UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2014

OR

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                      TO                    

Commission file number: 001-35733

 

Silvercrest Asset Management Group Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

45-5146560

(State or other jurisdiction

of incorporation)

 

(I.R.S. Employer

Identification No.)

1330 Avenue of the Americas, 38th Floor

New York, New York 10019

(Address of principal executive offices and zip code)

(212) 649-0600

(Registrant’s telephone number, including area code)

Not Applicable

(Formed name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

 

¨

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

x  (Do not check if a smaller reporting company)

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No   x

The number of outstanding shares of the registrant’s Class A common stock, par value $0.01 per share, and Class B common stock, par value $0.01 per share, as of November 11, 2014 were 7,658,010 and 4,570,413, respectively.

 

 

 

 

 

 


 

 

Part I

 

Financial Information

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

  

1

 

 

Condensed Consolidated Statements of Financial Condition as of September 30, 2014 and December 31, 2013

  

1

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013

  

2

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity/Partners’ Deficit for the nine months ended September 30, 2014 and 2013

  

3

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

  

4

 

 

Notes to Condensed Consolidated Financial Statements

  

6

 

 

 

  

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

27

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

45

Item 4.

 

Controls and Procedures

  

45

 

Part II 

 

Other Information

  

 

Item 1.

 

Legal Proceedings

  

46

Item 6.

 

Exhibits

  

46

 

 

 

 


 

Except where the context requires otherwise and as otherwise set forth herein, in this report, references to the “Company”, “we”, “us” or “our” refer to Silvercrest Asset Management Group Inc. (“Silvercrest”) and its consolidated subsidiaries, including Silvercrest L.P. (“Silvercrest L.P.” or “SLP”). SLP’s existing limited partners are referred to in this report as “principals”. On June 26, 2013, Silvercrest completed its corporate reorganization, and on July 2, 2013, Silvercrest closed its initial public offering. Prior to that date, Silvercrest was a private company. The reorganization and initial public offering are described in the notes to our Condensed Consolidated Financial Statements included in Part I of this Form 10-Q.

Forward-Looking Statements

This report contains, and from time to time our management may make, forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. In some cases, you can identify these statements by forward-looking words such as “may”, “might”, “will”, “should”, “expects”, “intends”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue”, the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions, may include projections of our future financial performance, future expenses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in our business or financial results. These statements are only predictions based on our current expectations and projections about future events. Among the important factors that could cause actual results, level of activity, performance or achievements to differ materially from those indicated by such forward-looking statements are: fluctuations in quarterly and annual results, adverse economic or market conditions, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Silvercrest brand and other factors disclosed under “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2013 which is accessible on the SEC’s website at www.sec.gov.  We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Factors that may cause our actual results to differ materially from our forward-looking statements include, but are not limited to:

·

our anticipated future results of operations;

·

our potential operating performance and efficiency and any related reputational harm or negative perceptions in the market;

·

our expectations with respect to future levels of assets under management, inflows and outflows;

·

our financing plans, issuance of debt or senior equity securities, cash needs and liquidity position;

·

our intention to pay dividends and our expectations about the amount of those dividends;

·

our expected levels of compensation of our employees and our expected ability to hire and retain qualified investment professionals;

·

our expectations with respect to future expenses and the level of future expenses;

·

our expected tax rate, and our expectations with respect to deferred tax assets;

·

our estimates of future amounts payable pursuant to our tax receivable agreements and the contingent value rights we have issued;

·

our ability to retain clients from whom we derive a substantial portion of our assets under management;

·

our ability to maintain our fee structure;

·

our particular choices with regard to investment strategies employed;

·

our ability to handle market volatility and risk in any and all markets to which we have exposure;

·

the cost of complying with current and future regulation, coupled with the cost of defending ourselves from related investigations or litigation;

·

failure of our operational safeguards against breaches in data security, privacy, conflicts of interest or employee misconduct;

·

our ability to compete in an intensely competitive industry; and

·

our reliance on prime brokers, custodians, administrators and other agents.

 

 

 

 


 

Part I – Financial Information

 

Item 1. Financial Statements

Silvercrest Asset Management Group Inc.

Condensed Consolidated Statements of Financial Condition

(Unaudited)

(In thousands, except share and par value data)

 

 

  

September 30,
2014

 

  

December  31,
2013

 

Assets

  

 

 

 

  

 

 

 

Cash and cash equivalents

  

$

27,943

  

  

$

27,122

  

Restricted certificates of deposit and escrow

  

 

586

  

  

 

1,021

  

Investments

  

 

100

  

  

 

103

  

Receivables, net

  

 

5,081

  

  

 

5,405

  

Due from Silvercrest Funds

  

 

2,926

  

  

 

2,653

  

Furniture, equipment and leasehold improvements, net

  

 

2,161

  

  

 

1,913

  

Goodwill

  

 

20,008

  

  

 

20,031

  

Intangible assets, net

  

 

11,510

  

  

 

12,589

  

Deferred tax asset—tax receivable agreement

  

 

23,815

  

  

 

25,022

 

Prepaid expenses and other assets

  

 

2,377

  

  

 

4,868

  

Total assets

  

$

96,507

  

  

$

100,727

  

Liabilities and Stockholders’ Equity

  

 

 

 

  

 

 

 

Accounts payable and accrued expenses

  

$

2,096

  

  

$

6,587

  

Accrued compensation

  

 

15,572

  

  

 

17,424

  

Notes payable

  

 

8,127

  

  

 

8,303

  

Borrowings under revolving credit facility

  

 

3,000

  

  

 

3,000

 

Deferred rent

  

 

1,422

  

  

 

1,742

  

Deferred tax and other liabilities

  

 

16,436

  

  

 

15,506

  

Total liabilities

  

 

46,653

  

  

 

52,562

  

Commitments and Contingencies (Note 10)

  

 

 

 

  

 

 

 

Stockholders’ Equity

  

 

 

 

  

 

 

 

Preferred Stock, par value $0.01, 10,000,000 shares authorized; none issued and outstanding, as of September 30, 2014 and December 31, 2013

  

 

 

 

  

 

 

Class A common stock, par value $0.01, 50,000,000 shares authorized; 7,658,010 and 7,522,974 issued and outstanding, as of September 30, 2014 and December 31, 2013, respectively

  

 

 

 

77

  

  

 

75

 

Class B common stock, par value $0.01, 25,000,000 shares authorized; 4,570,413 and 4,464,617 issued and outstanding, as of September 30, 2014 and December 31, 2013, respectively

  

 

 

 

46

  

  

 

45

 

Additional Paid-In Capital

  

 

39,137

  

  

 

39,003

 

Retained earnings

  

 

3,028

  

  

 

2,099

 

Total stockholders’ equity

  

 

42,288

  

  

 

41,222

 

Non-controlling interests

  

 

7,566

  

  

 

6,943

 

Total equity

  

 

49,854

  

  

 

48,165

 

Total liabilities and stockholders’ equity

  

$

96,507

  

  

$

100,727

  

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

1


 

Silvercrest Asset Management Group Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except per share data)

 

 

 

Three months ended 

September 30,

 

 

Nine months ended 

September 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Management and advisory fees

 

$

16,816

 

 

$

13,516

 

 

$

48,487

 

 

$

39,245

 

Performance fees and allocations

 

 

 

 

 

14

 

 

 

 

 

 

17

 

Family office services

 

 

1,001

 

 

 

1,207

 

 

 

3,276

 

 

 

3,632

 

Total revenue

 

 

17,817

 

 

 

14,737

 

 

 

51,763

 

 

 

42,894

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

9,959

 

 

 

8,388

 

 

 

29,431

 

 

 

19,513

 

General and administrative

 

 

3,382

 

 

 

3,162

 

 

 

9,818

 

 

 

8,596

 

Total expenses

 

 

13,341

 

 

 

11,550

 

 

 

39,249

 

 

 

28,109

 

Income before other (expense) income, net

 

 

4,476

 

 

 

3,187

 

 

 

12,514

 

 

 

14,785

 

Other (expense) income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

 

8

 

 

 

29

 

 

 

16

 

 

 

86

 

Interest income

 

 

17

 

 

 

36

 

 

 

53

 

 

 

85

 

Interest expense

 

 

(113

)

 

 

(180

)

 

 

(368

)

 

 

(288

)

Total other (expense) income, net

 

 

(88

)

 

 

(115

)

 

 

(299

)

 

 

(117

)

Income before provision for income taxes

 

 

4,388

 

 

 

3,072

 

 

 

12,215

 

 

 

14,668

 

Provision for income taxes

 

 

(1,465

)

 

 

(823

)

 

 

(4,253

)

 

 

(1,489

)

Net income

 

 

2,923

 

 

 

2,249

 

 

 

7,962

 

 

 

13,179

 

Less: net income attributable to non-controlling interests

 

 

(1,565

)

 

 

(1,515

)

 

 

(4,309

)

 

 

(1,515

)

Net income attributable to Silvercrest

 

$

1,358

 

 

$

734

 

 

$

3,653

 

 

$

11,664

 

Net income per share/unit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.18

 

 

$

0.14

 

 

$

0.48

 

 

$

1.34

 

Diluted

 

$

0.18

 

 

$

0.14

 

 

$

0.48

 

 

$

1.31

 

Weighted average shares/units outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

7,583,911

 

 

 

5,363,493

 

 

 

7,544,443

 

 

 

8,716,686

 

Diluted

 

 

7,583,911

 

 

 

5,363,493

 

 

 

7,544,443

 

 

 

8,873,877

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

2


 

Silvercrest Asset Management Group Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity/Partners’ Deficit

(Unaudited)

(In thousands)

 

 

 

Class A
Common
Stock
Shares

 

 

Class A
Common
Stock
Amount

 

 

Class B
Common
Stock
Shares

 

 

Class B
Common
Stock
Amount

 

 

Additional
Paid-In
Capital

 

 

Retained
Earnings

 

 

Total
Stockholders’
Equity

 

 

Non-
controlling
Interest

 

 

Total
Equity

 

 

Partners’
Capital

 

 

Excess of
Liabilities,
Redeemable
Partners’
Capital and
Partners’
Capital  
over Assets

 

 

Total
Partners’
Deficit

 

January 1, 2013

 

 

 

 

$

 

 

 

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

47,904

 

 

$

(108,374

)

 

$

(60,470

)

Contribution from partners

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

165

 

 

 

165

 

 

 

 

 

 

455

 

 

 

455

 

Distributions to partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,427

)

 

 

(1,427

)

 

 

(4,036

)

 

 

(23,864

)

 

 

(27,900

)

Accrued partner incentive distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,000

)

 

 

(6,000

)

Redemptions of partners’ interests

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(190

)

 

 

(190

)

 

 

 

 

 

(5,561

)

 

 

(5,561

)

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

227

 

 

 

227

 

 

 

 

 

 

1,024

 

 

 

1,024

 

Reclassification of equity-based awards due to elimination of redemption feature

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

824

 

 

 

824

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

734

 

 

 

734

 

 

 

1,515

 

 

 

2,249

 

 

 

2,827

 

 

 

8,102

 

 

 

10,929

 

Accrued interest on notes receivable from partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

(18

)

 

 

 

 

 

 

 

 

 

Issuance of Class A shares in IPO

 

 

5,509

 

 

 

55

 

 

 

 

 

 

 

 

 

55,214

 

 

 

 

 

 

55,269

 

 

 

 

 

 

55,269

 

 

 

 

 

 

 

 

 

 

Reorganization of equity structure

 

 

 

 

 

 

 

 

10,000

 

 

 

100

 

 

 

 

 

 

 

 

 

100

 

 

 

12,683

 

 

 

12,783

 

 

 

(46,695

)

 

 

133,394

 

 

 

86,699

 

Purchase of Class B units of SLP

 

 

 

 

 

 

 

 

(3,541

)

 

 

(35

)

 

 

(30,881

)

 

 

 

 

 

(30,916

)

 

 

(4,484

)

 

 

(35,400

)

 

 

 

 

 

 

 

 

 

Initial establishments of deferred tax assets, net amounts payable under tax receivable agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9,072

 

 

 

 

 

 

9,072

 

 

 

 

 

 

9,072

 

 

 

 

 

 

 

 

 

 

September 30, 2013

 

 

5,509

 

 

$

55

 

 

 

6,462

 

 

$

65

 

 

$

33,405

 

 

$

734

 

 

$

34,259

 

 

$

8,471

 

 

$

42,730

 

 

$

 

 

$

 

 

$

 

January 1, 2014

 

 

7,523

 

 

$

75

 

 

 

4,465

 

 

$

45

 

 

$

39,003

 

 

$

2,099

 

 

$

41,222

 

 

$

6,943

 

 

$

48,165

 

 

$

 

 

$

 

 

$

 

Distributions to partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(5,244

)

 

 

(5,244

)

 

 

 

 

 

 

 

 

 

Redemption of partner’s interest

 

 

 

 

 

 

 

 

(23

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(376

)

 

 

(376

)

 

 

 

 

 

 

 

 

 

Repayment of notes receivable from members

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

833

 

 

 

833

 

 

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

 

 

 

 

 

 

264

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

 

 

1,444

 

 

 

1,446

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,653

 

 

 

3,653

 

 

 

4,309

 

 

 

7,962

 

 

 

 

 

 

 

 

 

 

Accrued interest on notes receivable from partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(47

)

 

 

(47

)

 

 

 

 

 

 

 

 

 

Share conversion

 

 

136

 

 

 

2

 

 

 

(136

)

 

 

(2

)

 

 

319

 

 

 

 

 

 

319

 

 

 

(296

)

 

 

23

 

 

 

 

 

 

 

 

 

 

Deferred tax assets, net of amounts payable under tax receivable agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(185

)

 

 

 

 

 

(185

)

 

 

 

 

 

(185

)

 

 

 

 

 

 

 

 

 

Dividends paid on Class A common stock - $0.36 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,724

)

 

 

(2,724

)

 

 

 

 

 

(2,724

)

 

 

 

 

 

 

 

 

 

September 30, 2014

 

 

7,658

 

 

$

77

 

 

 

4,570

 

 

$

46

 

 

$

39,137

 

 

$

3,028

 

 

$

42,288

 

 

$

7,566

 

 

$

49,854

 

 

$

 

 

$

 

 

$

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


 

Silvercrest Asset Management Group Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Nine months ended September 30,

 

 

  

2014

 

  

2013

 

Cash Flows From Operating Activities

  

 

 

 

  

 

 

 

Net income

  

$

7,962

  

  

$

13,179

 

Adjustments to reconcile net income to net cash provided by operating activities:

  

 

 

 

  

 

 

 

Equity-based compensation

  

 

848

 

  

 

1,207

 

Depreciation and amortization

  

 

1,489

 

  

 

1,455

 

Deferred rent

  

 

(320

  

 

(335

)

Provision for doubtful accounts

 

 

227

 

 

 

 

Deferred income taxes

  

 

1,830

 

  

 

44

 

Non-cash interest on notes receivable from partners

  

 

(47

)

  

 

(62

)

Distributions received from investment funds

  

 

3

 

  

 

1,900

 

Other

  

 

4

 

  

 

(4

)

Cash flows due to changes in operating assets and liabilities:

  

 

 

 

  

 

 

 

Receivables and due from Silvercrest Funds

  

 

(175

  

 

(227

)

Prepaid expenses and other assets

  

 

1,682

 

  

 

(561

)

Accounts payable and accrued expenses

  

 

(2,280

)

  

 

80

 

Accrued compensation

  

 

(1,250

  

 

3,003

 

Other liabilities

  

 

647

 

  

 

33

 

Interest payable on notes payable

  

  

249

 

  

 

235

 

Net cash provided by operating activities

  

  

10,869

 

  

 

19,947

 

Cash Flows From Investing Activities

  

 

 

 

  

 

 

 

Restricted certificates of deposit and escrow

  

$

435

  

  

$

(57

)

Acquisition of furniture, equipment and leasehold improvements

  

 

(337

  

 

(73

)

Earn-outs paid related to acquisitions completed before January 1, 2009

  

 

(1,679

  

 

(703

)

Acquisition of Ten-Sixty Asset Management, LLC

  

 

 

  

 

(2,500

)

Net cash used in investing activities

  

  

(1,581

  

 

(3,333

)

Cash Flows From Financing Activities

  

 

 

 

  

 

 

 

Earn-outs paid related to acquisitions completed on or after January 1, 2009

 

$

(511

 

$

(462

)

Borrowings under revolving credit facility

 

 

 

 

 

7,000

 

Payments under revolving credit facility

 

 

 

 

 

(2,000

)

Contributions from partners

 

 

 

 

 

165

 

Redemptions of partners’ interests

  

 

(270

  

 

(451

)

Repayments of notes payable

  

 

(421

  

 

(704

)

Payments on capital leases

  

 

(38

  

 

(14

)

Distributions to partners

  

 

(5,244

  

 

(29,327

)

Offering costs

 

 

 

 

 

(1,420

)

Dividends paid on Class A common stock

 

 

(2,724

)

 

 

 

Payments from partners on notes receivable

  

 

741

 

  

 

887

 

Purchase of Class B units from partners of Silvercrest LP

 

 

 

 

 

(35,365

)

Sale and issuance of Silvercrest Asset Management Group Inc. Class A common stock

 

 

 

 

 

56,689

 

Net cash used in financing activities

  

  

(8,467

  

 

(5,002

)

Net increase in cash and cash equivalents

  

 

821

 

  

 

11,612

 

Cash and cash equivalents, beginning of period

  

 

27,122

  

  

 

13,443

 

Cash and cash equivalents, end of period

  

$

27,943

  

  

$

25,055

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

4


Silvercrest Asset Management Group Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

(continued)

 

 

 

Nine months ended September 30,

 

 

  

2014

 

  

2013

 

Supplemental Disclosures of Cash Flow Information

  

 

 

 

  

 

 

 

Net cash paid during the period for:

  

 

 

 

  

 

 

 

Income taxes

  

$

4,308

  

  

$

1,067

 

Interest

  

 

133

 

  

 

73

 

Supplemental Disclosures of Non-cash Financing and Investing Activities

  

 

 

 

  

 

 

 

Notes receivable from new partners issued as capital contributions to Silvercrest L.P.

 

$

 

 

$

455

 

Accrual of partner incentive distributions

 

 

 

 

 

6,000

 

Issuance of notes for redemption of partnership interest

 

 

 

 

 

5,300

 

Common stock surrendered

 

 

92

 

 

 

 

Issuance of notes payable for acquisition of Ten-Sixty Asset Management, LLC

  

 

 

  

 

1,592

  

Recognition of deferred tax assets as a result of IPO

 

 

11

 

 

 

12,806

 

Recognition of tax receivable agreement liability

 

 

 

 

 

3,734

 

Asset acquired under capital lease

 

 

321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

5


 

Silvercrest Asset Management Group Inc.

Notes to Condensed Consolidated Financial Statements

As of and for the Three and Nine Months ended September 30, 2014 and 2013

(Dollars in thousands)

 

1. ORGANIZATION AND BUSINESS

Silvercrest Asset Management Group Inc. (“Silvercrest”), together with its consolidated subsidiaries (collectively the “Company”), was formed as a Delaware corporation on July 11, 2011. Silvercrest was formed for the purpose of completing a public offering and related transactions in order to carry on the business of Silvercrest L.P. and its subsidiaries.

Silvercrest L.P., together with its consolidated subsidiaries (collectively “SLP”), provides investment management and family office services to individuals and families and their trusts, and to endowments, foundations and other institutional investors primarily located in the United States of America. The business includes the management of funds of funds and other investment funds, collectively referred to as the “Silvercrest Funds”.

SLP was formed on December 10, 2008 and commenced operations on January 1, 2009.

On March 11, 2004, SLP acquired 100% of the outstanding shares of James C. Edwards Asset Management, Inc. (“JCE”) and subsequently changed JCE’s name to Silvercrest Financial Services, Inc. (“SFS”). On December 31, 2004, SLP acquired 100% of the outstanding shares of The LongChamp Group, Inc. (now SAM Alternative Solutions, Inc.) (“LGI”). Effective March 31, 2005, SLP entered into an Asset Contribution Agreement with and acquired all of the assets, properties, rights and certain liabilities of Heritage Financial Management, LLC (“HFM”). Effective October 3, 2008, SLP acquired 100% of the outstanding limited liability company interests of Marathon Capital Group, LLC (“MCG”) through a limited liability company interest purchase agreement dated September 22, 2008. On November 1, 2011, SLP acquired certain assets of Milbank Winthrop & Co. (“Milbank”). On April 1, 2012, SLP acquired the LLC interests of MW Commodity Advisors, LLC (“Commodity Advisors”). On March 28, 2013, SLP acquired certain assets of Ten-Sixty Asset Management, LLC (“Ten-Sixty”). See Notes 3, 7 and 8 for additional information related to goodwill and intangible assets arising from these acquisitions.

Reorganization and Initial Public Offering

Pursuant to a reorganization agreement effective on June 26, 2013, Silvercrest became the sole general partner in Silvercrest L.P. and its only material asset is the general partner interest in Silvercrest L.P., represented by 7,658,010 Class A units or approximately 63% of the economic interests of Silvercrest L.P. Effective June 26, 2013, Silvercrest controlled all of the businesses and affairs of Silvercrest L.P. and, through Silvercrest L.P. and its subsidiaries, continues to conduct the business previously conducted by these entities prior to the reorganization.

On July 2, 2013, Silvercrest completed the initial public offering of 4,790,684 of its Class A common shares at $11.00 per share (the “IPO”). Silvercrest’s stock began trading on June 27, 2013 on NASDAQ under the symbol “SAMG”. The net proceeds from the IPO were $47,920, after payment of underwriting discounts and commissions of $3,324 and offering expenses paid by Silvercrest of $1,454.

On July 12, 2013, Silvercrest sold an additional 718,603 shares of its Class A common stock, at a public offering cost of $11.00 per share, pursuant to the exercise in full of the over-allotment option that the Company granted to the underwriters in connection with its initial public offering. The exercise of the over-allotment option resulted in gross proceeds of $7,905 and net proceeds, after expenses, of $7,379, after payment of underwriting discounts of $498 and offering expenses of $28. Following consummation of this issuance of 718,603 shares of Class A Common Stock, Silvercrest had outstanding 5,509,297 shares of Class A common stock.

The portion of operating results included in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2013 that relates to the six months ended June 30, 2013 and the portion of the Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2013 that relates to the six months ended June 30, 2013 are those of SLP, the Company’s accounting predecessor.

In connection with the IPO and the reorganization of SLP, Silvercrest and SLP entered into a series of transactions in order to reorganize their capital structures and complete the IPO. The reorganization and IPO transactions included, among others, the following:

Silvercrest GP LLC (“GP LLC”) (SLP’s general partner prior to the reorganization) distributed all of its interests in SLP to its members on a pro rata basis in accordance with each member’s interest in GP LLC;

6


 

SLP completed a unit distribution of 19.64 Class B partnership units for each outstanding and vested limited partnership unit prior to the consummation of the IPO which resulted in 10,000,000 outstanding Class B units;

GP LLC transferred its rights as general partner of SLP to Silvercrest, which became the sole general partner of SLP, and GP LLC was dissolved thereafter;

The partnership agreement of SLP was amended, effective as of the consummation of the IPO, to eliminate the call and put rights of SLP and its partners, respectively upon a partner’s death, or, if applicable, termination of employment, which required all limited partner’s units to be classified as temporary equity in SLP’s Consolidated Financial Statements;

For each Class B unit of SLP, Silvercrest issued one share of Class B common stock to the holders of Class B units of SLP, in exchange for its par value which was funded by SLP;

Silvercrest entered into a tax receivable agreement with each limited partner of SLP to return 85% of the tax benefits, estimated to be $15,897 as of September 30, 2014, that it receives as a result of its ability to step up its tax basis in the partnership units of SLP that it acquired from partners of SLP;

A special distribution by SLP of $10,000 was made to its existing partners prior to the consummation of the IPO, of which $7,000 was funded by borrowings under a credit facility with City National Bank; this special distribution, which was paid in July 2013, was treated as an equity transaction;

A special bonus payment by SLP was made to non-principals of $754 which was paid in July 2013, and was recorded as compensation expense during the quarter ended June 30, 2013;

Partner incentive distributions earned for the six months ended June 30, 2013 were treated as equity transactions and were accrued in accrued compensation as of June 30, 2013; and

The purchase of 3,540,684 Class B units from partners of SLP at an offering price of $11.00 per unit, as adjusted for underwriting discounts and commissions of $2,457 and offering expenses of $1,126, resulted in net proceeds of $35,365 to the selling partners. The Class B units acquired by Silvercrest were converted into Class A units of SLP.

Modification of Units of SLP

As part of the reorganization, the limited partner units of SLP were modified.

The Class B units (previously limited partnership units) of SLP, which are held by principals, were modified to eliminate a cash redemption feature. Prior to the reorganization, the terms of the limited partnership units included call and put rights to redeem the units from a holder whose employment by SLP had been terminated. As a result of the redemption feature, SLP was required to account for the limited partnership units held by employee-partners as temporary equity. At the time of the reorganization and as a result of the elimination of the redemption feature, SLP reclassified the redeemable equity of its limited partners to permanent equity. Any deferred equity units that were unvested at the time of the reorganization will continue to be reflected as share-based payment awards and will be expensed as compensation over the remaining vesting period (see Note 16, “Equity-Based Compensation”).

Tax Receivable Agreement

In connection with the IPO and reorganization of SLP, Silvercrest entered into a tax receivable agreement (the “TRA”) with the partners of SLP that will require it to pay them 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that it actually realizes (or is deemed to realize in the case of an early termination payment by it, or a change in control) as a result of the increases in tax basis and certain other tax benefits related to entering into the TRA, including tax benefits attributable to payments under the TRA. This will be Silvercrest’s obligation and not the obligation of SLP. Silvercrest expects to benefit from the remaining 15% of cash savings, if any, realized.

The TRA was effective upon the consummation of the IPO and will continue until all such tax benefits have been utilized or expired, unless Silvercrest exercises its right to terminate the TRA for an amount based on an agreed upon value of the payments remaining to be made under the agreement. The TRA will automatically terminate with respect to Silvercrest’s obligations to a partner if a partner (i) is terminated for cause, (ii) breaches his or her non-solicitation covenants with Silvercrest or any of its subsidiaries or (iii) voluntarily resigns or retires and competes with Silvercrest or any of its subsidiaries in the 12-month period following resignation of employment or retirement, and no further payments will be made to such partner under the TRA.

For purposes of the TRA, cash savings in income tax will be computed by comparing Silvercrest’s actual income tax liability to the amount of such taxes that it would have been required to pay had there been no increase in its share of the tax basis of the tangible and intangible assets of SLP.

7


 

Estimating the amount of payments that Silvercrest may be required to make under the TRA is imprecise by its nature, because the actual increase in its share of the tax basis, as well as the amount and timing of any payments under the TRA, will vary depending upon a number of factors, including:

the timing of exchanges of Class B units for shares of Silvercrest’s Class A common stock—for instance, the increase in any tax deductions will vary depending on the fair market value, which may fluctuate over time, of the depreciable and amortizable assets of SLP at the time of the exchanges;

the price of Silvercrest’s Class A common stock at the time of exchanges of Class B units—the increase in Silvercrest’s share of the basis in the assets of SLP, as well as the increase in any tax deductions, will be related to the price of Silvercrest’s Class A common stock at the time of these exchanges;

the extent to which these exchanges are taxable—if an exchange is not taxable for any reason (for instance, if a principal who holds Class B units exchanges units in order to make a charitable contribution), increased deductions will not be available;

the tax rates in effect at the time Silvercrest utilizes the increased amortization and depreciation deductions; and

the amount and timing of Silvercrest’s income—Silvercrest will be required to pay 85% of the tax savings, as and when realized, if any. If Silvercrest does not have taxable income, it generally will not be required to make payments under the TRA for that taxable year because no tax savings will have been actually realized.

In addition, the TRA provides that, upon certain mergers, asset sales, other forms of business combinations or other changes of control, Silvercrest’s (or its successors’) obligations with respect to exchanged or acquired Class B units (whether exchanged or acquired before or after such transaction) would be based on certain assumptions, including that Silvercrest would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the TRA.

Decisions made by the continuing partners of SLP in the course of running Silvercrest’s business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by an exchanging or selling principal under the TRA. For example, the earlier disposition of assets following an exchange or acquisition transaction will generally accelerate payments under the TRA and increase the present value of such payments, and the disposition of assets before an exchange or acquisition transaction will increase an existing owner’s tax liability without giving rise to any rights of a principal to receive payments under the TRA.

Were the Internal Revenue Service to successfully challenge the tax basis increases described above, Silvercrest would not be reimbursed for any payments previously made under the TRA. As a result, in certain circumstances, Silvercrest could make payments under the TRA in excess of its actual cash savings in income tax.

IPO and Use of Proceeds

The net proceeds from the IPO were $47,920. Silvercrest used a portion of the IPO net proceeds to purchase 3,540,684 Class B units of SLP from certain of its partners for $35,365.

The net proceeds from the underwriters’ exercise in full of the over-allotment option that the Company granted to the underwriters in connection with its initial public offering were $7,379.

Silvercrest intends to use the remaining proceeds from the IPO and underwriters’ over-allotment option for general corporate purposes.

Earnings per Share and Unit

In connection with the reorganization of SLP and the IPO, SLP completed a unit distribution of 19.64 units for each unit outstanding as of the date of the consummation of the IPO.

Diluted weighted average units outstanding for the three and nine months ended September 30, 2013 includes 237,089 performance units which are conditionally issuable units that would be issuable if September 30, 2013 was the end of the contingency period.  The portion of Basic and Diluted Earnings per share for the nine months ended September 30, 2013 that relates to the six months ended June 30, 2013 are presented on a historic basis.  

 

8


 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying Condensed Consolidated Financial Statements include the accounts of Silvercrest and its wholly-owned subsidiaries, SLP, SAMG LLC, SFS, MCG, Silvercrest Investors LLC, Silvercrest Investors II LLC and Silvercrest Investors III LLC as of and for the three and nine months ended September 30, 2014. The portion of the Condensed Consolidated Financial Statements for the nine months ended September 30, 2013 that relate to the six months ended June 30, 2013 are of the Company’s accounting predecessor, SLP, and its consolidated subsidiaries.  All intercompany transactions and balances have been eliminated.

The Condensed Consolidated Statement of Financial Condition at December 31, 2013 was derived from the audited Consolidated Statement of Financial Condition at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The results of operations for the three and nine-month periods ended September 30, 2014 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending December 31, 2014 or any future period.

The Condensed Consolidated Financial Statements of the Company included herein are unaudited and have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the interim results have been made. The Company’s Condensed Consolidated Financial Statements and the related notes should be read together with the Consolidated Financial Statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Company evaluates for consolidation those entities it controls through a majority voting interest or otherwise, including those SLP funds over which the general partner or equivalent is presumed to have control. The initial step in the Company’s determination of whether a fund for which SLP is the general partner is required to be consolidated is assessing whether the fund meets the definition of a variable interest entity (VIE). None of the funds for which SLP is the general partner met the definition of a VIE during the three and  nine months ended September 30, 2014 and 2013, as the total equity at risk of each fund is sufficient for the fund to finance its activities without additional subordinated financial support provided by any parties, including the equity holders.

SLP then considers whether the fund is a voting interest entity (VoIE) in which the unaffiliated limited partners have substantive “kick-out” rights that provide the ability to dissolve (liquidate) the limited partnership or otherwise remove the general partner without cause. SLP considers the “kick-out” rights to be substantive if the general partner for the fund can be removed by the vote of a simple majority of the unaffiliated limited partners and there are no significant barriers to the unaffiliated limited partners’ ability to exercise these rights in that among other things (1) there are no conditions or timing limits on when the rights can be exercised, (2) there are no financial or operational barriers associated with replacing the general partner, (3) there are a number of qualified replacement investment advisors that would accept appointment at the same fee level, (4) each fund’s documents provide for the ability to call and conduct a vote, and (5) the information necessary to exercise the kick-out rights and related vote are available from the fund and its administrator.

As of September 30, 2014 and December 31, 2013 and for the three and nine months ended September 30, 2014 and 2013, all of the funds for which SLP was the general partner had substantive “kick-out” rights and therefore neither SLP nor Silvercrest consolidated any of the Silvercrest Funds.

Non-controlling Interest

As of September 30, 2014, Silvercrest holds approximately 63% of the economic interests in SLP. Silvercrest is the sole general partner of SLP and, therefore, controls the management of SLP. As a result, Silvercrest consolidates the financial position and the results of operations of SLP and its subsidiaries, and records a non-controlling interest, as a separate component of stockholders’ equity on its Condensed Consolidated Statement of Financial Condition for the remaining economic interests in SLP. The non-controlling interest in the income or loss of SLP is included in the Condensed Consolidated Statement of Operations as a reduction or addition to net income derived from SLP.

Segment Reporting

The Company views its operations as comprising one operating segment. Each of the Company’s acquired businesses have similar economic characteristics and have been fully integrated upon acquisition. Furthermore, our chief operating decision maker, which is the Company’s Chief Executive Officer, monitors and reviews financial information at a consolidated level for assessing operating results and the allocation of resources.

9


 

Use of Estimates

The preparation of the Condensed Consolidated Financial Statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues, expenses and other income reported in the Condensed Consolidated Financial Statements and the accompanying notes. Actual results could differ from those estimates. Significant estimates and assumptions made by management include the fair value of acquired assets and liabilities, equity-based compensation, accounting for income taxes, the useful lives of long-lived assets and other matters that affect the Condensed Consolidated Financial Statements and related disclosures.

Cash and Cash Equivalents

The Company considers all highly liquid securities with original maturities of 90 days or less when purchased to be cash equivalents.

Restricted Certificates of Deposit

Certain certificates of deposit held at a major financial institution are restricted and serve as collateral for letters of credit for the Company’s lease obligations as described in Note 10.

Equity Method Investments

Entities and investments over which the Company exercises significant influence over the activities of the entity but which do not meet the requirements for consolidation are accounted for using the equity method of accounting, whereby the Company records its share of the underlying income or losses of these entities. Intercompany profit arising from transactions with affiliates is eliminated to the extent of its beneficial interest. Equity in losses of equity method investments is not recognized after the carrying value of an investment, including advances and loans, has been reduced to zero, unless guarantees or other funding obligations exist.

The Company evaluates its equity method investments for impairment, whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. The difference between the carrying value of the equity method investment and its estimated fair value is recognized as an impairment when the loss in value is deemed other than temporary. The Company’s equity method investments approximate their fair value at September 30, 2014 and December 31, 2013. The fair value of the equity method investments is estimated based on the Company’s share of the fair value of the net assets of the equity method investee which consist of Level I and Level II securities. No impairment charges related to equity method investments were recorded during the three and nine months ended September 30, 2014 or 2013.

Receivables and Due from Silvercrest Funds

Receivables consist primarily of amounts for advisory fees due from clients and management fees, and are stated as net realizable value. The Company maintains an allowance for doubtful receivables based on estimates of expected losses and specific identification of uncollectible accounts. The Company charges actual losses to the allowance when incurred.

Furniture, Equipment and Leasehold Improvements

Furniture, equipment and leasehold improvements consist primarily of furniture, fixtures and equipment, computer hardware and software and leasehold improvements and are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the assets’ estimated useful lives, which for leasehold improvements is the lesser of the lease term or the life of the asset, generally 10 years, and 3 to 7 years for other fixed assets.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that purchase price, including the fair value of contingent consideration, of the acquisition be allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date. Contingent consideration is recorded as part of the purchase price when such contingent consideration is not based on continuing employment of the selling shareholders. Contingent consideration that is related to continuing employment is recorded as compensation expense. Payments made for contingent consideration recorded as part of an acquisition’s purchase price are reflected as financing activities in the Company’s Condensed Consolidated Statements of Cash Flows.

10


 

For acquisitions completed subsequent to January 1, 2009, the Company remeasures the fair value of contingent consideration at each reporting period using a probability-adjusted discounted cash flow method based on significant inputs not observable in the market and any change in the fair value from either the passage of time or events occurring after the acquisition date, is recorded in earnings. Contingent consideration payments that exceed the acquisition date fair value of the contingent consideration are reflected as an operating activity in the Condensed Consolidated Statements of Cash Flows.

Goodwill and Intangible Assets

Goodwill consists of the excess of the purchase price over the fair value of identifiable net assets of businesses acquired. Goodwill is not amortized and is generally evaluated for impairment using a two-step process that is performed at least annually, or whenever events or circumstances indicate that impairment may have occurred.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, which provided new accounting guidance on testing goodwill for impairment. The enhanced guidance provides an entity the option to first perform a qualitative assessment of whether a reporting unit’s fair value is more likely than not less than its carrying value, including goodwill. In performing its qualitative assessment, an entity considers the extent to which adverse events or circumstances identified, such as changes in economic conditions, industry and market conditions or entity-specific events, could affect the comparison of the reporting unit’s fair value with its carrying amount. If an entity concludes that the fair value of a reporting unit is more likely than not less than its carrying amount, the entity is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and, accordingly, measure the amount, if any, of goodwill impairment loss to be recognized for that reporting unit. The guidance was effective for the Company as of January 1, 2012. The Company utilized this option when performing its annual impairment assessment in 2013 and concluded that its single reporting unit’s fair value was more likely than not greater than its carrying value, including goodwill.

The first step of the two-step process is a comparison of the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not considered impaired and the second step is unnecessary. If the carrying value of the reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment by comparing the carrying amount of the goodwill to a determination of the implied fair value of the goodwill. If the carrying amount of the goodwill is greater than the implied value, an impairment loss is recognized for the difference. The implied value of the goodwill is determined as of the test date by performing a purchase price allocation, as if the reporting unit had just been acquired, using currently estimated fair values of the individual assets and liabilities of the reporting unit, together with an estimate of the fair value of the reporting unit taken as a whole. The estimate of the fair value of the reporting unit is based upon information available regarding prices of similar groups of assets, or other valuation techniques including present value techniques based upon estimates of future cash flows.

The Company has one reporting unit at September 30, 2014 and December 31, 2013. No goodwill impairment charges were recorded during the three and nine months ended September 30, 2014 and 2013.

Identifiable finite-lived intangible assets are amortized over their estimated useful lives ranging from 3 to 20 years. The method of amortization is based on the pattern over which the economic benefits, generally expected undiscounted cash flows, of the intangible asset are consumed. Intangible assets for which no pattern can be reliably determined are amortized using the straight-line method. Intangible assets consist primarily of the contractual right to future management, advisory and performance fees from customer contracts or relationships.

Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the net carrying amount of the asset may not be recoverable. In connection with such review, the Company also re-evaluates the periods of depreciation and amortization for these assets. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their fair value.

Partner Distributions

Partner incentive allocations, which are determined by the general partner, can be formula-based or discretionary. Prior to the reorganization and consummation of the IPO, incentive allocations were considered distributions of net income as stipulated by SLP’s Second Amended and Restated Limited Partnership Agreement in effect prior to the reorganization and were recognized in the period in which they were paid. Subsequent to the reorganization and consummation of the IPO, partner incentive allocations are treated as compensation expense and recognized in the period in which they are earned. In the event there is insufficient distributable cash flow to make incentive distributions, the general partner in its sole and absolute discretion may determine not to make any distributions

11


 

called for under the partnership agreement. The remaining net income or loss after partner incentive allocations is generally allocated to unit holders based on their pro rata ownership.

Redeemable Partnership Units

Prior to the reorganization, redeemable partnership units in SLP consisted of units issued to its founders and those purchased by certain of its employees. These capital units entitled the holder to a share of the distributions of SLP. Units were subject to certain redemption features. Upon the termination of employment of the terminated employee, as defined, SLP had a right to call the units. In addition, the terminated employee had a right to put the units to SLP upon termination or death, provided the terminated employee had complied with certain restrictions, as described in SLP’s Second Amended and Restated Limited Partnership Agreement. In accordance with the provisions of SLP’s Second Amended and Restated Limited Partnership Agreement, the put described above expired upon the consummation of the IPO.  Subsequent to the completion of the reorganization and IPO, if a principal of SLP is terminated for cause, SLP has the right to redeem all of the vested Class B units collectively held by the principal and his or her permitted transferees for a purchase price equal to the lesser of (i) the aggregate capital account balance in SLP of the principal and his or her permitted transferees and (ii) the purchase price paid by the terminated principal to first acquire the Class B units.

SLP also makes distributions to its partners of various nature including incentive payments, profit distributions and tax distributions.

Class A Common Stock

The Company’s Class A stockholders are entitled to one vote for each share held of record on all matters submitted to a vote of the Company’s stockholders. Also, Class A stockholders are entitled to receive dividends, when and if declared by the Company’s board of directors, out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock. Dividends consisting of shares of Class A common stock may be paid only as follows: (i) shares of Class A common stock may be paid only to holders of shares of Class A common stock and (ii) shares will be paid proportionately with respect to each outstanding share of the Company’s Class A common stock. Upon the Company’s liquidation, dissolution or winding-up, or the sale of all, or substantially all, of the Company’s assets, after payment in full of all amounts required to be paid to creditors and to holders of preferred stock having a liquidation preference, if any, the Class A stockholders will be entitled to share ratably in the Company’s remaining assets available for distribution to Class A stockholders. Class B units of SLP held by principals will be exchangeable for shares of the Company’s Class A common stock, on a one-for-one basis, subject to customary adjustments for share splits, dividends and reclassifications.

Class B Common Stock

Shares of the Company’s Class B common stock are issuable only in connection with the issuance of Class B units of SLP. When a vested or unvested Class B unit is issued by SLP, the Company will issue the holder one share of its Class B common stock in exchange for the payment of its par value. Each share of the Company’s Class B common stock will be redeemed for its par value and cancelled by the Company if the holder of the corresponding Class B unit exchanges or forfeits its Class B unit pursuant to the terms of the Second Amended and Restated Limited Partnership Agreement of SLP and the terms of the Silvercrest Asset Management Group Inc. 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”). The Company’s Class B stockholders will be entitled to one vote for each share held of record on all matters submitted to a vote of the Company’s stockholders. The Company’s Class B stockholders will not participate in any dividends declared by the Company’s board of directors. Upon the Company’s liquidation, dissolution or winding-up, or the sale of all, or substantially all, of its assets, Class B stockholders only will be entitled to receive the par value of the Company’s Class B common stock.

Revenue Recognition

Revenue is recognized ratably over the period in which services are performed. Revenue consists primarily of investment advisory fees, family office services fees and fund management fees. Investment advisory fees are typically billed quarterly in advance at the beginning of the quarter or in arrears after the end of the quarter, based on a contractually specified percentage of the assets managed. For investment advisory fees billed in advance, the value of assets managed is determined based on the value of the customer’s account as of the last trading day of the preceding quarter. For investment advisory fees billed in arrears the value of assets managed is determined based on the value of the customer’s account on the last day of the quarter being billed. Family office services fees are typically billed quarterly in advance at the beginning of the quarter or in arrears after the end of the quarter based on a contractual percentage of the assets managed or based on a fixed fee arrangement. Management fees from proprietary and non-proprietary funds are calculated as a percentage of net asset values measured at the beginning of a month or quarter or at the end of a quarter, depending on the fund.

The Company accounts for performance based revenue in accordance with ASC 605-20-S99, “Accounting for Management Fees Based on a Formula”, by recognizing performance fees and allocations as revenue only when it is certain that the fee income is earned

12


 

and payable pursuant to the relevant agreements, and no contingencies remain. Performance fee contingencies are typically resolved at the end of each annual period. In certain arrangements, the Company is only entitled to receive performance fees and allocations when the return on assets under management exceeds certain benchmark returns or other performance targets. The Company records performance fees and allocations as a component of revenue.

Equity-Based Compensation

Equity-based compensation cost relating to the issuance of share-based awards to employees is based on the fair value of the award at the date of grant, which is expensed ratably over the requisite service period, net of estimated forfeitures. The forfeiture assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeiture assumptions may affect the timing of the total amount of expense recognized over the vesting period. The service period is the period over which the employee performs the related services, which is normally the same as the vesting period. Equity-based awards that do not require future service are expensed immediately. Equity-based awards that have the potential to be settled in cash at the election of the employee or prior to the reorganization related to redeemable partnership units are classified as liabilities (“Liability Awards”) and are adjusted to fair value at the end of each reporting period. Distributions associated with Liability Awards not expected to vest are accounted for as compensation expense in the Condensed Consolidated Statements of Operations.

Leases

The Company expenses the net lease payments associated with operating leases on a straight-line basis over the respective lease term including any rent-free periods. Leasehold improvements are recorded at cost and are depreciated using the straight-line method over the lesser of the estimated useful lives of the improvements (generally 10 years) or the remaining lease term.

Income Taxes

Silvercrest and SFS are subject to federal and state corporate income tax, which requires an asset and liability approach to the financial accounting and reporting of income taxes. SLP is not subject to federal and state income taxes, since all income, gains and losses are passed through to its partners. SLP is, however, subject to New York City unincorporated business tax. With respect to the Company’s incorporated entities, the annual tax rate is based on the income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates. Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Judgment is required in determining the tax expense and in evaluating tax positions. The tax effects of an uncertain tax position (“UTP”) taken or expected to be taken in income tax returns are recognized only if it is “more likely-than-not” to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting date. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes estimated accrued interest and penalties related to UTPs in income tax expense.

The Company recognizes the benefit of a UTP in the period when it is effectively settled. Previously recognized tax positions are derecognized in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination.

Recent Accounting Developments

In June 2013, the FASB issued ASU 2013-08, “Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements.” The ASU modifies the guidance in ASC 946 for determining whether an entity is an investment company, as well as the measurement and disclosure requirements for investment companies. The ASU also clarifies the characteristics of an investment company and requires an investment company to measure non-controlling ownership interests in other investment companies at fair value rather than using the equity method of accounting. The ASU does not change the current accounting where a noninvestment company parent retains the specialized accounting applied by an investment company subsidiary in consolidation. The ASU was effective for the Company on January 1, 2014. The adoption of this ASU did not have a material effect on the Company’s results of operations or financial position.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.” ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on the consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor determined the effect of this standard on its ongoing financial reporting.

13


 

In June 2014, the FASB issued Accounting Standards Update 2014-12, “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period ("ASU 2014-12").” ASU 2014-12 applies to all reporting entities that grant their employees share-based payments in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance target is achieved. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. A reporting entity should apply existing guidance ASC 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company is in the process of evaluating the impact of the adoption of this guidance on its Consolidated Financial Statements.

 

3. ACQUISITIONS

Milbank:

On November 1, 2011, the Company acquired certain assets of Milbank. A fair value adjustment to contingent purchase price consideration of $0 and $148 was recorded during the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively.  The Company has a liability of $784 and $1,295 related to Milbank included in accounts payable and accrued expenses in the Condensed Consolidated Statement of Financial Condition as of September 30, 2014 and December 31, 2013, respectively, for contingent consideration. During the nine months ended September 30, 2014 and 2013, the Company made contingent purchase price payments to Milbank of $511 and $462, respectively.

Commodity Advisors:

On April 1, 2012, SLP acquired Commodity Advisors. Commodity Advisors is the general partner of MW Commodity Strategies, L.P. (the “MW Commodity Fund LLC”), a fund whose investment objective is to seek superior risk adjusted returns through strategic, sector-based investments with commodity and macro trading investment managers. The acquisition of Commodity Advisors adds another strategy to the Company’s investment management, wealth planning and reporting capabilities, including proprietary value equity and fixed income disciplines and alternative investment advisory services. Furthermore, SLP is obligated to make quarterly contingent payments if incremental income, as defined in the purchase agreement, exceeds various thresholds. As these contingent payments are tied to the continued employment by SLP of the former member of Commodity Advisors, they will be considered compensation expense in the period in which such contingent payments are earned (See Note 10).

Ten-Sixty:

On March 28, 2013, SLP executed an Asset Purchase Agreement with and closed the related transaction to acquire certain assets of Ten-Sixty. Ten-Sixty is a registered investment adviser that advises on approximately $1.9 billion of assets primarily on behalf of institutional clients. This strategic acquisition enhances the Company’s hedge fund and investment manager due diligence capabilities, risk management analysis and reporting, and enhances its institutional business. Under the terms of the Asset Purchase Agreement, SLP paid cash consideration at closing of $2,500 and issued a promissory note to Ten-Sixty in the principal amount of $1,479 subject to adjustment. The principal amount of the promissory note was paid in two initial installments of $218 each on April 30, 2013 and December 31, 2013 and then quarterly installments from June 30, 2014 through March 31, 2017 of $87 each. The principal amount outstanding under this note bears interest at the rate of five percent per annum. During the year ended December 31, 2013, SLP incurred $51 in costs related to the acquisition of Ten-Sixty, and included these in general and administrative in the Condensed Consolidated Statement of Operations.

 

Cash paid on date of acquisition

  

$

2,500

  

Note payable due to Ten-Sixty

  

 

1,592

  

Total purchase consideration

  

$

4,092

  

The net tangible assets acquired from the Ten-Sixty transaction were determined to have a fair value of $0.

14


 

The following table summarizes the allocation of the excess of the purchase price over the fair value of assets acquired and liabilities assumed which was allocated to goodwill and intangible assets.

 

Goodwill

  

$

2,345

  

Customer relationships (10 years)

  

 

1,650

  

Non-compete agreements (5 years)

  

 

97

  

Total purchase consideration

  

$

4,092

  

The Company believes the recorded goodwill is supported by the anticipated revenues and expected synergies of integrating the operations of Ten-Sixty into the Company. Furthermore, there are expected synergies with respect to compensation and benefits and general and administrative costs. All goodwill is expected to be deductible for tax purposes.

The pro forma information below represents consolidated results of operations as if the acquisition of Ten-Sixty occurred on January 1, 2013. The pro forma information has been included for comparative purposes and is not indicative of results of operations of the Company had the acquisitions occurred as of January 1, 2013, nor is it necessarily indicative of future results.

 

 

Pro Forma 
Nine Months
Ended
September 30, 2013

 

Total Revenue

$

43,122

 

Net Income

$

13,231

 

 

 

4. INVESTMENTS AND FAIR VALUE MEASUREMENTS

Investments include $100 and $103 as of September 30, 2014 and December 31, 2013, respectively, representing the Company’s equity method investments in affiliated investment funds which have been established and managed by the Company and its affiliates. The Company’s financial interest in these funds can range up to 2%. Despite the Company’s insignificant financial interest, the Company exercises significant influence over these funds as the Company typically serves as the general partner, managing member or equivalent for these funds. During 2007, the Silvercrest Funds granted rights to the unaffiliated investors in each respective fund to provide that a simple majority of the fund’s unaffiliated investors will have the right, without cause, to remove the general partner or equivalent of that fund or to accelerate the liquidation date of that fund in accordance with certain procedures. At September 30, 2014 and 2013, the Company determined that none of the Silvercrest Funds were required to be consolidated. The Company’s involvement with these entities began on the dates that they were formed, which range from July 2003 to July 2008.

Fair Value Measurements

GAAP establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is affected by a number of factors, including the type of investment, the characteristics specific to the investment and the state of the marketplace including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices in an orderly market generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

·

Level I: Quoted prices are available in active markets for identic al investments as of the reporting date. The type of investments in Level I include listed equities and listed derivatives.

·

Level II: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Investments which are generally included in Level II include corporate bonds and loans, less liquid and restricted equity securities, certain over-the counter derivatives, and certain fund of hedge funds investments in which the Company has the ability to redeem its investment at net asset value at, or within three months of, the reporting date.

·

Level III: Pricing inputs are unobservable for the investment and includes situations where there is little, if any, market activity for the investment. The inputs into the determination of fair value require significant management judgment or estimation. Investments that are included in Level III generally include general and limited partnership interests in private equity and real estate funds, credit-oriented funds, certain over-the-counter derivatives, funds of hedge funds which use net asset value per share to determine fair value in which the Company may not have the ability to redeem its investment at net asset value at, or within three months of, the reporting date, distressed debt and non-investment grade residual interests in securitizations and collateralized debt obligations.

15


 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for any given investment is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

At September 30, 2014 and December 31, 2013, the Company did not have any financial assets or liabilities that are recorded at fair value on a recurring basis.

At September 30, 2014 and December 31, 2013, financial instruments that are not held at fair value are categorized in the table below:

 

 

  

September 30, 2014

 

  

December 31, 2013

 

  

 

 

 

  

Carrying
Amount

 

  

Fair
Value

 

  

Carrying
Amount

 

  

Fair
Value

 

  

Fair Value
Hierarchy

 

Financial Assets:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash

  

$

27,943

  

  

$

27,943

  

  

$

27,122

  

  

$

27,122

  

  

 

 

 

Restricted Certificates of Deposit and Escrow

  

$

586

  

  

$

586

  

  

$

1,021

  

  

$

1,021

  

  

 

Level 1

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Notes Payable

  

$

8,127

  

  

$

8,127

  

  

$

8,303

  

  

$

8,303

  

  

 

Level 2

(2)

Borrowings Under Revolving Credit Agreement

  

$

3,000

  

  

$

3,000

  

  

$

3,000

  

  

$

3,000

  

  

 

Level 2

(2)

(1)

Restricted certificates of deposit and escrow consists of money market funds that are carried at either cost or amortized cost that approximates fair value due to their short-term maturities. The money market funds are valued through the use of quoted market prices, or $1.00, which is generally the net asset value of the funds.

(2)

The carrying value of notes payable and borrowings under the revolving credit agreement approximates fair value, which is determined based on interest rates currently available to the Company for similar debt.

 

5. RECEIVABLES, NET

The following is a summary of receivables as of September 30, 2014 and December 31, 2013:

 

 

  

2014

 

 

2013

 

Management and advisory fees receivable

  

$

3,172

  

 

$

1,973

  

Unbilled receivables

  

 

2,312

  

 

 

3,741

  

Other receivables

  

 

2

  

 

 

30

  

Receivables

  

 

5,486

  

 

 

5,744

  

Allowance for doubtful receivables

  

 

(405

 

 

(339

Receivables, net

  

$

5,081

  

 

$

5,405

  

 

 

6. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

The following is a summary of furniture, equipment and leasehold improvements, net as of September 30, 2014 and December 31, 2013:

 

 

  

2014

 

 

2013

 

Leasehold improvements

  

$

3,690

 

 

$

3,679

  

Furniture and equipment

  

 

4,304

 

 

 

3,672

  

Artwork

  

 

360

 

 

 

345

  

Total cost

  

 

8,354

 

 

 

7,696

  

Accumulated depreciation and amortization

  

 

(6,193

)

 

 

(5,783

)

Furniture, equipment and leasehold improvements, net

  

$

2,161

 

 

$

1,913

  

Depreciation expense for the three months ended September 30, 2014 and 2013 was $147 and $100, respectively. Depreciation expense for the nine months ended September 30, 2014 and 2013 was $410 and $299, respectively.

 

16


 

7. GOODWILL

The following is a summary of the changes to the carrying amount of goodwill for the nine months ended September 30, 2014 and the year ended December 31, 2013:

 

 

  

2014

 

 

2013

 

Beginning

  

 

 

 

 

 

 

 

Gross balance

  

$

37,446

 

 

$

33,306

  

Accumulated impairment losses

  

 

(17,415

)

 

 

(17,415

)

Net balance

  

 

20,031

 

 

 

15,891

  

Purchase price adjustments from earnouts

  

 

(23

)

 

 

1,795

 

Acquisition of Ten-Sixty

  

 

 

 

 

2,345

  

Ending

  

 

 

 

 

 

 

 

Gross balance

  

 

37,423

 

 

 

37,446

  

Accumulated impairment losses

  

 

(17,415

)

 

 

(17,415

)

Net balance

  

$

20,008

 

 

$

20,031

  

 

 

8. INTANGIBLE ASSETS

The following is a summary of intangible assets as of September 30, 2014 and December 31, 2013:

 

 

  

Customer
Relationships

 

 

Other
Intangible
Assets

 

 

Total

 

Cost

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

  

$

17,560

  

 

$

1,663

  

 

$

19,223

  

Balance, September 30, 2014

  

 

17,560

 

 

 

1,663

 

 

 

19,223

  

Useful lives

  

 

10-20 years

 

 

 

3-5 years

 

 

 

 

 

Accumulated amortization

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2014

  

 

(5,410

)

 

 

(1,224

)

 

 

(6,634

)

Amortization expense

  

 

(913

)

 

 

(166

)

 

 

(1,079

)

Balance, September 30, 2014

  

 

(6,323

)

 

 

(1,390

)

 

 

(7,713

)

Net book value

  

$

11,237

 

 

$

273

 

 

$

11,510

  

Cost

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

  

$

15,910

  

 

$

1,566

  

 

$

17,476

  

Acquisition of certain assets of Ten-Sixty

  

 

1,650

  

 

 

97

  

 

 

1,747

  

Balance, December 31, 2013

  

 

17,560

  

 

 

1,663

  

 

 

19,223

  

Useful lives

  

 

10-20 years

  

 

 

3-5 years

  

 

 

 

 

Accumulated amortization

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

  

 

(4,238

)

 

 

(875

)

 

 

(5,113

)

Amortization expense

  

 

(1,172

)

 

 

(349

)

 

 

(1,521

)

Balance, December 31, 2013

 

 

(5,410

)

 

 

(1,224

)

 

 

(6,634

)

Net Book Value

  

 $

12,150

 

 

 $

439

 

 

 $

12,589

 

Amortization expense related to intangible assets was $360 and $402 for the three months ended September 30, 2014 and 2013, respectively. Amortization expense related to intangible assets was $1,079 and $1,156 for the nine months ended September 30, 2014 and 2013, respectively.

17


 

Amortization related to the Company’s finite life intangible assets is scheduled to be expensed over the next five years and thereafter as follows:

 

2014 (remainder of)

  

$

343

  

2015

  

 

1,291

  

2016

  

 

1,236

  

2017

  

 

1,135

  

2018

  

 

1,001

 

Thereafter

  

 

6,504

 

Total

  

$

11,510

  

 

 

9. DEBT

Credit Facility

On June 24, 2013, the subsidiaries of SLP entered into a $15,000 credit facility with City National Bank. The subsidiaries of SLP are the borrowers under such facility and SLP guarantees the obligations of its subsidiaries under the credit facility. The credit facility is secured by certain assets of SLP and its subsidiaries. The credit facility consists of a $7,500 delayed draw term loan that matures on June 24, 2020 and a $7,500 revolving credit facility that matures on December 24, 2016. The loan bears interest at either (a) the higher of the prime rate plus a margin of 0.05 percentage points and 2.5% or (b) the LIBOR rate plus 3 percentage points, at the borrowers’ option. On June 28, 2013, the borrowers borrowed $7,000 on the revolving credit loan. As of September 30, 2014 and December 31, 2013, no amount had been drawn on the term loan credit facility and the borrowers may draw up to the full amount of the term loan through June 25, 2018. Borrowings under the term loan on or prior to June 24, 2015 will be payable in 20 equal quarterly installments. Borrowings under the term loan after June 24, 2015 will be payable in equal quarterly installments through the maturity date. The credit facility contains restrictions on, among other things, (i) incurrence of additional debt, (ii) creating liens on certain assets, (iii) making certain investments, (iv) consolidating, merging or otherwise disposing of substantially all of our assets, (v) the sale of certain assets, and (vi) entering into transactions with affiliates. In addition, the credit facility contains certain financial covenants including a test on discretionary assets under management, maximum debt to EBITDA and a fixed charge coverage ratio. The credit facility contains customary events of default, including the occurrence of a change in control which includes a person or group of persons acting together acquiring more than 30% of the total voting securities of Silvercrest.

As of September 30, 2014 and December 31, 2013, $3,000 of principal was outstanding under the revolving credit loan.

The interest rate on the revolving credit loan as of September 30, 2014 was 3.75%.  Interest expense, which also includes amortization of deferred financing fees, incurred on the revolving credit and term loans for the three months ended September 30, 2014 and 2013 was $38 and $70, respectively. Interest expense, which also includes amortization of deferred financing fees, incurred on the revolving credit and term loans for the nine months ended September 30, 2014 and 2013 was $112 and $72, respectively.

Notes Payable

The following is a summary of notes payable:

 

 

  

September 30, 2014

 

 

  

Interest Rate

 

 

Amount

 

Principal on fixed rate notes

  

 

5.0

 

$

2,475

  

Variable rate notes issued for redemption of partners’ interests (see Note 15)

  

 

Prime plus 1

%

 

 

5,300

  

Interest payable

  

 

 

 

 

 

352

  

Total, September 30, 2014

  

 

 

 

 

$

8,127

  

 

 

  

December 31, 2013