ASSOCIATED CAPITAL GROUP, INC. : MANAGEMENT’S DISCUSSION AND ANALYSIS (“MD&A”) OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

Overview In December 2019, a novel strain of coronavirus (“COVID-19”) surfaced in China and spread…

Overview

In December 2019, a novel strain of coronavirus ("COVID-19") surfaced in China
and spread quickly to numerous countries, including the United States. On March
11, 2020, COVID-19 was identified as a global pandemic by the World Health
Organization. As world leaders focused on the unprecedented human and economic
challenges of COVID-19, global equity markets plunged as the coronavirus
pandemic spread. In the remainder of 2020 and continuing through 2021, as a
result of unprecedented fiscal and monetary stimulus and the fast tracking of
COVID-19 vaccines, the markets have rebounded strongly. The pandemic and
resulting economic dislocations did not have a significant adverse impact on our
AUM. As a result of this pandemic, the majority of our employees ("teammates")
were working remotely. The Company's remote work arrangements were mostly
discontinued as of July 2021. As restrictions around the globe begin to lift,
our teams will once again seek to meet and engage our current and prospective
investors in their local jurisdictions.

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There continues to be no material impact of remote work arrangements on our
operations, including our financial reporting systems, internal control over
financial reporting, and disclosure controls and procedures, and there has been
no material challenge in implementing our business continuity plan.

Financial Highlights

Financial Performance

The following is a summary of the Company’s financial performance for the
Quarters and Years ended December 31, 2021 and 2020:

($000s except per share data or as noted)

                                        Fourth Quarter             Full 

Year

                                       2021        2020        2021        

2020

AUM – end of period (in millions) $ 1,781 $ 1,351 $ 1,781 $ 1,351
AUM – average (in millions)

             1,735       1,286       1,595       

1,399

Net income/(loss) per share-diluted $ 0.43 $ 2.29 $ 2.68 $

 0.84
Book Value Per Share                  $ 42.48     $ 40.36     $ 42.48     $ 40.36



Financial Condition Overview

The Company consolidates certain investment partnerships and other entities for
which it has a controlling financial interest. The following table reflects the
net impact of the consolidated investment partnerships and other entities
("Consolidated Entities") on the consolidated statements of financial condition
(in thousands):

                                                                  December 31, 2021
                                                    Prior to          Consolidated
                                                  Consolidation         Entities        As Reported
Assets
Cash                                                     315,009              4,039          319,048
Investments                                              606,382             16,709          623,091
Other                                                     69,713            191,484          261,197
Total assets                                     $       991,104     $      212,232     $  1,203,336
Liabilities and equity
Total liabilities                                         45,024             20,510           65,534
Redeemable noncontrolling interests                            -            202,456          202,456
Total Associated Capital Group, Inc. equity(1)           946,080             (8,978 )        937,102
Noncontrolling interests(1)                                    -             (1,756 )         (1,756 )
Total liabilities and equity                     $       991,104     $      212,232     $  1,203,336



                                                       December 31, 2020
                                         Prior to          Consolidated
                                       Consolidation         Entities        As Reported
Assets
Cash                                           32,347              7,162           39,509
Investments                                   869,751             19,188          888,939
Other                                          45,709            200,388          246,097
Total assets                          $       947,807     $      226,738     $  1,174,545
Liabilities and equity
Total liabilities                              46,418             19,910           66,328
Redeemable noncontrolling interests                 -            206,828          206,828
Total equity                                  901,389                  -          901,389
Total liabilities and equity          $       947,807     $      226,738     $  1,174,545



(1) Debit adjustments to Associated Capital Group, Inc. equity and
noncontrolling interests reflects the amortization of the discount related to
the issuance of PMV SPAC's redeemable noncontrolling interest. The discount is
amortized over a period of 18 months through an adjustment to additional paid-in
capital and noncontrolling interest (proportionate to ownership interest in PMV
Sponsor) and is also adjusted periodically for income/loss allocated to
redeemable noncontrolling interest.

Consolidated Statements of Income

Investment advisory and incentive fees, which are based on the amount and
composition of AUM in our funds and accounts, represent our largest source of
revenues. Growth in revenues depends on good investment performance, which
influences the value of existing AUM as well as contributes to higher investment
and lower redemption rates and attracts additional investors while maintaining
current fee levels. Growth in AUM is also dependent on being able to access
various distribution channels, which is usually based on several factors,
including performance and service.  In light of the ongoing dynamics created by
COVID-19 and its impact on the global economy and markets, we could experience
higher volatility in short-term returns of our funds.

Incentive fees generally consist of an incentive allocation on the absolute gain
in a portfolio generally equating to 15-20% of the economic profit, as defined
in the agreements governing the investment vehicle or account. We recognize such
revenue only when the measurement period has been completed or at the time of an
investor redemption.

Compensation includes variable and fixed compensation and related expenses paid
to officers, portfolio managers, sales, trading, research and all other
professional staff. Variable compensation is paid to sales personnel and
portfolio management and may represent up to approximately 55% of revenues.

Management fee expense is incentive-based equal to 10% of adjusted aggregate
pre-tax profits paid to the Executive Chair or his designees for his services
pursuant to an employment agreement.

Other operating expenses include general and administrative operating costs.

Other income and expense includes net gains and losses from investments (which
include both realized and unrealized gains and losses from securities and equity
in earnings of investments in partnerships), interest and dividend income, and
interest expense. Net gains and losses from investments are derived from our
proprietary investment portfolio consisting of various public and private
investments and from consolidated investment funds.

Net income/(loss) attributable to noncontrolling interests represents the share
of net income attributable to third-party limited partners of certain
partnerships and offshore funds we consolidate. Please refer to Notes A and E in
our consolidated financial statements included elsewhere in this report.

Consolidated Statements of Financial Condition

We ended 2021 with approximately $942 million in cash and investments, net of
securities sold, not yet purchased of $13 million. This includes $319 million of
cash and cash equivalents; $61 million of short-term U.S. Treasury obligations;
$260 million of securities, net of securities sold, not yet purchased, including
shares of GAMCO with a market value of $60.4 million; and $289 million invested
in affiliated and third-party funds and partnerships, including investments in
closed end funds managed by an affiliate (primarily GAMCO) which have a value of
$64 million and more limited liquidity. Our financial resources provide
flexibility to pursue strategic objectives that may include acquisitions,
lift-outs, seeding new investment strategies, and co-investing, as well as
shareholder compensation in the form of share repurchases and dividends.

Total shareholders' equity attributable to shareholders of the Company was $937
million or $42.48 per share as of December 31, 2021, compared to $899 million or
$40.36 per share as of the prior year-end. Shareholders' equity per share is
calculated by dividing the total equity by the number of common shares
outstanding. The increase in equity from the end of 2020 was largely
attributable to net income for the year, partially offset by dividends, share
repurchases and the impact of amortization of the discount related to the
issuance of PMV SPAC's redeemable noncontrolling interest.

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Assets Under Management Highlights

We reported assets under management as follows (dollars in millions):

                         Year Ended December 31,
                         2021               2020          % Change
Merger Arbitrage     $      1,542       $      1,126          36.90
Event-Driven Value            195                180           8.33
Other                          44                 45          (2.22 )
Total AUM (a)        $      1,781       $      1,351          31.83


(a) Includes $238 million and $235 million of proprietary capital, respectively.

Changes in our AUM during 2021 were as follows (dollars in millions):

                                             Year Ended December 31, 2021
                                                                       Investment
                      Beginning       Inflows         Outflows           Return        Ending
Merger Arbitrage     $     1,126     $     566       $     (200 )     $         50     $ 1,542
Event-Driven Value           180             5              (12 )               22         195
Other                         45             -               (3 )                2          44
Total AUM            $     1,351     $     571       $     (215 )     $         74     $ 1,781


The majority of our AUM have calendar year-end measurement periods, and our
incentive fees are primarily recognized in the fourth quarter. Assets under
management increased on a net basis by $356 million for the year ended December
31, 2021
coupled with $74 million in market appreciation.

Operating Results for the Year Ended December 31, 2021 as Compared to the Year
Ended December 31, 2020

Revenues

Total revenues were $20.9 million for the year ended December 31, 2021, $1.9
million higher than total revenues of $19.0 million for the year ended December
31, 2020. Total revenues by type were as follows (dollars in thousands):

                                           Year Ended December 31,          

Change

                                             2021             2020           $           %
Investment advisory and incentive fees   $      20,530     $   18,288     $ 2,242        12.3
Other revenues                                     394            695        (301 )     (43.3 )
Total revenues                           $    $ 20,924     $ $ 18,983     $ 1,941        10.2



Investment advisory and incentive fees: We earn advisory fees based on our AUM.
Investment advisory fees are directly influenced by the amount of average AUM
and the fee rates applicable to various accounts.

Advisory and incentive fees were $20.5 million for 2021 compared to $18.3
million
for 2020, an increase of $2.2 million. This increase is the result of
the higher average AUM over the period.

Incentive fees are directly related to the gains generated for our clients'
accounts. We earn a percentage, usually 20%, of such gains. Incentive fees were
$12.4 million in 2021, up $1.9 million from $10.5 million in 2020, due to higher
assets under management coupled with superior investment performance.

Other revenues: Other revenues were $0.4 million for 2021 compared to $0.7
million
for 2020, a decrease of $0.3 million.

Expenses

Compensation: Compensation, which includes variable compensation, salaries,
bonuses and benefits, was $24.5 million for the year ended December 31, 2021, an
increase of $5.1 million from $19.4 million for the year ended December 31,
2020. Fixed compensation expense, which includes salaries, bonuses and benefits,
increased to $11.1 million in 2021 from $9.5 million in 2020. The remainder of
compensation expense represents variable compensation that fluctuates with
management and incentive fee revenues as well as the investment results of
certain proprietary accounts. Variable payouts are also impacted by the mix of
products upon which performance fees are earned and the extent to which they may
exceed their allocated costs. For 2021, these variable payouts (based on the
investment performance of the products with incentive fees) were $13.4 million,
an increase of $3.5 million from $9.9 million in 2020.

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Stock-based compensation, which primarily consists of awards accounted for as
liabilities, was $2.1 million in 2021, an increase of $2.3 million from $(0.2)
million recorded in 2020 due to increases in the Company's share price in 2021
coupled with a new grant of awards in May 2021.

Management fees: Management fee expense is incentive-based and entirely variable
compensation equal to 10% of the aggregate adjusted pre-tax profits, which is
paid to the Executive Chair or his designees pursuant to his employment
agreement with AC. In 2021 and 2020, AC recorded management fee expense of $8.4
million and $3.1 million, respectively.

Other operating expenses: Our other operating expenses were $7.1 million in 2021
compared to $8.9 million in 2020, a decrease of $1.8 million primarily due to a
one-time credit recorded in 2021 of $1.5 million.

Investment and other non-operating income/(expense), net

Net gain from investments: Net gain from investments is directly related to the
performance of our proprietary portfolio. For the year ended December 31, 2021,
net gains from investments were $93.4 million compared to $36.9 million in the
prior year primarily driven by investment income on our holdings of GBL as well
as other portfolio increases.

Interest and dividend income: Interest and dividend income increased to $12.1
million in 2021 from $8.7 million in 2020 primarily due to the $5.1 million ($2
per share) special dividend declared on our holdings of GAMCO in 2021.

Income Taxes

In 2021 we recorded income tax expense of $17.7 million resulting in an
effective tax rate ("ETR") of 21.8%. In 2020 we recorded income tax expense of
$9.4 million resulting in an ETR of 31.4%. The decrease in rate from 2020 is
primarily driven by foreign investments which increased the 2020 rate by 9.9%.

Noncontrolling Interests

Net income attributable to noncontrolling interests was $4.4 million in 2021
compared to $1.0 million in 2020. The increase of $3.4 million was driven
primarily by Gabelli Merger Plus+ Trust and mark to market earnings from PMV
SPAC.

Net Income/(Loss)

Net income for the year ended December 31, 2021 was $59.2 million compared to
net income of $18.8 million for the prior year. The change was primarily driven
by higher gains on our investment portfolio primarily driven by the 2021 market
recovery from the COVID-19 pandemic.

Liquidity and Capital Resources

Our principal assets consist of cash and cash equivalents; short-term treasury
securities; marketable securities, primarily equities, including 2.4 million
shares of GAMCO; and interests in affiliated and third-party funds and
partnerships. Although Investment Partnerships may be subject to restrictions as
to the timing of distributions, the underlying investments of such Investment
Partnerships are generally liquid, and the valuations of these products reflect
that underlying liquidity.

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Summary cash flow data is as follows (in thousands):

                                                                      Year 

Ended December 31,

                                                                        2021             2020
Cash flows provided by (used in) continuing operations:
Operating activities                                                $    238,194      $ (279,483 )
Investing activities                                                      65,285        (174,072 )
Financing activities                                                     (14,394 )       150,949
Net increase from continuing operations                                  

289,085 (302,606 )
Cash flows provided by (used in) discontinued operations:
Operating activities

                                                           -             114
Net increase in cash, cash equivalents and restricted cash               289,085        (302,492 )
Cash, cash equivalents and restricted cash at beginning of period         39,509         342,001
Cash, cash equivalents and restricted cash at end of period         $    328,594      $   39,509



We require relatively low levels of capital expenditures and have a highly
variable cost structure where costs increase and decrease based on the level of
revenues we receive. Our revenues, in turn, are highly correlated to the level
of AUM and to investment performance. We anticipate that our available liquid
assets should be sufficient to meet our cash requirements as we build out our
operating business. At December 31, 2021, we had cash and cash equivalents of
$319.0 million, investments in U.S. Treasury Bills of $61.0 and $260.2 million
of investments net of securities sold, not yet purchased of $12.9 million.
Included in cash and cash equivalents are $4.0 million and $7.2 million as of
December 31, 2021 and 2020, respectively, which were held by consolidated
investment funds and may not be readily available for the Company to access.

Net cash provided by operating activities from continuing operations was $238.2
million in 2021 due to $278.1 million of net decreases of securities and net
contributions to investment partnerships and our net income of $63.6, offset by
$82.9 million of adjustments for noncash items, primarily gains on investments
securities and partnership investments and deferred taxes, and $20.6 million in
net receivables/payables.

Net cash used in operating activities from continuing operations was $279.5
million in 2020 due to $295.8 million in net purchases of trading securities,
including $315.4 million of net purchases of U.S. Treasury Bills, $10.7 of net
income adjusted for noncash items, primarily unrealized gains on securities and
equity in net gains from partnerships, net distributions from Investment
Partnerships of $31.0 million and increases in net receivables/payables of $4.0
million.

Net cash provided by investing activities from continuing operations was $65.3
million in 2021 due to proceeds from sales of securities of $35.3 million and
return of capital on securities of $38.7 million, partially offset by purchases
of securities of $8.7 million.

Net cash used in investing activities from continuing operations was $174.1
million in 2020 due to the investment of cash in a trust account by the PMV SPAC
of $175 million, the purchase of our building in London for $11.1 million and
purchases of securities of $2.7 million partially offset by proceeds from sales
of securities of $13.1 million and return of capital on securities of $1.6
million.

Net cash used in financing activities from continuing operations was $14.4
million in 2021 resulting from stock buyback payments of $7.6 million, dividends
paid of $4.4 million and redemptions of redeemable noncontrolling interests of
$2.3 million.

Net cash provided by financing activities from continuing operations was $150.9
million in 2020 resulting from contributions from redeemable noncontrolling
interests of $162.6 million primarily related to contributions to PMV SPAC and
nonredeemable non-controlling interests of $2.4 million reduced by dividends
paid of $6.7 million and stock buyback payments of $7.4 million. Cash provided
by discontinued operations from the spin-off of Morgan Group was $0.1 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

In the ordinary course of business, we make a number of estimates and
assumptions relating to the reporting of results of operations and financial
condition in the preparation of our consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America ("GAAP"). We base our estimates on historical experience, when
available, and on other various assumptions that are believed to be reasonable
under the circumstances. Actual results could differ significantly from those
estimates under different assumptions and conditions.

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We believe that the following critical accounting policies require management to
exercise significant judgment:

Major Revenue-Generating Services and Revenue Recognition

The Company’s revenues are derived primarily from investment advisory and
incentive fees.

Investment advisory and incentive fees are directly influenced by the level and
mix of AUM as fees are derived from a contractually-determined percentage of the
balance of each account as well as a percentage of the investment performance of
certain accounts. Management fees from Investment Partnerships and offshore
funds are computed either monthly or quarterly, and amounts receivable are
included in investment advisory fees receivable on the consolidated statements
of financial condition. These revenues vary depending upon the level of capital
flows, financial market conditions, investment performance and the fee rates
applicable to each account.

Incentive allocations or fees are generally recognized at the end of an annual
measurement period and amounts receivable are included in investment advisory
fees receivable on the consolidated statements of financial condition.

See Note B, Significant Accounting Policies, in the consolidated financial
statements for additional information.

Investments in Securities

Investments in securities are a recorded at fair value in the statements of
financial condition in accordance with U.S. GAAP.  Securities transactions and
any related gains and losses are recorded on a trade date basis.  Realized gains
and losses from securities transactions are recorded on the specific identified
cost basis and are included in net gain from investments on the consolidated
statements of income.

Management determines the appropriate classification of securities at the time
of purchase. Government debt with maturities of greater than three months at the
time of purchase are considered investments in debt securities. The Company has
investments in debt securities accounted for as trading, including investments
in marketable securities held in trust by PMV.

Securities sold, but not yet purchased are recorded on the trade date, and are
stated at fair value and represent obligations of AC to purchase the securities
at prevailing market prices. Therefore, the future satisfaction of such
obligations may be for an amount greater or less than the amounts recorded on
the consolidated statements of financial condition. The ultimate gains or losses
recognized are dependent upon the prices at which these securities are purchased
to settle the obligations under the sales commitments. Unrealized gains and
losses and realized gains and losses from covers of securities sold, not yet
purchased transactions are included in net gain from investments on the
consolidated statements of income.

Consolidation

The Company assesses all entities with which it is involved for consolidation on
a case by case basis depending on the specific facts and circumstances
surrounding each entity. Pursuant to accounting guidance, the Company first
evaluates whether it holds a variable interest in an entity. The Company
considers all economic interests, including proportionate interests through
related parties, to determine if such interests are to be considered a variable
interest. Fees paid to the Company that are customary and commensurate with the
level of services provided from entities in which the Company does not hold
other economic interests in the entity are not considered as a variable
interest.

For any entity where the Company has determined that it does hold a variable
interest, the Company performs an assessment to determine whether it qualifies
as a variable interest entity ("VIE").

The granting of substantive kick-out rights is a key consideration in
determining whether a limited partnership or similar entity is a VIE and whether
or not that entity should be consolidated. The Company evaluates consolidation
on a case by case basis for those VIEs in which substantive kick-out rights have
been granted to the unaffiliated investors to either dissolve the fund or remove
the general partner.

Under the variable interest entity model, the Company consolidates those
entities where it is determined that the Company is the primary beneficiary of
the entity. The Company is determined to be the primary beneficiary when it has
a controlling financial interest in the VIE, which is defined as possessing both
(a) the power to direct the activities of the VIE that most significantly impact
the VIE's economic performance and (b) the obligation to absorb losses of the
VIE or the right to receive benefits from the VIE that could potentially be
significant to the VIE. If the Company alone is not considered to have a
controlling financial interest in the VIE but the Company and its related
parties under common control in the aggregate have a controlling financial
interest in the VIE, the Company will be deemed to be the primary beneficiary if
it is the party that is most closely associated with the VIE. When the Company
and its related parties not under common control in the aggregate have a
controlling financial interest in a VIE, the Company would be deemed to be the
primary beneficiary if substantially all the activities of the entity are
performed on behalf of the Company.

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The Company determines whether it is the primary beneficiary of a VIE at the
time it becomes initially involved with the VIE and reconsiders that conclusion
as required. Investments and redemptions (either by the Company, related parties
of the Company or third parties) or amendments to the governing documents of the
respective entity may affect an entity's status as a VIE or the determination of
the primary beneficiary.

Entities that do not qualify as VIEs are assessed for consolidation as voting
interest entities ("VOEs") under the voting interest model.  The Company
evaluates whether the entity should be evaluated under the guidance for
partnerships and similar entities, or corporations, and consolidates those
entities it controls through a majority voting interest or other means.  If the
Company is the general partner or managing member it generally will not be
required to consolidate a VOE.

The Company records noncontrolling interests in consolidated Investment
Partnerships for which the Company’s ownership is less than 100%.

See Note E, Investment Partnerships and Other Entities in the consolidated
financial statements for additional information.

Investments in Partnerships and Affiliates

The Company is general partner or co-general partner of various managed funds.
We also have investments in unaffiliated partnerships, offshore funds and other
entities (collectively, "investments in partnerships and affiliates"). The
Company accounts for its investments in partnerships and affiliates under the
equity method. Substantially all of the Company's equity method investees are
entities that record their underlying investments at fair value and included in
investments in partnerships. Therefore, under the equity method of accounting,
the Company's share of the investee's underlying net income predominantly
represents fair value adjustments in the investments held by the equity method
investees. The Company's share of the investee's underlying net income or loss
is based upon the most currently available information and is recorded as net
gain from investments on the consolidated statements of income. Capital
contributions are recorded as an increase in investments when paid, and
withdrawals and distributions are recorded as reductions of the investments when
received. Depending on the terms of the investment, the Company may be
restricted as to the timing and amounts of withdrawals.

Income Taxes

For purposes of the preparation of the consolidated financial statements, the
provision for income taxes is computed using the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
consolidated financial statements. Under this method deferred tax assets and
liabilities are recorded for temporary differences between the tax basis of
assets and liabilities and the reported amounts on the consolidated financial
statements using the statutory tax rates in effect for the year when the
reported amount of the asset or liability is expected to be recovered or
settled, respectively. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the results of operations in the period
that includes the enactment date. A valuation allowance is recorded to reduce
the carrying values of deferred tax assets to the amount that is more likely
than not to be realized. For each tax position taken or expected to be taken in
a tax return, the Company determines whether it is more likely than not that the
position will be sustained upon examination based on the technical merits of the
position, including resolution of any related appeals or litigation. A tax
position that meets the more likely than not recognition threshold is measured
to determine the amount of benefit to recognize. The tax position is measured at
the largest amount of benefit that is greater than 50% likely of being realized
upon settlement. The Company recognizes the accrual of interest on uncertain tax
positions and penalties in the income tax provision on the consolidated
statements of income.

Recent Accounting Developments

See Note B, Significant Accounting Policies – Recent Accounting Developments, in
the consolidated financial statements.

Seasonality and Inflation

We do not believe that our operations are subject to significant seasonal
fluctuations. We do not believe inflation will significantly affect our
compensation costs, as they are substantially variable in nature. The rate of
inflation may affect certain other expenses, however, such as information
technology and occupancy costs. To the extent inflation results in rising
interest rates and has other effects upon the securities markets, it may
adversely affect our financial position and results of operations by reducing
our AUM, revenues or otherwise.

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