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 March 31, 2016

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

 

x

 

 

 

 

Non-accelerated filer

 

¨  (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 May 6, 2016 was 8,027,825 and 4,671,047, respectively.

 

 

 

 


 

Part I

 

Financial Information

 

 

Item 1.

 

Condensed Consolidated Financial Statements (Unaudited)

  

1

 

 

Condensed Consolidated Statements of Financial Condition as of March 31, 2016 and December 31, 2015

  

1

 

 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015

  

2

 

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2016 and 2015

  

3

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

  

4

 

 

Notes to Condensed Consolidated Financial Statements as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015

  

5

 

 

 

  

 

Item 2.

 

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

  

26

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

  

42

Item 4.

 

Controls and Procedures

  

42

 

Part II 

 

Other Information

  

 

Item 1.

 

Legal Proceedings

  

43

Item 6.

 

Exhibits

  

44

 

 

 


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 subsidiary, Silvercrest L.P., the managing member of our operating subsidiary (“Silvercrest L.P.” or “SLP”). SLP is a limited partnership whose existing limited partners are referred to in this report as “principals”.

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. Important factors that could cause actual results, level of activity, performance or achievements to differ materially from those indicated by such forward-looking statements include but are not limited to: incurrence of net losses, fluctuations in quarterly and annual results, adverse economic or market conditions, our expectations with respect to future levels of assets under management, inflows and outflows, 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 hire and retain qualified investment professionals, 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 expected tax rate, and our expectations with respect to deferred tax assets, 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, 2015 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.

 

 

 

 


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)

 

 

  

March 31,
2016

 

  

December 31,
2015

 

Assets

  

 

 

 

  

 

 

 

Cash and cash equivalents

  

$

19,106

  

  

$

31,562

  

Restricted certificates of deposit

  

 

80

  

  

 

587

  

Investments

  

 

31

  

  

 

32

  

Receivables, net

  

 

4,774

  

  

 

4,502

  

Due from Silvercrest Funds

  

 

2,539

  

  

 

4,330

  

Furniture, equipment and leasehold improvements, net

  

 

2,295

  

  

 

2,425

  

Goodwill

  

 

25,168

  

  

 

24,682

  

Intangible assets, net

  

 

14,845

  

  

 

15,331

  

Deferred tax asset—tax receivable agreement

  

 

21,280

  

  

 

21,498

 

Prepaid expenses and other assets

  

 

3,834

  

  

 

3,262

  

Total assets

  

$

93,952

  

  

$

108,211

  

Liabilities and Equity

  

 

 

 

  

 

 

 

Accounts payable and accrued expenses

  

$

4,752

  

  

$

4,031

  

Accrued compensation

  

 

5,407

  

  

 

21,786

  

Notes payable

  

 

4,466

  

  

 

4,514

  

Deferred rent

  

 

745

  

  

 

852

  

Deferred tax and other liabilities

  

 

15,486

  

  

 

15,391

  

Total liabilities

  

 

30,856

  

  

 

46,574

  

Commitments and Contingencies (Note 10)

  

 

 

 

  

 

 

 

Equity

  

 

 

 

  

 

 

 

Preferred Stock, par value $0.01, 10,000,000 shares authorized; none issued and outstanding, as of March 31, 2016 and December 31, 2015

  

 

 

  

 

 

Class A common stock, par value $0.01, 50,000,000 shares authorized; 8,027,825 and 7,989,749 issued and outstanding, as of March 31, 2016 and December 31, 2015, respectively

  

 

80

  

  

 

80

 

Class B common stock, par value $0.01, 25,000,000 shares authorized; 4,661,849 and 4,695,014 issued and outstanding, as of March 31, 2016 and December 31, 2015, respectively

  

 

45

  

  

 

46

 

Additional Paid-In Capital

  

 

41,116

  

  

 

40,951

 

Retained earnings

  

 

5,106

  

  

 

4,758

 

Total Silvercrest Asset Management Group Inc.’s equity

  

 

46,347

  

  

 

45,835

 

Non-controlling interests

  

 

16,749

  

  

 

15,802

 

Total equity

  

 

63,096

  

  

 

61,637

 

Total liabilities and equity

  

$

93,952

  

  

$

108,211

  

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

1


 

Silvercrest Asset Management Group Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

(In thousands, except share and per share data)

 

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

Revenue

 

 

 

 

 

 

 

 

Management and advisory fees

 

$

18,334

 

 

$

16,703

 

Family office services

 

 

929

 

 

 

725

 

Total revenue

 

 

19,263

 

 

 

17,428

 

Expenses

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

11,442

 

 

 

9,762

 

General and administrative

 

 

4,197

 

 

 

3,528

 

Total expenses

 

 

15,639

 

 

 

13,290

 

Income before other (expense) income, net

 

 

3,624

 

 

 

4,138

 

Other (expense) income, net

 

 

 

 

 

 

 

 

Other income, net

 

 

8

 

 

 

8

 

Interest income

 

 

17

 

 

 

20

 

Interest expense

 

 

(65

)

 

 

(58

)

Total other (expense) income, net

 

 

(40

)

 

 

(30

)

Income before provision for income taxes

 

 

3,584

 

 

 

4,108

 

Provision for income taxes

 

 

1,088

 

 

 

1,298

 

Net income

 

 

2,496

 

 

 

2,810

 

Less: net income attributable to non-controlling interests

 

 

(1,189

)

 

 

(1,407

)

Net income attributable to Silvercrest

 

$

1,307

 

 

$

1,403

 

Net income per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.18

 

Diluted

 

$

0.16

 

 

$

0.18

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

7,995,720

 

 

 

7,770,610

 

Diluted

 

 

7,995,720

 

 

 

7,770,610

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

2


 

Silvercrest Asset Management Group Inc.

Condensed Consolidated Statements of Changes in Stockholders’ Equity

(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

 

January 1, 2015

 

 

7,768

 

 

$

78

 

 

 

4,520

 

 

$

46

 

 

$

39,175

 

 

$

3,217

 

 

$

42,516

 

 

$

10,546

 

 

$

53,062

 

Distributions to partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,241

)

 

 

(1,241

)

Repayment of notes receivable from partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

481

 

 

 

481

 

Equity-based compensation

 

 

 

 

 

 

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

389

 

 

 

389

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,403

 

 

 

1,403

 

 

 

1,407

 

 

 

2,810

 

Accrued interest on notes receivable from partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18

)

 

 

(18

)

Share conversion

 

 

18

 

 

 

 

 

 

(18

)

 

 

(1

)

 

 

57

 

 

 

 

 

 

56

 

 

 

(56

)

 

 

 

Deferred tax, net of amounts payable under tax receivable agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

23

 

 

 

 

 

 

23

 

Dividends paid on Class A common stock - $0.12
per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(932

)

 

 

(932

)

 

 

 

 

 

(932

)

March 31, 2015

 

 

7,786

 

 

$

78

 

 

 

4,629

 

 

$

45

 

 

$

39,255

 

 

$

3,688

 

 

$

43,066

 

 

$

11,508

 

 

$

54,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

January 1, 2016

 

 

7,990

 

 

$

80

 

 

 

4,695

 

 

$

46

 

 

$

40,951

 

 

$

4,758

 

 

$

45,835

 

 

$

15,802

 

 

$

61,637

 

Distributions to partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,375

)

 

 

(1,375

)

Repayment of notes receivable from partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

508

 

 

 

508

 

Equity-based compensation

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

794

 

 

 

794

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,307

 

 

 

1,307

 

 

 

1,189

 

 

 

2,496

 

Deferred tax, net of amounts payable under tax receivable agreement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

11

 

 

 

 

 

 

11

 

Accrued interest on notes receivable from partners

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

(15

)

Share conversion

 

 

38

 

 

 

 

 

 

(38

)

 

 

(1

)

 

 

154

 

 

 

 

 

 

153

 

 

 

(154

)

 

 

(1

)

Dividends paid on Class A common stock - $0.12
per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(959

)

 

 

(959

)

 

 

 

 

 

(959

)

March 31, 2016

 

 

8,028

 

 

$

80

 

 

 

4,662

 

 

$

45

 

 

$

41,116

 

 

$

5,106

 

 

$

46,347

 

 

$

16,749

 

 

$

63,096

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

3


Silvercrest Asset Management Group Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

 

 

Three months ended March 31,

 

 

 

2016

 

 

2015

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

2,496

 

 

$

2,810

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

772

 

 

 

115

 

Depreciation and amortization

 

 

665

 

 

 

460

 

Deferred rent

 

 

(107

)

 

 

(116

)

Deferred income taxes

 

 

367

 

 

 

645

 

Non-cash interest on notes receivable from partners

 

 

(15

)

 

 

(18

)

Distributions received from investment funds

 

 

1

 

 

 

1,292

 

Other

 

 

(2

)

 

 

 

Cash flows due to changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Receivables and due from Silvercrest Funds

 

 

1,519

 

 

 

1,420

 

Prepaid expenses and other assets

 

 

(556

)

 

 

(1,390

)

Accounts payable and accrued expenses

 

 

547

 

 

 

681

 

Accrued compensation

 

 

(16,357

)

 

 

(16,191

)

Interest payable on notes payable

 

 

53

 

 

 

46

 

Net cash used in operating activities

 

 

(10,617

)

 

 

(10,246

)

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Restricted certificates of deposit and escrow

 

$

507

 

 

$

 

Acquisition of furniture, equipment and leasehold improvements

 

 

(48

)

 

 

(162

)

Acquisition of Cappiccille & Company, LLC

 

 

(148

)

 

 

 

Net cash provided by (used in) investing activities

 

 

311

 

 

 

(162

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

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

 

$

(180

)

 

$

 

Repayments of notes payable

 

 

(101

)

 

 

(129

)

Payments on capital leases

 

 

(43

)

 

 

(19

)

Distributions to partners

 

 

(1,375

)

 

 

(1,241

)

Dividends paid on Class A common stock

 

 

(959

)

 

 

(932

)

Payments from partners on notes receivable

 

 

508

 

 

 

481

 

Net cash used in financing activities

 

 

(2,150

)

 

 

(1,840

)

Net decrease in cash and cash equivalents

 

 

(12,456

)

 

 

(12,248

)

Cash and cash equivalents, beginning of period

 

 

31,562

 

 

 

30,820

 

Cash and cash equivalents, end of period

 

$

19,106

 

 

$

18,572

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Net cash paid during the period for:

 

 

 

 

 

 

 

 

Income taxes

 

$

967

 

 

$

1,054

 

Interest

 

 

6

 

 

 

11

 

Supplemental Disclosures of Non-cash Financing and Investing Activities

 

 

 

 

 

 

 

 

Recognition of deferred tax assets as a result of IPO

 

$

 

 

$

184

 

Recognition of deferred tax assets as a result of share conversions

 

 

152

 

 

 

 

Asset acquired under capital lease

 

 

 

 

 

11

 

Earnout accrual for acquisition of certain assets of Cappiccille & Company, LLC

 

 

354

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

4


 

Silvercrest Asset Management Group Inc.

Notes to Condensed Consolidated Financial Statements

As of March 31, 2016 and December 31, 2015 and for the Three Months ended March 31, 2016 and 2015

(Unaudited)

(Dollars in thousands, except per share and par value data)

 

1. ORGANIZATION AND BUSINESS

Silvercrest Asset Management Group Inc. (“Silvercrest”), together with its consolidated subsidiary, Silvercrest L.P., a limited partnership, (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., the managing member of our operating subsidiary, and its subsidiaries.  Effective on June 26, 2013, Silvercrest became the sole general partner of Silvercrest L.P. and its only material asset is the general partner interest in Silvercrest L.P., represented by 8,027,825 Class A units or approximately 63% of the outstanding 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.

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”.

Silvercrest L.P. was formed on December 10, 2008 and commenced operations on January 1, 2009.

On March 11, 2004, SAMG LLC 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 100% of the outstanding limited liability company interests of MW Commodity Advisors, LLC (“Commodity Advisors”). On March 28, 2013, SLP acquired certain assets of Ten-Sixty Asset Management, LLC (“Ten-Sixty”). On June 30, 2015, SLP acquired certain assets of Jamison, Eaton & Wood, Inc. (“Jamison”).  On January 11, 2016, SLP acquired certain assets of Cappiccille & Company, LLC (“Cappiccille”).  See Notes 3, 7 and 8 for additional information related to goodwill and intangible assets arising from these acquisitions.

Tax Receivable Agreement

In connection with the Company’s initial public offering (the “IPO”) and reorganization of SLP that were completed on June 26, 2013, Silvercrest entered into a tax receivable agreement (the “TRA”) with the partners of SLP that requires 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 are 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. The payments to be made pursuant to the tax receivable agreement are a liability of Silvercrest and not Silvercrest L.P., and thus this liability has been recorded as an “other liability” on our Condensed Consolidated Statement of Financial Condition.  As of March 31, 2016, this liability is estimated to be $14,795 and is included in deferred tax and other liabilities in the Condensed Consolidated Statements of Financial Condition. 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.

5


 

Estimating the amount of payments that Silvercrest may be required to make under the TRA is imprecise by 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 Silvercrest’s 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 Silvercrest’s 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 Silvercrest’s 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 Silvercrest’s 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.

 

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 SLP, including its wholly owned subsidiaries, Silvercrest Asset Management Group LLC (“SAMG”), SFS, MCG, Silvercrest Investors LLC, Silvercrest Investors II LLC and Silvercrest Investors III LLC as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015.  All intercompany transactions and balances have been eliminated.

The Condensed Consolidated Statement of Financial Condition at December 31, 2015 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 months ended March 31, 2016 and 2015 are not necessarily indicative of the operating results that may be expected for the full fiscal year ending December 31, 2016 and 2015 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 financial position and 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, 2015.

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

6


 

of whether a fund for which SLP is the general partner is required to be consolidated is assessing whether the fund is a variable interest entity or a voting interest entity.

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.

If the fund is a variable interest entity, SLP then determines whether it has a variable interest in the fund. 

During the three months ended March 31, 2016 and 2015, each fund is deemed to be a VoIE and neither SLP nor Silvercrest consolidated any of the Silvercrest Funds.

Non-controlling Interest

As of March 31, 2016, Silvercrest holds approximately 63% of the outstanding 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 or are in the process of being fully integrated. Furthermore, our chief operating decision maker, who 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.

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, the activities over which the Company exercises significant influence, 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.

7


 

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 March 31, 2016 and December 31, 2015. 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 is based on the net asset value, consisting of Level I and Level II securities, of the equity method investee. No impairment charges related to equity method investments were recorded during the three months ended March 31, 2016 or 2015.

Receivables and Due from Silvercrest Funds

Receivables consist primarily of amounts for advisory fees due from clients, management fees and family office services 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 for other fixed assets is 3 to 7 years.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting. The acquisition method of accounting requires that the 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.

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.

The Company accounts for Goodwill under Accounting Standard Codification (“ASC”) No. 350, “Intangibles - Goodwill and Other,” which 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 Company utilized this option when performing its annual impairment assessment in 2015 and 2014, and concluded that its single reporting unit’s fair value was more likely than not greater than its carrying value, including goodwill.

The Company has one reporting unit at March 31, 2016 and December 31, 2015. No goodwill impairment charges were recorded during the three months ended March 31, 2016 and 2015.

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.

8


 

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 reevaluates 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. 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 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

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 or (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.  The profit distributions and tax distributions are accounted for as equity transactions.

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, which are earned pursuant to the terms of the underlying advisory contract, 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

9


 

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 No. 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 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.

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 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 Condensed Consolidated 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 derecognizes 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 No. 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP.  Originally, ASU No. 2014-09 was to become effective on January 1, 2017, but the effective date has been deferred for one year. Early adoption is permitted as of the original effective date. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on the Condensed 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.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments—Overall (Topic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities." Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair

10


 

value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments.  Some of the amendments in ASU 2016-01 include the following: (1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; (3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and (4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. ASU 2016-01 will be effective on January 1, 2018. The Company is in the process of evaluating the impact of adoption of this guidance on its Condensed Consolidated Financial Statements. 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).” This amendment introduces a lessee model that brings most leases on the balance sheet. The new standard also aligns many of the underlying principles of the new lessor model with those in ASC 606, the FASB’s new revenue recognition standard (e.g., those related to evaluating when profit can be recognized). Furthermore, the ASU addresses other concerns related to the current lease accounting model. This amendment is effective for all entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the adoption of this guidance on its Condensed Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” which simplifies several aspects of the accounting for employee share-based payment transactions including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This amendment is effective for public entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is in the process of evaluating the impact of the adoption of this guidance on its Condensed Consolidated Financial Statements.

 

 

3. ACQUISITIONS

Cappiccille:

On December 15, 2015, the Company executed an Asset Purchase Agreement (the “Asset Purchase Agreement”), by and among the Company, SLP, SAMG LLC (the “Buyer”) and Cappiccille & Company, LLC, a Delaware limited liability company (“Cappiccille” or the “Seller”), and Michael Cappiccille (the “Principal”), to acquire certain assets of Cappiccille.  The transaction contemplated by the Asset Purchase Agreement closed on January 11, 2016 and is referred to herein as the “Cappiccille Acquisition”.

Pursuant to the terms of the Asset Purchase Agreement, SAMG LLC acquired (i) substantially all of the business and assets of the Seller, a provider of tax services, including goodwill and the benefit of the amortization of goodwill related to such assets and (ii) the personal goodwill of the Principal. In consideration of the purchased assets and goodwill, SAMG LLC paid to the Seller and the Principal an aggregate purchase price consisting of a cash payment of $148. The Company determined that the acquisition-date fair value of the contingent consideration was $354, based on the likelihood that the financial and performance targets described in the Asset Purchase Agreement will be achieved.  SAMG LLC will make earnout payments to the Principal as soon as practicable following December 31, 2016, 2017, 2018, 2019, and during 2020, in an amount equal to 19% of the revenue attributable to the business and assets of Cappiccille, based on revenue gained or lost post-transaction during the twelve months ended on the applicable determination date, except that the earnout payment for 2016 shall be equal to 19% of the revenue attributable to the Cappiccille for the period between the closing date of the Cappiccille Acquisition and December 31, 2016 and the earnout payment for 2020 shall be equal to 19% of the revenue attributable to the Cappiccille Acquisition for the period between January 1, 2020 and the fifth anniversary of the closing date of the Cappiccille Acquisition.  The estimated fair value of contingent consideration is recognized at the date of acquisition, and adjusted for changes in facts and circumstances until the ultimate resolution of the contingency. Changes in the fair value of contingent consideration are reflected as a component of general and administrative expenses in the Condensed Consolidated Statement of Operations. The fair value of the contingent consideration was based on discounted cash flow models using projected revenue for each earnout period. The discount rate applied to the projected revenue was determined based on the weighted average cost of capital for the Company and took into account that the overall risk associated with the payments was similar to the overall risks of the Company as there is no target, floor or cap associated the contingent payments.  The Company has a liability of $354 related to earnout payments to be made in conjunction with the Cappiccille Acquisition which is included in accounts payable and accrued expenses in the Condensed Consolidated Statement of Financial Condition as of March 31, 2016 for contingent consideration.

Jamison:

On March 30, 2015, the Company executed an Asset Purchase Agreement (the “Asset Purchase Agreement”), by and among the Company, SLP, SAMG LLC (the “Buyer”) and Jamison Eaton & Wood, Inc., a New Jersey corporation (“Jamison” or the “Seller”),

11


 

and Keith Wood, Ernest Cruikshank, III, William F. Gadsden and Frederick E. Thalmann, Jr., each such individual a principal of Jamison (together, the “Principals of Jamison”), to acquire certain assets of Jamison.  The transaction contemplated by the Asset Purchase Agreement closed on June 30, 2015 and is referred to herein as the “Jamison Acquisition”.

Pursuant to the terms of the Asset Purchase Agreement, SAMG LLC acquired (i) substantially all of the business and assets of the Seller, an investment adviser, including goodwill and the benefit of the amortization of goodwill related to such assets and (ii) the personal goodwill of the Principals of Jamison. In consideration of the purchased assets and goodwill, SAMG LLC paid to the Seller and the Principals of Jamison an aggregate purchase price consisting of (1) cash payments in the aggregate amount of $3,550 (the “Closing Cash Payment”), (2) a promissory note issued to the Seller in the principal amount of $394, with an interest rate of 5% per annum (the “Seller Note”), (3) promissory notes in varying amounts issued to each of the Principals of Jamison for an aggregated total amount of $1,771, each with an interest rate of 5% per annum (together, the “Principals of Jamison Notes”) and (4) Class B units of SLP (the “Class B Units”) issued to the Principals of Jamison with a value equal to $3,562 and an equal number of shares of Class B common stock of the Company, having voting rights but no economic interest (together, the “Equity Consideration”). The Company determined that the acquisition-date fair value of the contingent consideration was $1,429, based on the likelihood that the financial and performance targets described in the Asset Purchase Agreement will be achieved.  SAMG LLC will make earnout payments to the Principals of Jamison as soon as practicable following December 31, 2015, 2016, 2017, 2018, 2019 and during 2020, in an amount equal to 20% of the EBITDA attributable to the business and assets of Jamison (the “Jamison Business”), based on revenue gained or lost post-transaction during the twelve months ended on the applicable determination date, except that the earnout payment for 2015 shall be equal to 20% of the EBITDA attributable to the Jamison Business for the period between the closing date of the Jamison Acquisition and December 31, 2015 and the earnout payment for 2020 shall be equal to 20% of the EBITDA attributable to the Jamison Business for the period between January 1, 2020 and the fifth anniversary of the closing date of the Jamison Acquisition.  The estimated fair value of contingent consideration is recognized at the date of acquisition, and adjusted for changes in facts and circumstances until the ultimate resolution of the contingency. Changes in the fair value of contingent consideration are reflected as a component of general and administrative expenses in the Condensed Consolidated Statement of Operations. The fair value of the contingent consideration was based on discounted cash flow models using projected EBITDA for each earnout period. The discount rate applied to the projected EBITDA was determined based on the weighted average cost of capital for the Company and took into account that the overall risk associated with the payments was similar to the overall risks of the Company as there is no target, floor or cap associated the contingent payments.  The Company has a liability of $1,162 related to earnout payments to be made in conjunction with the Jamison Acquisition which is included in accounts payable and accrued expenses in the Condensed Consolidated Statement of Financial Condition as of March 31, 2016 and December 31, 2015 for contingent consideration.

In connection with their receipt of the Equity Consideration, the Principals of Jamison became subject to the rights and obligations set forth in the limited partnership agreement of SLP and are entitled to distributions consistent with SLP’s distribution policy.  In addition, the Principals of Jamison became parties to the Exchange Agreement, which governs the exchange of Class B Units for Class A common stock of the Company, the Resale and Registration Rights Agreement, which provides the Principals of Jamison with liquidity with respect to shares of Class A common stock of the Company received in exchange for Class B Units, and the TRA of the Company, which entitles the Principals of Jamison to share in a portion of the tax benefit received by the Company upon the exchange of Class B Units for Class A common stock of the Company.

The Asset Purchase Agreement includes customary representations, warranties and covenants.

The strategic acquisition of Jamison, a long-standing and highly regarded investment boutique, strengthens the Company’s presence in the greater New York market and the Company gains investment managers that have significant experience and knowledge of the industry.  Jamison’s clients will gain access to the Company’s complete investment management, wealth planning and reporting capabilities, including proprietary value equity and fixed income disciplines and alternative investment advisory services.

Jamison revenue and income before provision for income taxes for the three months ended March 31, 2016 that are included in the Condensed Consolidated Statement of Operations are $1,370 and $226, respectively.

 

Cash paid on date of acquisition

$

3,550

 

Notes payable to Jamison and Principals of Jamison

 

2,165

 

Units issued

 

3,562

 

Contingent consideration

 

1,429

 

Total purchase consideration

$

10,706

 

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

 

Prepaid expense

$

135

 

Furniture and equipment

 

335

 

Security deposits

 

30

 

Capital leases

 

(253

)

Deferred rent

 

(19

)

Total fair value of net tangible assets acquired

 

228

 

Goodwill

 

4,674

 

Customer relationships (10 years)

 

5,000

 

Non-compete agreements (5 years)

 

804

 

Total purchase consideration

$

10,706

 

The purchase price allocations were finalized as of December 31, 2015. 

The Company believes the recorded goodwill is supported by the anticipated revenues and expected synergies of integrating the operations of Jamison into the Company.  The goodwill is expected to be deductible for tax purposes.

The unaudited pro forma information below represents consolidated results of operations as if the acquisition of Jamison occurred on January 1, 2015. 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, 2015, nor is it necessarily indicative of future results.

 

 

  

Pro Forma 

Three Months Ended
March 31, 2015

 

Total Revenue

  

$

18,867

  

Net Income

  

$

2,992

  

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 was a registered investment adviser that advised on approximately $1,900,000 of assets primarily on behalf of institutional clients. This strategic acquisition enhanced the Company’s hedge fund and investment manager due diligence capabilities, risk management analysis and reporting, and enhanced 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.  As of March 31, 2016, $379 remained outstanding on the note payable related to the Ten-Sixty acquisition.

Milbank:

On November 1, 2011, SAMG LLC executed an asset purchase agreement to acquire certain assets of Milbank.  The Company has a liability of $673 related to earn-outs payable to Milbank included in accounts payable and accrued expenses in the Condensed Consolidated Statement of Financial Condition as of March 31, 2016 and December 31, 2015, for contingent consideration.

 

4. INVESTMENTS AND FAIR VALUE MEASUREMENTS

Investments

Investments include $31 and $32 as of March 31, 2016 and December 31, 2015, respectively, representing the Company’s interests 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 in amounts up to 2% of the net assets of the funds. Despite the Company’s insignificant financial interest, the Company applies the equity method to account for its interests in affiliated investment funds because it 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 March 31, 2016 and 2015, 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 2014.

13


 

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 identical 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.

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 March 31, 2016 and December 31, 2015, the Company did not have any financial assets or liabilities that are recorded at fair value on a recurring basis.

At March 31, 2016 and December 31, 2015, financial instruments that are not held at fair value are categorized in the table below:

 

 

  

March 31, 2016

 

  

December 31, 2015

 

  

 

 

 

  

Carrying
Amount

 

  

Fair
Value

 

  

Carrying
Amount

 

  

Fair
Value

 

  

Fair Value
Hierarchy

 

Financial Assets:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Cash

  

$

19,106

 

  

$

19,106

  

  

$

31,562

  

  

$

31,562

  

  

 

 

 

Restricted Certificates of Deposit

  

$

80

  

  

$

80

  

  

$

587

  

  

$

587

  

  

 

Level 1

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Notes Payable

  

$

4,466

  

  

$

4,466

  

  

$

4,514

  

  

$

4,514

  

  

 

Level 2

(2)

 

(1)

Restricted certificates of deposit 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.

 

14


 

5. RECEIVABLES, NET

The following is a summary of receivables as of March 31, 2016 and December 31, 2015:

 

 

  

March 31,

2016

 

 

December 31,

2015

 

Management and advisory fees receivable

  

$

2,710

  

 

$

2,327

  

Unbilled receivables

  

 

2,421

  

 

 

2,532

  

Other receivables

  

 

2

  

 

 

2

  

Receivables

  

 

5,133

  

 

 

4,861

  

Allowance for doubtful receivables

  

 

(359

 

 

(359

Receivables, net

  

$

4,774

  

 

$

4,502

  

 

 

6. FURNITURE, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

The following is a summary of furniture, equipment and leasehold improvements, net as of March 31, 2016 and December 31, 2015:

 

 

  

March 31,

2016

 

 

December 31,

2015

 

Leasehold improvements

  

$

3,877

 

 

$

3,874

  

Furniture and equipment

  

 

5,199

 

 

 

5,157

  

Artwork

  

 

432

 

 

 

429

  

Total cost

  

 

9,508

 

 

 

9,460

  

Accumulated depreciation and amortization

  

 

(7,213

)

 

 

(7,035

)

Furniture, equipment and leasehold improvements, net

  

$

2,295

 

 

$

2,425

  

 

Depreciation expense for the three months ended March 31, 2016 and 2015 was $179 and $137, respectively.  

 

7. GOODWILL

The following is a summary of the changes to the carrying amount of goodwill for the three months ended March 31, 2016 and the year ended December 31, 2015:

 

 

  

March 31,

2016

 

 

December 31,

2015

 

Beginning

  

 

 

 

 

 

 

 

Gross balance

  

$

42,097

 

 

$

37,423

  

Accumulated impairment losses

  

 

(17,415

)

 

 

(17,415

)

Net balance

  

 

24,682

 

 

 

20,008

  

Acquisition of Jamison

  

 

 

 

 

4,674

 

Acquisition of Cappiccille

 

 

486

 

 

 

 

Ending

  

 

 

 

 

 

 

 

Gross balance

  

 

42,583

 

 

 

42,097

  

Accumulated impairment losses

  

 

(17,415

)

 

 

(17,415

)

Net balance

  

$

25,168

 

 

$

24,682

  

 

 

15


 

8. INTANGIBLE ASSETS, NET

The following is a summary of intangible assets as of March 31, 2016 and December 31, 2015:

 

 

 

Customer
Relationships

 

 

Other
Intangible
Assets

 

 

Total

 

Cost

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2016

  

$

22,560

  

 

$

2,467

  

 

$

25,027

  

Balance, March 31, 2016

  

 

22,560

 

 

 

2,467

 

 

 

25,027

  

Useful lives

  

 

10-20 years

 

 

 

3-5 years

 

 

 

 

 

Accumulated amortization

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2016

  

 

(8,062

)

 

 

(1,634

)

 

 

(9,696

)

Amortization expense

  

 

(415

)

 

 

(71

)

 

 

(486

)

Balance, March 31, 2016

  

 

(8,477

)

 

 

(1,705

)

 

 

(10,182

)

Net book value

  

$

14,083

 

 

$

762

 

 

$

14,845

  

Cost

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

  

$

17,560

  

 

$

1,663

  

 

$

19,223

  

Acquisition of Jamison

 

 

5,000

 

 

 

804

 

 

 

5,804

 

Balance, December 31, 2015

  

 

22,560

  

 

 

2,467

  

 

 

25,027

  

Useful lives

  

 

10-20 years

  

 

 

3-5 years

  

 

 

 

 

Accumulated amortization

  

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2015

  

 

(6,627

)

 

 

(1,429

)

 

 

(8,056

)

Amortization expense

  

 

(1,435

)

 

 

(205

)

 

 

(1,640

)

Balance, December 31, 2015

 

 

(8,062

)

 

 

(1,634

)

 

 

(9,696

)

Net Book Value

  

$

14,498

 

 

$

833

 

 

$

15,331

 

 

Amortization expense related to intangible assets was $486 and $323 for the three months ended March 31, 2016 and 2015, respectively.  

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

 

2016 (remainder of)

  

$

1,442

  

2017

  

 

1,826

  

2018

  

 

1,685

  

2019

  

 

1,390

  

2020

  

 

1,299

 

Thereafter

  

 

7,203

 

Total

  

$

14,845

  

 

 

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 thereunder. 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 March 31, 2016 and December 31, 2015, 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 were payable in 20 equal quarterly installments. Borrowings under the term loan after June 24, 2015 are 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.

16


 

As of March 31, 2016 and December 31, 2015, the Company did not have any outstanding borrowings under the revolving credit loan.

Interest expense, which also includes amortization of deferred financing fees, incurred on the revolving credit and term loans for the three months ended March 31, 2016 and 2015 was $12 and $10, respectively.

Notes Payable

The following is a summary of notes payable:

 

 

  

March 31, 2016

 

 

  

Interest Rate

 

 

Amount

 

Principal on fixed rate notes

  

 

5.0

 

$

2,544

  

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

  

 

Prime plus 1

%

 

 

1,789

  

Interest payable

  

 

 

 

 

 

133

  

Total, March 31, 2016

  

 

 

 

 

$

4,466

  

 

 

  

December 31, 2015

 

 

  

Interest Rate

 

 

Amount

 

Principal on fixed rate notes

  

 

5.0

 

$

2,639

  

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

  

 

Prime plus 1

%

 

 

1,789

  

Interest payable

  

 

 

 

 

 

86

  

Total, December 31, 2015

  

 

 

 

 

$

4,514

  

 

The carrying value of notes payable approximates fair value. The fixed rate notes, which are related to the Jamison, Ten-Sixty and Milbank acquisitions, approximate fair value based on interest rates currently available to the Company for similar debt.  The variable rate notes are based on the U.S. Prime Rate.

As of March 31, 2016, future principal amounts payable under the fixed and variable rate notes are as follows:

 

2016 (remainder of)

  

$

1,900

  

2017

  

 

1,711

  

2018

  

 

722

  

Total

  

$

4,333

  

 

On June 3, 2013, Silvercrest redeemed units from two of our former principals. In conjunction with this redemption, Silvercrest issued promissory notes in an aggregate principal amount of approximately $5,300, subject to downward adjustments to the extent of any breach by the holders of such notes. The principal amounts of the notes were originally payable in four equal annual installments on each of June 3, 2014, 2015, 2016 and 2017. The principal amount outstanding under these notes bear interest at the U.S. Prime Rate plus 1% in effect at the time payments are due. Silvercrest elected not to make the June 3, 2014 payment as it was being assessed as to whether the former principals had complied with the note covenants and whether any reduction to these notes should be made.  In October 2014, certain reductions totaling $1,722 were agreed to, based upon a review of the note covenants.  As a result, the principal amounts of the notes of $3,578 became payable in four equal installments of approximately $900 on November 1, 2014, and on each of August 1, 2015, 2016 and 2017.  As of March 31, 2016 and December 31, 2015, $1,789 remained outstanding on the notes and accrued but unpaid interest on the notes was approximately $52 and $32, respectively.  

On June 30, 2015, Silvercrest issued promissory notes in an aggregate principal amount of approximately $2,165 in connection with the Jamison Acquisition.  The principal amount outstanding under the notes bears interest at 5% per annum.  The principal amounts of the notes are payable in three equal installments of approximately $722 on each of June 30, 2016, 2017 and 2018.  Accrued but unpaid interest on the notes was approximately $82 and $55 as of March 31, 2016 and December 31, 2015, respectively.

 

 

17


 

10. COMMITMENTS AND CONTINGENCIES

Lease Commitments

The Company leases office space pursuant to operating leases that are subject to specific escalation clauses. Rent expense charged to operations for the three months ended March 31, 2016 and 2015 amounted to $964 and $917, respectively. The Company received sub-lease income from subtenants during the three months ended March 31, 2016 and 2015 of $100 and $91, respectively. Therefore, for the three months ended March 31, 2016 and 2015, net rent expense amounted to $864 and $826, respectively, and is included in general and administrative expenses in the Condensed Consolidated Statement of Operations.  

As security for performance under the leases, the Company is required to maintain letters of credit in favor of the landlord totaling $506 as of March 31, 2016 and December 31, 2015.  Furthermore, the Company maintains an $80 letter of credit in favor of its Boston landlord. Both are collateralized by the Company’s revolving credit facility with City National Bank.

In March 2014, the Company entered into a lease agreement for additional office space in Richmond, VA.  The lease commenced on May 1, 2014 and expires July 31, 2019. The lease is subject to escalation clauses and provides for a rent-free period of three months.  Monthly rent expense is $5.  The Company paid a refundable security deposit of $3.

In June 2015, the Company entered into a lease agreement for office space in Charlottesville, VA.  The lease commenced on June 30, 2015 and expires on June 30, 2018.  The lease is subject to escalation clauses and provides for a rent-free period of two months.  Monthly rent expense is $2.  The Company paid a refundable security deposit of $2.

In connection with the Jamison Acquisition, the Company assumed lease agreements for office space in Bedminster and Princeton, NJ.  The Bedminster lease, as extended, expires on March 31, 2022.  Monthly rent expense on this lease is $11.  The Princeton lease, as extended, expires on April 30, 2016.  Monthly rent expense on this lease is $5.  Both leases are subject to escalation clauses, and the Bedminster lease provides for a rent-free period of four months.

In December 2015, the Company extended its lease related to its New York City office space.  The amended lease commences on October 1, 2017 and expires on September 30, 2028.  The lease is subject to escalation clauses, and provides for a rent-free period of twelve months and for tenant improvements of up to $2,080.  Monthly rent under this extension will be $446.

In January 2016, the Company entered into a lease agreement for office space in Princeton, NJ.  The lease commences April 23, 2016 and expires on August 31, 2022.  This lease replaces the Princeton lease discussed above that expires on April 30, 2016.  Monthly rent expense on this lease is $6.  The lease is subject to escalation clauses, and provides for a rent-free period of one month.

With the Cappiccille acquisition, the Company assumed a lease agreement for office space in Livingston, NJ.  The lease is month-to-month.  Monthly rent expense is $2.

Future minimum lease payments and rentals under lease agreements which expire through 2028 are as follows:

 

 

  

Minimum Lease
Commitments

 

  

Non-cancellable
Subleases

 

 

Minimum Net
Rentals

 

Remainder of 2016

  

$

2,897

  

  

$

(320

)

 

$

2,577

  

2017

  

 

3,057

  

  

 

(328

)

 

 

2,729

  

2018

  

 

1,632

  

  

 

 

 

 

1,632

  

2019

  

 

5,654

  

  

 

 

 

 

5,654

  

2020

 

 

5,621

 

 

 

 

 

 

5,621

 

Thereafter

 

 

43,669

 

 

 

 

 

 

43,669

 

Total

  

$

62,530

  

  

$

(648

)

 

$

61,882

  

 

The Company has capital leases for certain office equipment. The Company entered into a new capital lease agreement for a telephone system during 2014.  The amount financed was $321 and the lease has a term of five years, which began on March 1, 2014.   Monthly minimum lease payments are $5, and continue through November 30, 2018.   On June 30, 2015, the Company assumed certain capital leases for equipment totaling $253 as part of the Jamison Acquisition.  In July 2015, the Company entered into a new capital lease for a copier.  The amount financed was $21 and the lease has a term of three years, which began on July 1, 2015.  Monthly minimum lease payments are $1, and continue through June 30, 2018.  In October 2015, the Company entered in a new capital lease for a copier.  The amount financed was $18 and the lease has a term of three years, which began on November 1, 2015.  Monthly minimum lease payments are $1, and continue through October 31, 2018.  The aggregate principal balance of capital leases was $397 and $440 as of March 31, 2016 and December 31, 2015, respectively.

18


 

The assets relating to capital leases that are included in equipment as of March 31, 2016 and December 31, 2015 are as follows:

 

 

  

March 31,

2016

 

 

December 31,

2015

 

Capital lease assets included in furniture and equipment

  

$

625

  

 

$

648

  

Capital lease assets included in software

  

 

58

  

 

 

58

  

Less: Accumulated depreciation and amortization

  

 

(281

)

 

 

(250

)

 

  

$

402

  

 

$

456

  

 

Depreciation expense relating to capital lease assets was $31 and $17 for the three months ended March 31, 2016 and 2015, respectively.  

Future minimum lease payments under capital leases are as follows:

 

 

  

Future Minimum Lease
Commitments

 

Remainder of 2016

  

$

129

  

2017

  

 

149

  

2018

  

 

107

  

2019

  

 

11

  

Total

  

$

396

  

 

 

11. STOCKHOLDERS’ EQUITY

SLP historically made, and will continue to make, distributions of its net income to the holders of its partnership units for income tax purposes as required under the terms of its Second Amended and Restated Limited Partnership Agreement and also made, and will continue to make, additional distributions of net income under the terms of its Second Amended and Restated Limited Partnership Agreement. Partnership distributions totaled $1,375 and $1,241, for the three months ended March 31, 2016 and 2015, respectively.   Distributions are included in non-controlling interests in the Condensed Consolidated Statements of Financial Condition.

Pursuant to SLP’s Second Amended and Restated Limited Partnership Agreement, as amended and restated, partner incentive allocations are treated as distributions of net income. The remaining net income or loss after partner incentive allocations was generally allocated to the partners based on their pro rata ownership. Net income allocation is subject to the recovery of the allocated losses of prior periods. Distributions of partner incentive allocations of net income for the three months ended March 31, 2016 and 2015 amounted to $18,827 and $18,568, respectively. The distributions are included in non-controlling interests in the Condensed Consolidated Statements of Financial Condition and Condensed Consolidated Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2016 and 2015.  The Company treats SLP’s partner incentive allocations as compensation expense and accrues such amounts when earned. During the three months ended March 31, 2016 and 2015, SLP accrued partner incentive allocations of $4,422 and $4,241, respectively.  

Silvercrest—Stockholders’ Equity

Silvercrest has the following authorized and outstanding equity:

 

 

  

Shares at March 31, 2016

 

  

Authorized

 

  

Outstanding

 

  

Voting Rights

  

Economic
Rights

Common shares

  

 

 

 

  

 

 

 

  

 

  

 

Class A, par value $0.01 per share

  

 

50,000,000

  

  

 

8,027,825

  

  

1 vote per share (1)

  

All (1)

Class B, par value $0.01 per share

  

 

25,000,000

  

  

 

4,661,849

  

  

1 vote per  share (2),(3)

  

None (2), (3)

Preferred shares

  

 

 

 

  

 

 

 

  

 

  

 

Preferred stock, par value $0.01 per share

  

 

10,000,000

  

  

 

 

  

See footnote (4) below

  

See footnote (4) below

 

(1)

Each share of Class A common stock is entitled to one vote per share. Class A common stockholders have 100% of the rights of all classes of Silvercrest’s capital stock to receive dividends.

(2)

Each share of Class B common stock is entitled to one vote per share.

19


 

(3)

Each Class B unit of SLP held by a principal is exchangeable for one share of the Company’s Class A common stock. The principals collectively hold 4,661,849 Class B units, which represent the right to receive their proportionate share of the distributions made by SLP, and 966,510 restricted stock units which will vest and settle in the form of Class B units of SLP. The 966,510 restricted stock units which have been issued to our principals entitle the holders thereof to participate in distributions from SLP as if the underlying Class B units are outstanding and thus are taken into account to determine the economic interest of each holder of units in SLP. However, because the Class B units underlying the restricted stock units have not been issued and are not deemed outstanding, the holders of restricted stock units have no voting rights with respect to those Class B units. Silvercrest will not issue shares of Class B common stock in respect of restricted stock units of SLP until such time that the underlying Class B units are issued.  

(4)

Silvercrest’s board of directors has the authority to issue preferred stock in one or more classes or series and to fix the rights, preferences, privileges and related restrictions, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any class or series, or the designation of the class or series, without the approval of its stockholders.

The Company is dependent on cash generated by SLP to fund any dividends. Generally, SLP will distribute its profits to all of its partners, including Silvercrest, based on the proportionate ownership each holds in SLP. Silvercrest will fund dividends to its stockholders from its proportionate share of those distributions after provision for its income taxes and other obligations.

During the three months ended March 31, 2016, Silvercrest issued the following shares:

Class A Common Stock

 

 

 

Transaction

 

 

# of

 

 

 

Date

 

 

Shares

 

Class A common stock outstanding - January 1, 2016

 

 

 

 

 

7,989,749

 

Issuance of Class A common Stock upon conversion of
Class B units to Class A common stock

 

March 2016

 

 

 

38,076

 

Class A common shares outstanding – March 31, 2016

 

 

 

 

 

8,027,825

 

 

Class B Common Stock

 

 

 

Transaction

 

 

# of

 

 

 

Date

 

 

Shares

 

Class B common stock outstanding - January 1, 2016

 

 

 

 

 

4,695,014

 

Class B common stock issued upon vesting of deferred equity units

 

February 2016

 

 

 

4,911

 

Cancellation of Class B common stock upon conversion of
Class B units to Class A common stock

 

March 2016

 

 

 

(38,076

)

Class B common shares outstanding – March 31, 2016

 

 

 

 

 

4,661,849

 

 

In February 2016, the Company issued 4,911 shares of Class B common stock upon the vesting of deferred equity units which resulted in the issuance of a like number of Class B units of Silvercrest LP. The shares of Class B common stock were issued pursuant to the terms of the Certificate of Incorporation of the Company which requires the Company to issue at the par value per share of Class B common stock, one share of Class B common stock for each Class B Unit of Silvercrest LP issued.    

In March 2016, the Company redeemed from certain existing partners 38,076 shares of Class B common stock in connection with the exchange of a like number of Class B units to Class A common stock pursuant to the resale and registration rights agreement between the Company and its principals.

The total amount of shares of Class B common stock outstanding and held by principals equals the number of Class B units those individuals hold in SLP. Shares of Silvercrest’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, Silvercrest will issue to the holder one share of its Class B common stock in exchange for the payment of its par value. Each share of Silvercrest’s Class B common stock will be redeemed for its par value and cancelled by Silvercrest 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, the terms of the 2012 Equity Incentive Plan of Silvercrest, or otherwise.

 

20


 

12. NOTES RECEIVABLE FROM PARTNERS

Partner contributions to SLP are made in cash, in the form of five or six year interest-bearing promissory notes and/or in the form of nine year interest-bearing limited recourse promissory notes. Limited recourse promissory notes were issued in January 2008 and August 2009 with interest rates of 3.53% and 2.77%, respectively. The recourse limitation includes a stated percentage of the initial principal amount of the limited recourse note plus a stated percentage of the accreted principal amount as of the date upon which all amounts due are paid in full plus all costs and expenses required to be paid by the borrower and all amounts required to be paid pursuant to a pledge agreement associated with each note issued. Certain notes receivable are payable in annual installments and are collateralized by SLP’s units that are purchased with the note. Notes receivable from partners are reflected as a reduction of non-controlling interests in the Condensed Consolidated Statements of Financial Condition.

Notes receivable from partners are as follows for the three months ended March 31, 2016 and the year ended December 31, 2015:

 

 

  

March 31,
2016

 

 

December 31,
2015

 

Beginning balance

  

$

2,789

  

 

$

3,212

  

Repayment of notes

  

 

(508

)

 

 

(489

)

Interest accrued and capitalized on notes receivable

  

 

15

  

 

 

66

  

Ending balance

  

$

2,296

  

 

$

2,789

  

 

Full recourse notes receivable from partners as of March 31, 2016 and December 31, 2015 are $1,073 and $1,575, respectively. Limited recourse notes receivable from partners as of March 31, 2016 and December 31, 2015 are $1,223 and $1,214, respectively. There is no allowance for credit losses on notes receivable from partners as of March 31, 2016 and December 31, 2015.

 

13. RELATED PARTY TRANSACTIONS

During the first three months of 2016 and 2015, the Company provided services to the following, which operate as feeder funds investing through master-feeder or mini-master feeder structures:

 

·

the domesticated Silvercrest Hedged Equity Fund, L.P. (formed in 2011 and formerly Silvercrest Hedged Equity Fund),

 

·

Silvercrest Hedged Equity Fund (International), Ltd. (which invests through Silvercrest Hedged Equity Fund, L.P.),

 

·

the domesticated Silvercrest Emerging Markets Fund, L.P. (formed in 2011 and formerly Silvercrest Emerging Markets Fund),

 

·

Silvercrest Emerging Markets Fund (International), Ltd. (which invests through Silvercrest Emerging Markets Fund L.P.),

 

·

Silvercrest Market Neutral Fund (currently in liquidation),

 

·

Silvercrest Market Neutral Fund (International) (currently in liquidation),

 

·

Silvercrest Municipal Advantage Portfolio A LLC,

 

·

Silvercrest Municipal Advantage Portfolio P LLC,

 

·

Silvercrest Municipal Advantage Portfolio S LLC (formed in 2015),

 

·

the domesticated Silvercrest Strategic Opportunities Fund LP (formed in 2011 and formerly Silvercrest Strategic Opportunities Fund, and terminated in 2013),

 

·

the Silvercrest Strategic Opportunities Fund (International) (terminated in 2011),

 

·

the Silvercrest Jefferson Fund, L.P. (formed in 2014), and

 

·

the Silvercrest Jefferson Fund, Ltd. (the Company took over as investment manager in 2014, formerly known as the Jefferson Global Growth Fund, Ltd.), which invests in Silvercrest Jefferson Master Fund, L.P. (formed in 2014).

The Company also provides services to the following, which operate and invest separately as stand-alone funds:

 

·

the Silvercrest Global Opportunities Fund, L.P. (currently in liquidation),

 

·

Silvercrest Global Opportunities Fund (International), Ltd. (currently in liquidation),

 

·

Silvercrest Capital Appreciation Fund LLC (currently in liquidation),

 

·

Silvercrest International Equity Fund, L.P. (merged into Silvercrest International Fund, L.P. in October 2013),

21


 

 

·

Silvercrest Municipal Special Situations Fund LLC (merged into Silvercrest Municipal Advantage Portfolio S LLC in 2015),  

 

·

Silvercrest Municipal Special Situations Fund II LLC (merged into Silvercrest Municipal Advantage Portfolio S LLC in 2015),

 

·

Silvercrest Select Growth Equity Fund, L.P. (liquidated as of December 31, 2015),

 

·

Silvercrest International Fund, L.P. (previously known as Silvercrest Global Fund, L.P.  Silvercrest International Equity Fund, L.P. merged into this fund in October 2013),

 

·

Silvercrest Small Cap Fund, L.P. (currently in liquidation),

 

·

Silvercrest Special Situations Fund, L.P., and

 

·

Silvercrest Commodity Strategies Fund, L.P.

Pursuant to agreements with the above entities, the Company provides investment advisory services and receives an annual management fee of 0% to 1.75% of assets under management and a performance fee or allocation of 0% to 10% of the above entities’ net appreciation over a high-water mark.

For the three months ended March 31, 2016 and 2015, the Company earned from the above activities management fee income, which is included in “Management and advisory fees” in the Condensed Consolidated Statements of Operations, of $1,582 and $1,902, respectively. As of March 31, 2016 and December 31, 2015, the Company was owed $2,539 and $4,330, respectively, from its various funds, which is included in Due from Silvercrest Funds on the Condensed Consolidated Statements of Financial Condition.

For the three months ended March 31, 2016 and 2015, the Company earned advisory fees of $123 and $127, respectively, from assets managed on behalf of certain of its partners.  As of March 31, 2016 and December 31, 2015, the Company is owed approximately $4 and $3 from certain of its partners, which is included in Receivables, net on the Condensed Consolidated Statements of Financial Condition.

 

14. INCOME TAXES

As of March 31, 2016, the Company had net deferred tax assets of $21,053, which is recorded as a non-current deferred tax asset of $21,280 specific to Silvercrest which consists primarily of assets related to temporary differences between the financial statement and tax bases of intangible assets related to its acquisition of partnership units of SLP, a non-current deferred tax liability of $110 specific to SLP which consists primarily of liabilities related to differences between the financial statement and tax bases of intangible assets offset in part by amounts for deferred rent expense and a non-current deferred tax liability of $117 related to the corporate activity of SFS which is primarily related to temporary differences between the financial statement and tax bases of intangible assets.  Of the total net deferred taxes at March 31, 2016, $93 of the net deferred tax liabilities relate to non-controlling interests. These amounts are included in prepaid expenses and other assets and deferred tax and other liabilities on the Condensed Consolidated Statement of Financial Condition, respectively.

As of December 31, 2015, the Company had net deferred tax assets of $21,269, which is recorded as a non-current deferred tax asset of $21,498 specific to Silvercrest which consists primarily of assets related to temporary differences between the financial statement and tax bases of intangible assets related to its acquisition of partnership units of SLP, a net non-current deferred tax liability of $108 specific to SLP which consists primarily of liabilities related to differences between the financial statement and tax bases of intangible assets and a non-current deferred tax liability of $121 related to the corporate activity of SFS which is primarily related to temporary differences between the financial statement and tax bases of intangible assets. These amounts are included in prepaid expenses and other assets and deferred tax and other liabilities in the Condensed Consolidated Statement of Financial Condition, respectively.

The current tax expense was $720 and $653 for the three months ended March 31, 2016 and 2015, respectively. Of the amount for the three months ended March 31, 2016, $344 relates to Silvercrest’s corporate tax expense, $374 relates to SLP’s state and local liability and $2 relates to SFS’s corporate tax expense.  The deferred tax expense for the three months ended March 31, 2016 and 2015 was $367 and $645, respectively. When combined with current tax expense, the total income tax provision for the three months ended March 31, 2016 and 2015 is $1,088 and $1,298, respectively.  The tax expense for the three months ended March 31, 2016, also includes additional deferred tax expenses of ($21) for discrete items. The discrete items are primarily attributable to changes in apportionment relative to tax year 2016.

The current tax expense increased from the comparable period in 2015 mainly due to increased taxable profitability during 2016.  The deferred tax expense decreased from the comparable period in 2015 primarily due to movements in discrete items recorded during the three months ended March 31, 2015 related to a reduction in future statutory corporate tax rates in New York State and changes in the rules with respect to sourcing sales in New York City.

22


 

Of the total current tax expense for the three months ended March 31, 2016 and 2015, $155 and $129, respectively, relates to non-controlling interests.  Of the deferred tax expense for the three months ended March 31, 2016 and 2015, ($1) and $3, respectively, relates to non-controlling interests.  When combined with current tax expense, the total income tax provision for the three months ended March 31, 2016 and 2015 related to non-controlling interests is $154 and $132, respectively.

In the normal course of business, the Company is subject to examination by federal, state, and local tax regulators. As of March 31, 2016, the Company’s U.S. federal income tax returns for the years 2012 through 2015 are open under the normal three-year statute of limitations and therefore subject to examination.

The guidance for accounting for uncertainty in income taxes prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The Company does not believe that it has any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.  Furthermore, the Company does not have any material uncertain tax positions at March 31, 2016 and 2015.

 

 

15. REDEEMABLE PARTNERSHIP UNITS

If a principal of SLP is terminated for cause, SLP would have 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.

 

16. EQUITY-BASED COMPENSATION

Deferred Equity Units

Determining the appropriate fair value model and calculating the fair value of equity compensation awards requires the input of complex and subjective assumptions, including the expected life of the equity compensation awards and the stock price volatility. In addition, determining the appropriate amount of associated periodic expense requires management to estimate the amount of employee forfeitures and the likelihood of the achievement of certain performance targets. The assumptions used in calculating the fair value of equity compensation awards and the associated periodic expense represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary in the future to modify the assumptions it made or to use different assumptions, or if the quantity and nature of the Company’s equity-based compensation awards changes, then the amount of expense may need to be adjusted and future equity compensation expense could be materially different from what has been recorded in the current period.

SLP has granted equity-based compensation awards to certain partners under SLP’s 2010, 2011 and 2012 Deferred Equity programs (the “Equity Programs”). The Equity Programs allow for the granting of deferred equity units based on the fair value of the Company’s units. These deferred equity units contain both service and performance requirements.

Each grant includes a deferred equity unit (“Deferred Equity Unit”) and performance unit (“Performance Unit”) subject to various terms including terms of forfeiture and acceleration of vesting. The Deferred Equity Unit represents the unsecured right to receive one unit of SLP or the equivalent cash value of up to 50% (or such other percentage as may be determined by the Company’s Executive Committee) of SLP’s units issuable upon the vesting of any such Deferred Equity Units and the remaining 50% in units upon the vesting of any such Deferred Equity Units. Such cash amount is to be calculated using the equivalent share price of the Silvercrest’s Class A common stock as of the applicable vesting date. The Performance Unit represents the unsecured right to receive one unit of SLP for every two units of SLP issuable upon the vesting of any such Deferred Equity Units.

Twenty-five percent of the Deferred Equity Units vest on each of the first, second, third, and fourth anniversaries of the grant date until the Deferred Equity Units are fully vested. The Performance Units are subject to forfeiture and subject to the satisfaction of a predetermined performance target at the end of the four-year vesting period. If the performance target is achieved, then the Performance Units vest at the end of the four-year vesting period. The rights of the partners with respect to the Performance Units remain subject to forfeiture at all times prior to the date on which such rights become vested and will be forfeited if the performance target is not achieved.

Distributions related to Deferred Equity Units that are paid to partners are charged to non-controlling interests. Distributions related to the unvested portion of Deferred Equity Units that are assumed to be forfeited are recognized as compensation expense because these distributions are not required to be returned by partners to SLP upon forfeiture.

23


 

The grant date fair values of Performance Units were determined by applying a performance probability factor to the Deferred Equity Unit Value. These methodologies included the use of third party data and discounts for lack of control and marketability.

Only the portion of Deferred Equity Units that can be settled in cash are considered to be liability awards and are adjusted to fair value at the end of each reporting period.

For the three months ended March 31, 2016 and 2015, the Company recorded compensation expense related to such Deferred Equity Units of $14 and $115, respectively, of which $1 and $16, respectively, relates to the Performance Units.  During the three months ended March 31, 2016, the Company reversed $33 of compensation expense related to the Performance Units that did not vest, as the conditions for vesting were not met. Distributions include cash distributions paid on liability awards.

During the three months ended March 31, 2016 and 2015, $0 of vested Deferred Equity Units were settled in cash. As of March 31, 2016 and December 31, 2015, there was $0 and $21, respectively, of estimated unrecognized compensation expense related to unvested awards. As of March 31, 2016 and December 31, 2015, the unrecognized compensation expense related to unvested awards is expected to be recognized over a period of 0 and 0.13 years, respectively.

A summary of these equity grants by the Company as of March 31, 2016 and 2015 during the periods then ended is presented below:

 

 

  

 

 

Deferred Equity Units

 

 

Performance Units

 

 

  

Units

 

 

 

Range of Fair Value
per unit

 

 

Units

 

 

Fair Value
per unit

 

Balance at January 1, 2016

 

 

4,911

 

 

$

12.00

 

 

$

14.25

 

 

 

6,386

 

 

$

3.75

 

Vested

 

 

(4,911

)

 

 

 

 

 

(10.92

)

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

(6,386

)

 

 

 

Balance at March 31, 2016

 

 

 

 

$

 

 

$

 

 

 

 

 

$