an initial business combination following the consumer globally with companies having an enterprise valuation in the range of $200 million to $3.5 billion.
We have a proprietary portfolio of cash and investments which we expect to use to invest primarily in funds that we will manage, provide seed capital for new products including SPACs that we or
our affiliates sponsor, expand our geographic presence, develop new markets and pursue strategic acquisitions and alliances.
Morgan Group Holding Co. Spin-Off
On March 16, 2020, the Company announced that its Board of Directors approved the spin-off of Morgan Group Holding Co (“Morgan Group”) which included our institutional research services
business, to AC’s shareholders whereby AC would distribute to its shareholders on a pro rata basis the 50,000,000 shares of Morgan Group that it owned upon close of the spin-off.
The historical financial results of Morgan Group have been reflected in the Company’s condensed consolidated financial statements as discontinued operations for all periods presented through
September 30, 2020.
In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China and has since spread quickly to numerous countries, including the United States. On March 11, 2020, COVID-19 was
identified as a global pandemic by the World Health Organization. In response to its spread, governmental authorities have imposed restrictions on travel and congregation and the temporary closure of many non-essential businesses in affected
jurisdictions, including, beginning in March 2020, in the United States. As world leaders focused on the unprecedented human and economic challenges of COVID-19, global equity markets plunged as the coronavirus pandemic spread. In March, the
unfolding events led to the worst month for stocks since 2008 and the worst first quarter since 1937. In the remainder of the year, as a result of unprecedented fiscal and monetary stimulus and the fast tracking of potential COVID-19 vaccines,
some of which have been approved and have begun to be distributed, the markets have rebounded strongly. The pandemic and resulting economic dislocations did not have a significant adverse impact on our AUM. As a result of this pandemic, many of
our employees (“teammates”) were working remotely.
However, there was 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 Company’s remote work arrangements were mostly discontinued as of July 2021.
Financial Highlights
The following is a summary of the Company’s financial performance for the Quarters ended September 30, 2021 and 2020:
($000s except per share data or as noted)
|
|
Third Quarter
|
|
|
|
2021
|
|
|
2020
|
|
AUM - end of period (in millions)
|
|
$
|
1,680
|
|
|
$
|
1,251
|
|
AUM - average (in millions)
|
|
|
1,651
|
|
|
|
1,280
|
|
Net income/(loss) per share-diluted
|
|
$
|
0.07
|
|
|
$
|
0.26
|
|
Book Value Per Share
|
|
$
|
42.24
|
|
|
$
|
38.25
|
|
Consolidated Statements of Income
Investment advisory and incentive fees, which are based on the amount and composition of 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 attracts 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. In light of the dynamics created by COVID-19 and its impact on the global supply chain and banks, oil, travel and
leisure, we could experience higher volatility in short term returns of our funds.
Incentive fees generally consist of an incentive allocation on the absolute gain in a portfolio generally equating to 20% of the economic profit, as defined in the agreements governing the
investment vehicle or account. We recognize such revenue only when the measurement period has been completed generally in December or at the time of an investor redemption.
Compensation includes variable and fixed compensation and related expenses paid to officers, portfolio managers, sales, trading, research and all other professional staff. Variable compensation
is paid to sales personnel and portfolio management and may represent up to 55% of revenues.
Management fee expense is incentive-based compensation equal to 10% of adjusted aggregate pre-tax profits paid to the Executive Chairman or his designees for his services pursuant to an
employment agreement.
Other operating expenses include general and administrative operating costs.
Other income and expense includes net gains and losses from investments (which include both realized and unrealized gains and losses from securities and equity in earnings of investments in
partnerships), interest and dividend income, and interest expense. Net gains and losses from investments are derived from our proprietary investment portfolio consisting of various public and private investments and from consolidated investment
funds.
Net income/(loss) attributable to noncontrolling interests represents the share of net income attributable to third-party limited partners of certain partnerships and offshore funds we
consolidate. Please refer to Notes A and D in our consolidated financial statements included elsewhere in this report.
Consolidated Statements of Financial Condition
We ended the third quarter of 2021 with approximately $947 million in cash and investments, net of securities sold, not yet purchased of $14 million and net of payables to broker of $225
million relating to an unsettled T-bill rollover trade. This includes $344.5 million of cash and cash equivalents (net of the unsettled T-bill rollover); $50 million of short-term U.S. Treasury obligations; $260 million of securities, net of
securities sold, not yet purchased, including shares of GAMCO with a market value of $65.6 million; and $292 million invested in affiliated and third-party funds and partnerships, including investments in affiliated closed end funds which have a
value of $74 million and more limited liquidity. Our financial resources provide flexibility to pursue strategic objectives that may include acquisitions, lift-outs, seeding new investment strategies, and co-investing, as well as shareholder
compensation in the form of share repurchases and dividends.
Total shareholders’ equity was $932 million or $42.24 per share as of September 30, 2021, compared to $899 million or $40.36 per share as of December 31, 2020. Shareholders’ equity per share is
calculated by dividing the total equity by the number of common shares outstanding. The increase in equity from the end of 2020 was largely attributable to income for the year. Accumulated accretion of redeemable noncontrolling interest is
expected to reverse upon the consummation of a business combination which is expected to result in the deconsolidation of PMV SPAC.
RESULTS OF OPERATIONS
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2021
|
|
|
2020
|
|
|
2021
|
|
|
2020
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment advisory and incentive fees
|
|
$
|
2,014
|
|
|
$
|
1,865
|
|
|
$
|
6,627
|
|
|
$
|
6,424
|
|
Other
|
|
|
98
|
|
|
|
80
|
|
|
|
299
|
|
|
|
550
|
|
Total revenues
|
|
|
2,112
|
|
|
|
1,945
|
|
|
|
6,926
|
|
|
|
6,974
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
2,819
|
|
|
|
3,026
|
|
|
|
11,710
|
|
|
|
8,405
|
|
Management fee
|
|
|
226
|
|
|
|
-
|
|
|
|
7,209
|
|
|
|
-
|
|
Other operating expenses
|
|
|
(764
|
)
|
|
|
2,471
|
|
|
|
4,952
|
|
|
|
6,422
|
|
Total expenses
|
|
|
2,281
|
|
|
|
5,497
|
|
|
|
23,871
|
|
|
|
14,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(169
|
)
|
|
|
(3,552
|
)
|
|
|
(16,945
|
)
|
|
|
(7,853
|
)
|
Other income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain/(loss) from investments
|
|
|
5,676
|
|
|
|
15,603
|
|
|
|
79,303
|
|
|
|
(34,770
|
)
|
Interest and dividend income
|
|
|
1,119
|
|
|
|
1,218
|
|
|
|
9,119
|
|
|
|
4,675
|
|
Interest expense
|
|
|
(97
|
)
|
|
|
(32
|
)
|
|
|
(251
|
)
|
|
|
(146
|
)
|
Shareholder-designated contribution
|
|
|
(541
|
)
|
|
|
(2,782
|
)
|
|
|
(2,717
|
)
|
|
|
(3,007
|
)
|
Total other income (expense), net
|
|
|
6,157
|
|
|
|
14,007
|
|
|
|
85,454
|
|
|
|
(33,248
|
)
|
Income/(loss) before income taxes
|
|
|
5,988
|
|
|
|
10,455
|
|
|
|
68,509
|
|
|
|
(41,101
|
)
|
Income tax expense/(benefit)
|
|
|
484
|
|
|
|
3,564
|
|
|
|
15,094
|
|
|
|
(8,858
|
)
|
Income/(loss) from continuing operations, net of taxes
|
|
|
5,504
|
|
|
|
6,891
|
|
|
|
53,415
|
|
|
|
(32,243
|
)
|
Income/(loss) from discontinued operations, net of taxes
|
|
|
-
|
|
|
|
(139
|
)
|
|
|
-
|
|
|
|
(632
|
)
|
Income/(loss) before noncontrolling interests
|
|
|
5,504
|
|
|
|
6,752
|
|
|
|
53,415
|
|
|
|
(32,875
|
)
|
Income/(loss) attributable to noncontrolling interests
|
|
|
4,001
|
|
|
|
937
|
|
|
|
3,641
|
|
|
|
(572
|
)
|
Net income/(loss) attributable to Associated Capital Group, Inc.’s shareholders
|
|
$
|
1,503
|
|
|
$
|
5,815
|
|
|
$
|
49,774
|
|
|
$
|
(32,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share attributable to Associated Capital Group, Inc.’s shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic - Continuing operations
|
|
$
|
0.07
|
|
|
$
|
0.27
|
|
|
$
|
2.25
|
|
|
$
|
(1.41
|
)
|
Basic - Discontinued operations
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
(0.03
|
)
|
Basic – Total
|
|
$
|
0.07
|
|
|
$
|
0.26
|
|
|
$
|
2.25
|
|
|
$
|
(1.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted - Continuing operations
|
|
$
|
0.07
|
|
|
$
|
0.27
|
|
|
$
|
2.25
|
|
|
$
|
(1.41
|
)
|
Diluted - Discontinued operations
|
|
|
-
|
|
|
|
(0.01
|
)
|
|
|
-
|
|
|
|
(0.03
|
)
|
Diluted - Total
|
|
$
|
0.07
|
|
|
$
|
0.26
|
|
|
$
|
2.25
|
|
|
$
|
(1.44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
22,084
|
|
|
|
22,354
|
|
|
|
22,141
|
|
|
|
22,391
|
|
Diluted
|
|
|
22,084
|
|
|
|
22,354
|
|
|
|
22,141
|
|
|
|
22,391
|
|
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020
Overview
Our operating loss for the quarter was $0.2 million compared to $3.6 million for the comparable quarter of 2020. The decrease in operating loss was driven by lower other operating expenses of
$(3.2) million mainly attributable to our consolidated funds. Other income was a gain of $6.2 million in the 2021 quarter compared to a gain of $14.0 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 expense in the current quarter of $0.5 million compared to expense of $3.6 million in the prior year’s quarter. Consequently, our current quarter net income was $1.5 million, or $0.07 per
diluted share, compared to net income of $5.8 million, or $0.26 per diluted share, in the prior year’s comparable quarter.
Revenues
Total revenues were $2.1 million for the quarter ended September 30, 2021, $0.2 million higher than the prior year’s period.
We earn advisory fees based on the average level of AUM in our products. Advisory and incentive fees were $2.0 million for 2021, $0.1 million higher than the comparable quarter of 2020. AUM of
$1.7 billion was 34.3% higher than the prior year quarter. Incentive fees are not recognized until the uncertainty surrounding the amount of variable consideration ends and the fee is crystalized, typically on an annual basis on December 31.
Unrecognized incentive fees amounted to $9.4 million for the quarter ended September 30, 2021 and $1.1 million for the quarter ended September 30, 2020.
Expenses
Compensation, which include variable compensation, salaries, bonuses and benefits, was $2.8 million for the three months ended September 30, 2021, compared to $3.0 million for the three months
ended September 30, 2020. Fixed compensation, which includes salaries and benefits and stock based compensation, increased to $1.8 million for the 2021 period from $1.7 million in the prior year. For the three months ended September 30, 2021 and
2020, stock-based compensation was $0.4 million and $0.1 million, respectively. The increase was due to a new grant in May 2021 and the recovery of AC stock prices during 2021. Discretionary bonus accruals were $0.5 million in the 2021 and 2020
periods. 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 2021, these variable payouts were $0.5 million, down $0.3 million from $0.8 million in 2020.
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 management fee expense of $0.2 million for the three-month period ended September 30, 2021. No management fee expense was recorded for the three-month period ended September 30, 2020 due to the year to date
pre-tax loss.
Other operating expenses were $(0.8) million during the three months ended September 30, 2021 compared to $2.5 million in the prior year.
Other
Net gain/(loss) from investments is primarily related to the performance of our securities portfolio and investments in partnerships. Investment gains were $5.7 million in the 2021 quarter
versus $15.6 million in the comparable 2020 quarter, the decrease driven by September 2021 market performance coupled with last year's recovery from the market's COVID-19 sell off.
Interest and dividend income decreased to $1.1 million in the 2021 quarter from $1.2 million in the 2020 quarter.
Shareholder-designated contributions decreased to $0.5 million in the 2021 quarter from $3 million in the prior year’s quarter.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020
Overview
Our operating loss for the year to date period was $16.9 million compared to $7.9 million for the comparable period of 2020. The increase in operating loss was attributable to higher management
fees of $7.2 million, higher operating expenses due to higher compensation costs of $3.3 million due to an increase in stock compensation costs of $1.5 million and an increase in variable performance-based compensation of $1.7 million, these
increases were partially offset by lower other operating expenses of $1.5 million. Other income was comprised of a gain of $85.5 million in the 2021 period compared to a loss of $33.2 million in the prior year’s period primarily due to
mark-to-market changes in the value of our investment portfolio. The Company recorded income tax expense in the current year to date period of $15.1 million compared to a benefit of $8.9 million in the prior year’s period. Consequently, our
current period net income was $49.8 million, or $2.25 per diluted share, compared to net loss of $32.3 million, or $(1.44) per diluted share, in the prior year’s comparable period.
Revenues
Total revenues were $6.9 million for the year to date period ended September 30, 2021, in line with the prior year’s period.
We earn advisory fees based on the average level of AUM in our products. Advisory fees were $6.6 million for 2021, an increase of $0.2 from the comparable period of 2020.
Expenses
Compensation, which includes variable compensation, salaries, bonuses and benefits, was $11.7 million for the nine months ended September 30, 2021, compared to $8.4 million for the nine months
ended September 30, 2020. Fixed compensation, which includes salaries and benefits and stock based compensation, increased to $5.9 million for the 2021 period from $4.6 million in the prior year. For the nine months ended September 30, 2021 and
2020, stock-based compensation was $1.2 million and $(0.3) million, respectively. The increase was mainly attributable to the recovery of AC stock prices during 2021. Discretionary bonus accruals were $1.7 million in 2021 and $1.6 million in the
2020 period. 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 2021, these variable payouts were $4.2 million, up $1.7 million from $2.5 million in 2020.
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 management fee expense of $7.2 million for the nine-month period ended September 30, 2021. No management fee expense was recorded for the nine-month period ended September 30, 2020 due to the year to date pre-tax
loss.
Other operating expenses were $5.0 million during the first nine months of 2021 compared to $6.4 million in the prior year.
Other
Net gain/(loss) from investments is primarily related to the performance of our securities portfolio and investments in partnerships. Investment gains were $79.3 million in the 2021 period
versus a loss of $(34.8) million in the comparable 2020 period reflecting mark-to-market changes in the value of our investments due to the recovery of market values from the COVID-19 pandemic.
Interest and dividend income increased to $9.1 million in the 2021 period from $4.7 million in the 2020 period primarily due to the special dividend declared on our holdings of GAMCO in the
2021 period.
Shareholder-designated contributions decreased to $2.7 million in the 2021 period from $3.0 million in the prior year’s period.
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 $1.7 billion as of September 30, 2021, an increase of 24.4% and 34.3% over the December 31, 2020 and September 30, 2020 periods, respectively. The changes were
attributable to market appreciation/(depreciation) and investor net inflows.
Assets Under Management (in millions)
|
|
|
|
|
|
|
|
|
|
|
% Change From
|
|
|
|
September 30,
2021
|
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
|
December 31,
2020
|
|
|
September
30,
2020
|
|
Event Merger Arbitrage
|
|
$
|
1,438
|
|
|
$
|
1,126
|
|
|
$
|
1,091
|
|
|
|
27.71
|
|
|
|
31.81
|
|
Event-Driven Value
|
|
|
198
|
|
|
|
180
|
|
|
|
105
|
|
|
|
10.00
|
|
|
|
88.57
|
|
Other
|
|
|
44
|
|
|
|
45
|
|
|
|
55
|
|
|
|
(2.22
|
)
|
|
|
(20.00
|
)
|
Total AUM
|
|
$
|
$ 1,680
|
|
|
$
|
$ 1,351
|
|
|
$
|
$ 1,251
|
|
|
|
24.35
|
|
|
|
34.29
|
|
Fund flows for the three months ended September 30, 2021 (in millions):
|
|
June 30,
2021
|
|
|
Market
Appreciation/
(Depreciation)
|
|
|
Net Cash
Flows
|
|
|
September 30,
2021
|
|
Event Merger Arbitrage
|
|
$
|
1,364
|
|
|
$
|
(10
|
)
|
|
$
|
84
|
|
|
$
|
1,438
|
|
Event-Driven Value
|
|
|
201
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
198
|
|
Other
|
|
|
46
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
44
|
|
Total AUM
|
|
$
|
1,611
|
|
|
|
(13
|
)
|
|
$
|
82
|
|
|
$
|
1,680
|
|
The majority of our AUM have calendar year-end measurement periods, and our incentive fees are primarily recognized in the fourth quarter. Assets under management increased on a net basis by
$69 million for the quarter ended September 30, 2021 due to net inflows of $82 million, partially offset by market losses of $13 million.
ITEM 4.
|
Controls and Procedures
|
Evaluation of Disclosure Controls and Procedures
Our current management, including our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the “Exchange Act”), as of September 30, 2021. Based on this evaluation of our disclosure controls and procedures management has concluded that our disclosure controls and procedures were not effective as of September 30, 2021
because of a material weakness in our internal control over financial reporting, as further described below.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act and based upon
the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”)). Our internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with GAAP.
An effective internal control system, no matter how well designed, has inherent limitations, including the possibility of human error or overriding of controls, and therefore can provide only
reasonable assurance with respect to reliable financial reporting. Because of its inherent limitations, our internal control over financial reporting may not prevent or detect all misstatements, including the possibility of human error, the
circumvention or overriding of controls, or fraud. Effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of
our annual or interim financial statements would not be prevented or detected on a timely basis.
Under the supervision and with the participation of our management we have conducted an evaluation of the effectiveness of our internal control over financial reporting based on the COSO
framework. Based on evaluation under these criteria, management determined, based upon the existence of the material weakness described below, that we did not maintain effective internal control over financial reporting as of September 30, 2021.
The material weakness in internal control over financial reporting was identified in 2019 and caused by the Company not having sufficient personnel with technical accounting and reporting
skills, which resulted in the lack of segregation of duties to separate financial statement preparation from senior management review and misstatements during 2019 related to non-routine transactions that were corrected before issuance of our
Form 10Qs and 10K for periods in 2019. This material weakness resulted in an increased risk of a material misstatement in the financial statements.
Changes in Internal Control Over Financial Reporting
There were no changes during the quarter ended September 30, 2021 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Remediation Plan and Status
In light of the material weakness in our internal controls over financial reporting, management has taken steps to enhance and improve the design and operating effectiveness of our internal
controls over financial reporting, including the following implemented steps: (i) hired additional qualified personnel to address inadequate segregation of duties; (ii) assigned preparation and review responsibilities to additional personnel for
the financial reporting process; (iii) documented the completion and review of assigned responsibilities through checklists and completed a search to add additional finance staff to augment accounting personnel.
We are working to remediate the material weakness as quickly and efficiently as possible and expect that the material weakness will be remediated by the end of fiscal 2021. This expected timing incorporates management's continued efforts to strengthen processes, controls and policies as described above, as well as the necessary steps required to perform a management assessment
of our internal controls. Notwithstanding the material weakness described above, our management has concluded that the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material
respects, our financial position, results of operation and cash flows in conformity with generally accepted accounting principles.
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.