NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS:
Westwood Holdings Group, Inc. (“Westwood”, “the Company”, “we”, “us” or “our”) was incorporated under the laws of the State of Delaware on December 12, 2001. Westwood manages investment assets and provides services for its clients through its wholly-owned subsidiaries, Westwood Management Corp. and Westwood Advisors, L.L.C. (referred to hereinafter together as “Westwood Management”), Westwood Trust and Westwood International Advisors Inc. (“Westwood International Advisors”). On July 27, 2020, Westwood’s Board of Directors approved the liquidation of Westwood International Advisors, which occurred effective September 30, 2020.
Westwood Management provides investment advisory services to institutional clients, a family of mutual funds called the Westwood Funds®, other mutual funds, individual investors and clients of Westwood Trust. Prior to its liquidation, our wholly owned subsidiary, Westwood International Advisors, provided investment advisory services to institutional clients, the Westwood Funds®, other mutual funds, the UCITS Fund (which was liquidated in June 2020), individual investors and clients of Westwood Trust. Westwood Trust provides trust and custodial services and participation in self-sponsored common trust funds (“CTFs”) to institutions and high net worth individuals. Revenue is largely dependent on the total value and composition of assets under management ("AUM"). Accordingly, fluctuations in financial markets and in the composition of AUM impact our revenues and results of operations.
Westwood Management is registered with the Securities and Exchange Commission ("SEC") as an investment advisor ("RIA") under the Investment Advisers Act of 1940. Westwood Trust is chartered and regulated by the Texas Department of Banking.
As a result of the liquidation and closures of Westwood International Advisors and our Toronto office, in 2020 we recognized $0.5 million of severance expense, $0.3 million of lease impairment expense and $0.1 million of vendor contract related costs, offset by $1.3 million restricted stock forfeitures. The severance expense and restricted stock forfeitures were recognized within "Employee compensation and benefits," the lease impairment expense was recognized within "General and administrative," and the vendor contract costs were recognized within "Information technology" on the Consolidated Statements of Comprehensive Income (Loss).
Additionally, we repatriated previously undistributed income to the United States from Canada and incurred $1.1 million of withholding taxes (net of U.S. federal tax deduction). The withholding taxes were recognized in "Income tax expense" on the Consolidated Statements of Comprehensive Income (Loss).
Divestiture of our Omaha Operations
On September 6, 2017, we entered into an agreement to sell the Omaha-based component of our Wealth Management business. The sale closed on January 12, 2018. We received proceeds of $10.0 million, net of working capital requirements, and recorded a $0.5 million gain on the sale, which is included as “Gain on sale of operations” on our Consolidated Statements of Comprehensive Income (Loss). The sale reduced our goodwill and intangible assets, but did not have a material impact on our Consolidated Balance Sheets. The following table presents cash proceeds received and net assets sold (in thousands):
|
|
|
|
|
|
Cash Proceeds
|
$
|
10,013
|
|
Net assets sold:
|
|
Accounts receivable
|
99
|
|
Other current assets
|
112
|
|
Goodwill
|
7,340
|
|
Intangible assets, net
|
2,170
|
|
Property and equipment, net
|
18
|
|
Accounts payable and accrued liabilities
|
(241)
|
|
Other liabilities
|
(9)
|
|
Gain on sale of operations
|
$
|
524
|
|
The component was reported within both our Advisory and Trust segments. The sale did not represent a major strategic shift in our business and did not qualify for discontinued operations reporting.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of Westwood and its subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
We assess each legal entity that we manage to determine whether consolidation is appropriate at the onset of the relationship. We first determine whether the entity is a variable interest entity (“VIE”), or a voting interest entity (“VOE”), under GAAP and whether we have a controlling financial interest in the entity. Assessing whether or not an entity is a VOE or VIE and if it requires consolidation involves judgment and analysis. Factors considered in this assessment include, but are not limited to, the legal organization of the entity, our equity ownership and contractual involvement with the entity and any related party or de facto agent implications of our involvement with the entity. We reconsider whether entities are a VIE or VOE whenever contractual arrangements change, the entity receives additional equity or returns equity to its investors or changes in facts and circumstances occur that change the investors’ abilities to direct the activities of the entity.
A VIE is an entity in which (i) the total equity investment at risk is not sufficient to enable the entity to finance its activities without subordinated financial support, (ii) the at-risk equity holders, as a group, lack the characteristics of a controlling financial interest or (iii) the entity is structured with disproportionate voting rights, and substantially all of the activities are conducted on behalf of an investor with disproportionately few voting rights. That is, the at-risk equity holders do not have the obligation to absorb significant losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity’s economic performance. An enterprise must consolidate all VIEs of which it is the primary beneficiary. We determine if a sponsored investment meets the definition of a VIE by considering whether the fund’s equity investment at risk is sufficient to finance its activities without additional subordinated financial support and whether the fund’s at-risk equity holders absorb any losses, have the right to receive residual returns and have the right to direct the activities of the entity most responsible for the entity’s economic performance. The primary beneficiary of a VIE is defined as the party that, considering the involvement of related parties and de facto agents, has (i) the power to direct the activities of the VIE that most significantly affect its economic performance and (ii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. This evaluation is updated on a continuing basis.
A VOE is an entity that is outside the scope of the guidance for VIEs. Consolidation of a VOE is required when a reporting entity owns a controlling financial interest in a VOE. Ownership of a majority of the voting interests is the usual condition for a controlling financial interest.
We evaluated (i) our relationship as sponsor of the Common Trust Funds (“CTFs”) and managing member of the private equity funds Westwood Hospitality Fund I, LLC and Westwood Technology Opportunities Fund I, LP (collectively the “Private Funds”), (ii) our advisory relationships with the Westwood Funds®, and (iii) our investments in InvestCloud and Charis discussed in Note 5 “Investments” (“Private Equity”) to determine whether each of these entities is a variable interest entity (“VIE”) or voting ownership entity (“VOE”).
Based on our analyses, we determined that the CTFs and Private Funds were VIEs, as the at-risk equity holders do not have the ability to direct the activities that most significantly impact the entities' economic performance, and the Company and its representatives have a majority control of the entities' respective boards of directors and can influence the respective entities' management and affairs.
Based on our analyses, we determined the Westwood Funds® and Private Equity (i) have sufficient equity at risk to finance the entities' activities independently, (ii) have the obligation to absorb losses, the right to receive residual returns and the right to direct the activities of the entities that most significantly impact the entities' economic performance and (iii) are not structured with disproportionate voting rights.
Based on our analyses of our investments in these entities for the periods ending December 31, 2020 and 2019, we have not consolidated the CTFs or Private Funds under the VIE method or the Westwood Funds® or Private Equity under the VOE method.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash and cash equivalents consist of money market accounts and other short-term, highly liquid investments with maturities of three months or less, other than pooled investment vehicles that are considered investments. We maintain some cash and cash equivalents balances with financial institutions that are in excess of Federal Deposit Insurance Corporation insurance limits. The Company has not experienced losses on uninsured cash accounts.
Accounts Receivable
Accounts receivable represents balances arising from services provided to customers and are recorded on an accrual basis, net of any allowance for doubtful accounts. Accounts receivable are written off when they are determined to be uncollectible. Any allowance for doubtful accounts is estimated based on the Company’s historical amounts written off, existing conditions in the industry, and the financial stability of the customer. The majority of our accounts receivable balances consist of advisory and trust fees receivable from customers that we believe are, and have experienced to be, fully collectible. Accordingly, our Consolidated Financial Statements include neither an allowance for bad debt, nor bad debt expense.
Investments
With the exception of our investment in Charis, which is discussed below under "Fair Value of Financial Instruments", our investments that are measured at fair market value are classified as trading securities and are carried at quoted market values on the accompanying Consolidated Balance Sheets. Net unrealized holding gains or losses on investments classified as trading securities are reflected as a component of other revenues. We measure realized gains and losses on investments using the specific identification method.
For an investment without a readily determinable fair value, the Company has elected to apply the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes. The Company will reassess whether such an investment qualifies for the measurement alternative at each reporting period. In evaluating an investment for impairment or observable price changes, we will use inputs including recent financing events, as well as other available information regarding the investee's historical and forecasted performance.
Fair Value of Financial Instruments
We determined the estimated fair values of our financial instruments using available information. The fair value amounts discussed in Notes 5 “Investments” and 6 “Fair Value of Financial Instruments” are not necessarily indicative of either the amounts realizable upon disposition of these instruments or of our intent or ability to dispose of these assets. The estimated fair value of cash and cash equivalents, accounts receivable, prepaid income taxes, other current assets, accounts payable and accrued liabilities, dividends payable, compensation and benefits payable and income taxes payable approximates their carrying value due to their short-term maturities. The carrying amount of investments designated as “trading” securities, primarily U.S. Government and Government agency obligations, money market funds, equity funds, equities and exchange-traded bond funds, equals fair value based on prices quoted in active markets and, with respect to funds, the reported net asset value (“NAV”) of the shares held. Market values of our money market holdings generally do not fluctuate.
Our investment in Westwood Hospitality Fund I, LLC is measured at fair value using NAV.
Our investment in Charis is measured at fair value on a recurring basis using a market approach based on a price to tangible book value multiple that is determined to be reasonable in the current environment, or market transactions. Management believes this valuation methodology is consistent with the banking industry and will reevaluate our methodology and inputs on a quarterly basis.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable assets at the date of acquisition. Goodwill is tested at least annually for impairment.
We test more frequently if indicators are present or changes in circumstances suggest that impairment may exist. These indicators include declines in revenues, earnings or cash flows, or the development of a material adverse change in the business climate. We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, which is referred to as a component. We have identified two reporting units, which are consistent with our reporting segments: Advisory and Trust. The Company is not required to calculate the fair value of a reporting unit unless we determine that it is more likely than not that its fair value is less than the carrying amount. We assess goodwill for impairment using either a qualitative or quantitative assessment. The qualitative assessment includes consideration of the current trends in the industry in which we operate, macroeconomic conditions and recent financial performance of our reporting units. The quantitative analysis requires a comparison of each reporting unit’s carrying value to the fair value of the respective unit. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The fair value of each reporting unit is estimated using a market multiple approach and an income approach.
During the third quarter of 2020 we completed our annual goodwill impairment assessment. Following a sustained decline in the Company's market capitalization, we determined that the entire goodwill related to our Advisory segment was impaired, and recorded impairment charges of $3.4 million to "Impairment expense" on the Consolidated Statements of Comprehensive Income (Loss). As part of our evaluation, we determined the fair value of each of our reporting units using a weighted average approach of the market and income approaches. As part of this current assessment, we determined that an increase in the discount rate (from the prior assessment) applied in the valuation was required to align with market-based assumptions. The higher discount rate, in conjunction with revised long-term projections, resulted in a lower fair value of the Advisory segment.
There was no goodwill impairment in the Trust segment, nor were there any goodwill impairments recorded during 2018 or 2019.
Our intangible assets represent the acquisition date fair value of the acquired client relationships, trade names and the cost of internally-developed software, each of which is reflected net of amortization. In valuing these assets, we made significant estimates regarding their useful lives, growth rates and potential attrition. We periodically review our intangible assets for events or circumstances that would indicate impairment. See Note 10 “Goodwill and Other Intangible Assets.”
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation of furniture and equipment is provided over the estimated useful lives of the assets (from 3 to 7 years), and depreciation on leasehold improvements is provided over the lesser of the estimated useful life or lease term using the straight-line method. We capitalize leasehold improvements, furniture and fixtures, computer hardware and most office equipment purchases.
Revenue Recognition
Revenues are recognized when the performance obligation (the investment management and advisory or trust services provided to the client) defined by the investment advisory or sub-advisory agreement is satisfied. For each performance obligation, we determine at contract inception whether the revenue satisfies over time or at a point in time. Our revenues from a contract asset related to wealth management software, and its implementation, are recognized over time, and all other revenues are recognized at a point in time. We derive our revenues from investment advisory fees, trust fees and other sources of revenues. Advisory and Trust fees are calculated based on a percentage of AUM and the performance obligation is realized over the then-current calendar quarter. Once clients receive our investment advisory services we have an enforceable right to payment.
Incremental costs to obtain a contract are eligible to be capitalized if the costs are expected to be recovered over the service period. We incur certain incremental costs in obtaining new Trust business and continually evaluate whether costs should be capitalized and amortized over the expected period of benefit of the asset. Certain costs used to fulfill a contract such as the distribution services utilized to sell our Westwood Funds® are expensed as incurred. We recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
Stock-Based Compensation
We have issued restricted stock to certain U.S. employees and Board of Directors in accordance with our Seventh Amended and Restated Westwood Holdings Group, Inc. Stock Incentive Plan (the “Plan”). We account for stock-based compensation in accordance with ASC 718, Compensation-Stock Compensation and adopted Accounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation: Improvements to Employee Share-Based Payment Accounting effective January 1, 2017.
Under ASC 718, stock-based compensation expense reflects the fair value of stock-based awards measured at grant date and is recognized over the relevant service period. We expense the fair value of stock-based compensation awards granted to our employees and directors in our Consolidated Financial Statements on a straight-line basis over the period that services are required to be provided in exchange for the award (“requisite service period”), which is typically the period over which the award vests. Stock-based compensation is recognized only for awards that vest. We measure the fair value of compensation cost related to restricted stock awards based on the closing market price of our common stock on the grant date. For performance-based share awards, we assess actual performance versus the predetermined performance goals and record compensation expense once we conclude it is probable that we will meet the performance goals required to vest the applicable performance-based awards.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Share Award Plan of Westwood Holdings Group, Inc. for Service Provided in Canada to its Subsidiaries (the “Canadian Plan”) provided compensation in the form of common stock for services performed by employees of Westwood International Advisors, prior to its 2020 closure. We recorded compensation costs for these awards on a straight-line basis over the vesting period once we determined it was probable that the award would be earned. Awards expected to be settled in shares were funded into a trust pursuant to an established Canadian employee benefit plan. Generally, the Canadian trust subsequently acquired Westwood common shares in market transactions and held such shares until the shares were vested and distributed, or forfeited. Shares held in the trust were shown on our Consolidated Balance Sheet as treasury shares. Until shares were acquired by the trust, we recorded compensation costs and measured the liability as a cash-based award, which was included in “Compensation and benefits payable” on our Consolidated Balance Sheets. For the year ended December 31, 2020, there was no compensation expense recorded for these awards. For the years ended December 31, 2019 and 2018, the compensation expense recorded for these awards was $0.2 million and $0.1 million, respectively. When the number of shares related to an award was determinable, the award became an equity award accounted for in a manner similar to restricted stock, which is described in Note 7 “Employee Benefits.”
Currency Translation and Re-measurement
Assets and liabilities of Westwood International Advisors, our non-U.S. dollar functional currency subsidiary, are translated at exchange rates as of applicable reporting dates. The gains and losses resulting from translating non-U.S. dollar functional currency into U.S. dollars are recorded through other comprehensive income (loss).
Following the closure and liquidation of Westwood International Advisors, we reclassified foreign currency translation adjustments of $4.2 million from accumulated other comprehensive income (loss) to net income (loss) in the year ended December 31, 2020.
Revenue and expense transactions are recorded at the rates of exchange prevailing on the dates of the transactions. Gains and losses resulting from transactions in foreign currencies are included in “(Gain) loss on foreign currency transactions” in our Consolidated Statements of Comprehensive Income (Loss). For the year ended December 31, 2020, we recorded a gain of $1.2 million, for the year ended December 31, 2019, we recorded a loss of $1.9 million, and for the year ended December 31, 2018, we recorded a gain of $2.8 million.
Income Taxes
We file a U. S. federal income tax return as a consolidated group for Westwood and its U.S.-based subsidiaries. We file a Canadian income tax return for Westwood International Advisors. Deferred income tax assets and liabilities are determined based on temporary differences between the financial statements and income tax bases of assets and liabilities as measured at enacted income tax rates.
Deferred income tax expense is generally the result of changes in deferred tax assets and liabilities. Deferred taxes relate primarily to incentive compensation and stock-based compensation expense. We record net deferred tax assets to the extent we believe such assets will more likely than not be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event we were to determine that we would not be able to realize our deferred income tax assets in the future, we would record a valuation allowance. No such valuation allowance has been recorded in our Consolidated Financial Statements.
We account for uncertain tax positions by recognizing the impact of a tax position in our Consolidated Financial Statements when we believe it is more likely than not that the tax position would not be sustained upon examination by the appropriate tax authority based on the merits of the position. We include penalties and interest on income-based taxes, if any, in the “General and administrative” line on our Consolidated Statements of Comprehensive Income (Loss). See Note 8 “Income Taxes.”
Recent Accounting Pronouncements
Recently Adopted
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. The purpose of this amendment is to simplify the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the previous two-step impairment test. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the prior requirement to calculate a goodwill impairment charge using Step 2, which requires an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its carrying amount. The amendments in this ASU are effective for
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
fiscal years and interim periods beginning after December 15, 2019. We adopted this ASU as of January 1, 2020, and there was no significant impact on our Consolidated Financial Statements. Information regarding the impairment of goodwill related to our Advisory segment is included in Note 10 "Goodwill and Other Intangible Assets."
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement. The purpose of this amendment is to modify, remove and add certain disclosure requirements for fair value measurements. Under ASU 2018-13, entities are required to disclose the amount of total gains or losses recognized in other comprehensive income (loss) attributable to assets and liabilities categorized within Level 3 of the fair value hierarchy. The ASU includes an incremental requirement about significant unobservable inputs for Level 3 fair value measurements. The requirement to disclose reasons for transfers between Level 1 and Level 2 was removed. Various requirements for Level 3 disclosure were also modified. The amendments in this ASU are effective for all entities for fiscal years and interim periods beginning after December 15, 2019. We adopted this ASU as of January 1, 2020, and further information is included in Note 6 "Fair Value Measurements." There was no significant impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The purpose of this amendment is to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The amendments in this update are effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this ASU as of January 1, 2020 under the prospective transition method. Incremental costs related to hosting arrangements will be recorded on the Consolidated Balance Sheets in either other current or other long-term assets, instead of intangible assets, net. Related amortization will be recorded in information technology expense on the Consolidated Statements of Comprehensive Income (Loss). Amortization of previously capitalized costs was recorded in general and administrative expense.
In May 2019, the FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. The purpose of this amendment is to amend ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, to allow companies to irrevocably elect, upon adoption of ASU 2016-13, the fair value option on financial instruments that were previously recorded at amortized cost and are within the scope of ASC 326-20, Financial Instruments-Credit Losses: Amortization Cost, if the instruments are eligible for the fair value option under Accounting Standards Codification 825 - Financial Instruments. The fair value option election does not apply to held-to-maturity debt securities. The amendments in this update are effective for public companies for fiscal years beginning after December 15, 2019, including interim periods within that fiscal year. We adopted this ASU as of January 1, 2020, and it did not have a significant impact on our Consolidated Financial Statements.
Not Yet Adopted
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects of the income tax accounting guidance, including interim-period accounting for enacted changes in tax law. ASU 2019-12 is effective for public business entities for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, and early adoption is permitted. We do not expect the amendment to have a material impact on our Consolidated Financial Statements, and we plan to adopt the standard within the required time frame.
3. REVENUE
Advisory Fee Revenues
Our advisory fees are generated by Westwood Management and Westwood International Advisors (prior to its closure, effective September 30, 2020), for managing client accounts under investment advisory and sub-advisory agreements. Advisory fees are typically calculated based on a percentage of AUM and are paid in accordance with the terms of the agreements. Advisory fees are paid quarterly in advance based on AUM on the last day of the preceding quarter, quarterly in arrears based on AUM on the last day of the quarter just ended or are based on a daily or monthly analysis of AUM for the stated period. We recognize advisory fee revenues as services are rendered. Since our advance paying clients' billing periods coincide with the calendar quarter to which such payments relate, revenue is recognized within the quarter and our Consolidated Financial Statements contain no deferred advisory fee revenues. Advisory clients typically consist of institutional and mutual fund accounts.
Institutional investors include separate accounts of (i) corporate pension and profit sharing plans, public employee retirement funds, Taft-Hartley plans, endowments, foundations and individuals; (ii) subadvisory relationships where Westwood
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
provides investment management services for funds offered by other financial institutions; (iii) pooled investment vehicles, including the UCITS Fund and collective investment trusts; and (iv) managed account relationships with brokerage firms and other registered investment advisors that offer Westwood products to their customers. The UCITS Fund was liquidated in June 2020.
Mutual funds include the Westwood Funds®, a family of mutual funds for which Westwood Management serves as advisor. These funds are available to individual investors, as well as offered as part of our investment strategies for institutional investors and wealth management accounts.
Arrangements with Performance-Based Obligations
A limited number of our advisory clients have a contractual performance-based fee component in their contracts, which generates additional revenues if we outperform a specified index over a specific period of time, and a limited number of our mutual fund offerings have fees that generate additional revenues if we outperform specified indices over specific periods of time.
The revenue is based on future market performance and is subject to factors outside our control. We cannot conclude that a significant reversal in the cumulative amount of revenue recognized will not occur during the measurement period, and therefore the revenue is recorded at the end of the measurement period when the performance obligation has been satisfied.
Trust Fee Revenues
Our trust fees are generated by Westwood Trust pursuant to trust or custodial agreements. Trust fees are separately negotiated with each client and are generally based on a percentage of AUM. Westwood Trust also provides trust services to a small number of clients on a fixed fee basis. The fees for most of our trust clients are calculated quarterly in arrears, based on a daily average of AUM for the quarter, or monthly, based on the month-end value of AUM. Since billing periods for most of Westwood Trust’s clients coincide with the calendar quarter, revenue is fully recognized within the quarter and our Consolidated Financial Statements contain no deferred advisory fee revenues.
Other Revenues
Following the execution of a $2.6 million contract with a service provider, we recognized contract revenue of $0.4 million for the year ended December 31, 2020, which was recognized for financial reporting purposes over time. We estimate contract revenue based upon the expected value method, which requires significant judgment regarding probabilities of consideration amounts, variable considerations and constraints. We did not recognize any contract revenue for the years ended December 31, 2018 or 2019.
Revenue Disaggregated
Sales taxes are excluded from revenues. The following table presents our revenue disaggregated by account type (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Advisory Fees:
|
|
|
|
|
|
|
Institutional
|
|
$
|
26,701
|
|
|
$
|
37,289
|
|
|
$
|
59,345
|
|
Mutual Funds
|
|
10,857
|
|
|
19,288
|
|
|
29,792
|
|
Wealth Management
|
|
470
|
|
|
456
|
|
|
230
|
|
Performance-based
|
|
2,808
|
|
|
764
|
|
|
2,984
|
|
Trust Fees
|
|
23,563
|
|
|
25,483
|
|
|
28,953
|
|
Trust Performance-based
|
|
366
|
|
—
|
|
|
—
|
|
Other
|
|
346
|
|
|
799
|
|
|
996
|
|
Total revenues
|
|
$
|
65,111
|
|
|
$
|
84,079
|
|
|
$
|
122,300
|
|
We have clients in various locations around the world. The following table presents our revenue disaggregated by our clients' geographical locations (in thousands):
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2020
|
|
Advisory
|
|
Trust
|
|
Performance-based
|
|
Other
|
|
Total
|
Asia
|
|
$
|
696
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
696
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada
|
|
1,505
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,505
|
|
Europe
|
|
2,707
|
|
|
—
|
|
|
1,570
|
|
|
—
|
|
|
4,277
|
|
U.S.
|
|
33,120
|
|
|
23,563
|
|
|
1,604
|
|
|
346
|
|
|
58,633
|
|
Total
|
|
$
|
38,028
|
|
|
$
|
23,563
|
|
|
$
|
3,174
|
|
|
$
|
346
|
|
|
$
|
65,111
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
Advisory
|
|
Trust
|
|
Performance-based
|
|
Other
|
|
Total
|
Asia
|
|
$
|
1,639
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,639
|
|
Australia
|
|
591
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
591
|
|
Canada
|
|
2,740
|
|
|
—
|
|
|
—
|
|
|
282
|
|
|
3,022
|
|
Europe
|
|
3,703
|
|
|
—
|
|
|
764
|
|
|
—
|
|
|
4,467
|
|
U.S.
|
|
48,360
|
|
|
25,483
|
|
|
—
|
|
|
517
|
|
|
74,360
|
|
Total
|
|
$
|
57,033
|
|
|
$
|
25,483
|
|
|
$
|
764
|
|
|
$
|
799
|
|
|
$
|
84,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2018
|
|
Advisory
|
|
Trust
|
|
Performance-based
|
|
Other
|
|
Total
|
Asia
|
|
$
|
4,305
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,305
|
|
Australia
|
|
3,783
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,783
|
|
Canada
|
|
6,605
|
|
|
—
|
|
|
—
|
|
|
163
|
|
|
6,768
|
|
Europe
|
|
4,860
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,860
|
|
U.S.
|
|
69,814
|
|
|
28,953
|
|
|
2,984
|
|
|
833
|
|
|
102,584
|
|
Total
|
|
$
|
89,367
|
|
|
$
|
28,953
|
|
|
$
|
2,984
|
|
|
$
|
996
|
|
|
$
|
122,300
|
|
4. SEGMENT REPORTING:
We operate two segments: Advisory and Trust. These segments are managed separately based on the types of products and services offered and their related client bases. The Company’s segment information is prepared on the same basis that management uses to review the financial information for operational decision-making purposes. The Company's chief operating decision maker, our Chief Executive Officer, evaluates the performance of our segments based primarily on fee revenues and Economic Earnings. Westwood Holdings Group, Inc., the parent company of Advisory and Trust, does not have revenues and is the entity in which we record typical holding company expenses including employee compensation and benefits for holding company employees, directors’ fees and investor relations costs. All segment accounting policies are the same as those described in the summary of significant accounting policies. Intersegment balances that eliminate in consolidation have been applied to the appropriate segment.
Advisory
Our Advisory segment provides investment advisory services to (i) corporate pension and profit sharing plans, public employee retirement funds, Taft-Hartley plans, endowments, foundations and individuals, (ii) sub-advisory relationships where Westwood provides investment management services to the Westwood Funds®, funds offered by other financial institutions and funds offered by our Trust segment and (iii) pooled investment vehicles, including the UCITS Fund (liquidated in June 2020) and collective investment trusts. Westwood Management and Westwood International Advisors (prior to its closure, effective September 30, 2020), which provide investment advisory services to similar clients, are included in our Advisory segment.
Trust
Westwood Trust provides trust and custodial services and participation in common trust funds that it sponsors to institutions and high net worth individuals. Westwood Trust is included in our Trust segment.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Advisory
|
|
Trust
|
|
Westwood
Holdings
|
|
Eliminations
|
|
Consolidated
|
Year Ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Net fee revenues from external sources
|
|
$
|
40,836
|
|
|
$
|
23,929
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
64,765
|
|
Net intersegment revenues
|
|
2,338
|
|
|
263
|
|
|
—
|
|
|
(2,601)
|
|
|
—
|
|
Net interest and dividend revenue
|
|
35
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
Other revenue
|
|
311
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
311
|
|
Total revenues
|
|
43,520
|
|
|
24,192
|
|
|
—
|
|
|
(2,601)
|
|
|
65,111
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
322
|
|
|
1,656
|
|
|
664
|
|
|
—
|
|
|
2,642
|
|
Impairment expense
|
|
3,403
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,403
|
|
Other operating expenses
|
|
34,675
|
|
|
17,398
|
|
|
13,041
|
|
|
(2,601)
|
|
|
62,513
|
|
Total expenses
|
|
38,400
|
|
|
19,054
|
|
|
13,705
|
|
|
(2,601)
|
|
|
68,558
|
|
Unrealized losses on private investments
|
|
(311)
|
|
|
(222)
|
|
|
(178)
|
|
|
—
|
|
|
(711)
|
|
Investment income
|
|
552
|
|
|
52
|
|
|
—
|
|
|
—
|
|
|
604
|
|
Other income
|
|
—
|
|
|
—
|
|
|
135
|
|
|
—
|
|
|
135
|
|
Foreign currency translation adjustments to net income (loss) upon liquidation of a foreign subsidiary
|
|
—
|
|
|
—
|
|
|
(4,169)
|
|
|
—
|
|
|
(4,169)
|
|
Income (loss) before income taxes
|
|
5,361
|
|
|
4,968
|
|
|
(17,917)
|
|
|
—
|
|
|
(7,588)
|
|
Income tax expense (benefit)
|
|
3,456
|
|
|
1,977
|
|
|
(4,074)
|
|
|
—
|
|
|
1,359
|
|
Net income (loss)
|
|
$
|
1,905
|
|
|
$
|
2,991
|
|
|
$
|
(13,843)
|
|
|
$
|
—
|
|
|
$
|
(8,947)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
204,827
|
|
|
$
|
54,749
|
|
|
$
|
17,247
|
|
|
$
|
(127,671)
|
|
|
$
|
149,152
|
|
Segment goodwill
|
|
$
|
—
|
|
|
$
|
16,401
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,401
|
|
Expenditures for long-lived assets
|
|
$
|
20
|
|
|
$
|
24
|
|
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Net fee revenues from external sources
|
|
$
|
57,797
|
|
|
$
|
25,483
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
83,280
|
|
Net intersegment revenues
|
|
3,457
|
|
|
236
|
|
|
—
|
|
|
(3,693)
|
|
|
—
|
|
Net interest and dividend revenue
|
|
103
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
103
|
|
Other revenue
|
|
696
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
696
|
|
Total revenues
|
|
62,053
|
|
|
25,719
|
|
|
—
|
|
|
(3,693)
|
|
|
84,079
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
311
|
|
|
1,765
|
|
|
548
|
|
|
—
|
|
|
2,624
|
|
Other operating expenses
|
|
46,235
|
|
|
19,672
|
|
|
14,597
|
|
|
(3,693)
|
|
|
76,811
|
|
Total expenses
|
|
46,546
|
|
|
21,437
|
|
|
15,145
|
|
|
(3,693)
|
|
|
79,435
|
|
Unrealized gains on private investments
|
|
1,438
|
|
|
1,026
|
|
|
832
|
|
|
—
|
|
|
3,296
|
|
Investment income
|
|
1,017
|
|
|
298
|
|
|
3
|
|
|
—
|
|
|
1,318
|
|
Other income
|
|
—
|
|
|
—
|
|
|
144
|
|
|
—
|
|
|
144
|
|
Income (loss) before income taxes
|
|
17,962
|
|
|
5,606
|
|
|
(14,166)
|
|
|
—
|
|
|
9,402
|
|
Income tax expense (benefit)
|
|
4,308
|
|
|
1,459
|
|
|
(2,276)
|
|
|
—
|
|
|
3,491
|
|
Net income
|
|
$
|
13,654
|
|
|
$
|
4,147
|
|
|
$
|
(11,890)
|
|
|
$
|
—
|
|
|
$
|
5,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
242,854
|
|
|
$
|
51,274
|
|
|
$
|
24,732
|
|
|
$
|
(140,153)
|
|
|
$
|
178,707
|
|
Segment goodwill
|
|
$
|
3,403
|
|
|
$
|
16,401
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,804
|
|
Expenditures for long-lived assets
|
|
$
|
288
|
|
|
$
|
223
|
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
593
|
|
|
|
|
|
|
|
|
|
|
|
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Advisory
|
|
Trust
|
|
Westwood
Holdings
|
|
Eliminations
|
|
Consolidated
|
Year Ended December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
Net fee revenues from external sources
|
|
$
|
92,351
|
|
|
$
|
28,953
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121,304
|
|
Net intersegment revenues
|
|
6,973
|
|
|
238
|
|
|
—
|
|
|
(7,211)
|
|
|
—
|
|
Net interest and dividend revenue
|
|
708
|
|
|
202
|
|
|
—
|
|
|
—
|
|
|
910
|
|
Other revenue
|
|
53
|
|
|
33
|
|
|
—
|
|
|
—
|
|
|
86
|
|
Total revenues
|
|
100,085
|
|
|
29,426
|
|
|
—
|
|
|
(7,211)
|
|
|
122,300
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
276
|
|
|
1,764
|
|
|
499
|
|
|
—
|
|
|
2,539
|
|
Other operating expenses
|
|
48,970
|
|
|
25,467
|
|
|
16,597
|
|
|
(7,211)
|
|
|
83,823
|
|
Total expenses
|
|
49,246
|
|
|
27,231
|
|
|
17,096
|
|
|
(7,211)
|
|
|
86,362
|
|
Gain (loss) on sale of operations
|
|
(1)
|
|
|
(16)
|
|
|
541
|
|
|
—
|
|
|
524
|
|
Income (loss) before income taxes
|
|
50,838
|
|
|
2,179
|
|
|
(16,555)
|
|
|
—
|
|
|
36,462
|
|
Income tax expense (benefit)
|
|
12,032
|
|
|
572
|
|
|
(2,893)
|
|
|
—
|
|
|
9,711
|
|
Net income (loss)
|
|
$
|
38,806
|
|
|
$
|
1,607
|
|
|
$
|
(13,662)
|
|
|
$
|
—
|
|
|
$
|
26,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
230,565
|
|
|
$
|
64,196
|
|
|
$
|
19,240
|
|
|
$
|
(114,818)
|
|
|
$
|
199,183
|
|
Segment goodwill
|
|
$
|
3,403
|
|
|
$
|
16,401
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
19,804
|
|
Expenditures for long-lived assets
|
|
$
|
314
|
|
|
$
|
295
|
|
|
$
|
382
|
|
|
$
|
—
|
|
|
$
|
991
|
|
Geographical information
Refer to Note 3, “Revenue” for our revenue disaggregated by our clients' geographical location.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
(in thousands)
|
|
2020
|
|
2019
|
Property and equipment, net, by geographic area:
|
|
|
|
|
U.S.
|
|
$
|
3,186
|
|
|
$
|
4,095
|
|
Canada
|
|
—
|
|
|
57
|
|
Total Property and equipment, net
|
|
$
|
3,186
|
|
|
$
|
4,152
|
|
5. INVESTMENTS:
During 2018, we made a $5.4 million strategic investment in InvestCloud, which is included in “Investments” on our Consolidated Balance Sheets. This investment represents an equity interest in a private company without a readily determinable fair value. The Company has elected to apply the measurement alternative of cost minus impairment, if any, plus or minus changes resulting from observable price changes. Following observable price changes for this investment in the year ended December 31, 2019, we recorded a gain of $2.8 million in "Unrealized gains on private investments" on our Consolidated Statements of Comprehensive Income (Loss). As of December 31, 2020, there were no additional observable price changes or indicators of impairment for this investment.
In 2019 we made a $3.4 million strategic private equity investment in Charis, which is included in "Noncurrent investments at fair value" on our Consolidated Balance Sheets. In the year ended December 31, 2020, we recorded an unrealized loss of $0.5 million in "Unrealized gains (losses) on private investments" on our Consolidated Statements of Comprehensive Income (Loss), primarily as a result of the global macroeconomic effects of the COVID-19 pandemic. In the year ended December 31, 2019, we recorded a gain of $0.6 million in "Unrealized gains (losses) on private investments" following fair value increases resulting from market transactions on our Consolidated Statements of Comprehensive Income (Loss).
In 2019 we made a $0.3 million investment in Westwood Hospitality Fund I, LLC, a private investment fund. Our investment is included in “Noncurrent investments at fair value” on our Consolidated Balance Sheets, and it is measured at fair value on a recurring basis using net asset value (“NAV”) as a practical expedient.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
All other investments are carried at fair value on a recurring basis and are accounted for as trading securities.
Investments carried at fair value are presented in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair
Value
|
December 31, 2020:
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency obligations
|
|
$
|
65,132
|
|
|
$
|
2
|
|
|
$
|
(180)
|
|
|
$
|
64,954
|
|
Money market funds
|
|
4,003
|
|
|
—
|
|
|
—
|
|
|
4,003
|
|
Equity funds
|
|
90
|
|
|
—
|
|
|
(5)
|
|
|
85
|
|
Equities
|
|
288
|
|
|
94
|
|
|
—
|
|
|
382
|
|
Exchange-traded bond funds
|
|
115
|
|
|
3
|
|
|
—
|
|
|
118
|
|
Total trading securities
|
|
$
|
69,628
|
|
|
$
|
99
|
|
|
$
|
(185)
|
|
|
$
|
69,542
|
|
Private investment fund
|
|
250
|
|
|
—
|
|
|
(154)
|
|
|
96
|
|
Private equity
|
|
3,420
|
|
|
11
|
|
|
—
|
|
|
3,431
|
|
Total investments carried at fair value
|
|
$
|
73,298
|
|
|
$
|
110
|
|
|
$
|
(339)
|
|
|
$
|
73,069
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019:
|
|
|
|
|
|
|
|
|
U.S. Government and Government agency obligations
|
|
$
|
39,074
|
|
|
$
|
174
|
|
|
$
|
—
|
|
|
$
|
39,248
|
|
Money market funds
|
|
4,592
|
|
|
—
|
|
|
—
|
|
|
4,592
|
|
Equity funds
|
|
6,399
|
|
|
85
|
|
|
—
|
|
|
6,484
|
|
Total trading securities
|
|
$
|
50,065
|
|
|
$
|
259
|
|
|
$
|
—
|
|
|
$
|
50,324
|
|
Private investment fund
|
|
250
|
|
|
13
|
|
|
—
|
|
|
263
|
|
Private equity
|
|
3,420
|
|
|
555
|
|
|
—
|
|
|
3,975
|
|
Total investments carried at fair value
|
|
$
|
53,735
|
|
|
$
|
827
|
|
|
$
|
—
|
|
|
$
|
54,562
|
|
The following amounts, except for income tax amounts, are included in our Consolidated Statements of Comprehensive Income (Loss) under the headings “Other revenues, net," "Unrealized gains (losses) on private investments," or "Investment Income" for 2020 and 2019. For 2018, the following amounts are included under the heading "Other revenues, net" (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Realized gains
|
|
$
|
110
|
|
|
$
|
707
|
|
|
$
|
920
|
|
Realized losses
|
|
(116)
|
|
|
(122)
|
|
|
(121)
|
|
Net realized gains (losses)
|
|
$
|
(6)
|
|
|
$
|
585
|
|
|
$
|
799
|
|
Income tax expense from gains (losses)
|
|
$
|
(1)
|
|
|
$
|
123
|
|
|
$
|
168
|
|
Interest income – trading
|
|
$
|
786
|
|
|
$
|
894
|
|
|
$
|
620
|
|
Dividend income
|
|
$
|
101
|
|
|
$
|
283
|
|
|
$
|
290
|
|
Unrealized gains/(losses)
|
|
$
|
(1,056)
|
|
|
$
|
3,650
|
|
|
$
|
(737)
|
|
There were no corporate funds invested in Westwood Funds® as of December 31, 2020. $6.4 million of corporate funds were invested in Westwood Funds® as of December 31, 2019, which are included in “Investments, at fair value” on our Consolidated Balance Sheets. See Note 15 “Variable Interest Entities.”
6. FAIR VALUE MEASUREMENTS:
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and requires additional disclosures regarding certain fair value measurements. ASC 820 establishes a three-tier hierarchy for measuring fair value, as follows:
•Level 1 – quoted market prices in active markets for identical assets and liabilities
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
•Level 2 – inputs other than quoted prices that are directly or indirectly observable
•Level 3 – unobservable inputs where there is little or no market activity
Our strategic investment in InvestCloud discussed in Note 5 "Investments" is excluded from the recurring fair value table shown below, as we have elected to apply the measurement alternative for that investment.
The following table summarizes the values of our assets and liabilities as of the dates indicated within the fair value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV (1)
|
|
Total
|
As of December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Investments in trading securities
|
|
$
|
69,542
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
69,542
|
|
Private investment fund
|
|
—
|
|
|
—
|
|
|
—
|
|
|
96
|
|
|
96
|
|
Private equity
|
|
—
|
|
|
—
|
|
|
3,431
|
|
|
—
|
|
|
3,431
|
|
Total assets measured at fair value
|
|
$
|
69,542
|
|
|
$
|
—
|
|
|
$
|
3,431
|
|
|
$
|
96
|
|
|
$
|
73,069
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Investments in trading securities
|
|
$
|
50,324
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
50,324
|
|
Private investment fund
|
|
—
|
|
|
—
|
|
|
—
|
|
|
263
|
|
|
263
|
|
Private equity
|
|
—
|
|
|
—
|
|
|
3,975
|
|
|
—
|
|
|
3,975
|
|
Total assets measured at fair value
|
|
$
|
50,324
|
|
|
$
|
—
|
|
|
$
|
3,975
|
|
|
$
|
263
|
|
|
$
|
54,562
|
|
(1) Comprised of certain investments measured at fair value using NAV as a practical expedient. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented on our Consolidated Balance Sheets.
|
Our investment in Charis is included within Level 3 of the fair value hierarchy as we value that investment utilizing inputs not observable in the market. Our investment is measured at fair value on a recurring basis using a market approach based on a price to tangible book value multiple range that is determined to be reasonable in the current environment, or market transactions. Management believes this valuation methodology is consistent with the banking industry and we will reevaluate our methodology and inputs on a quarterly basis.
The following table summarizes the changes in Level 3 investments measured at fair value on a recurring basis for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
Beginning balance
|
$
|
3,975
|
|
|
$
|
—
|
|
Purchases
|
—
|
|
|
3,420
|
|
Unrealized gains (losses)
|
(544)
|
|
|
555
|
|
Ending balance
|
$
|
3,431
|
|
|
$
|
3,975
|
|
The December 31, 2020 private investment fair value of $3.4 million was valued using a market approach based on a price to tangible book value multiple, with unobservable book value multiples ranging from $1.20 to $1.80 per share, with a weighted average of $1.28 per share. Significant increases (decreases) in book value multiples in isolation would have resulted in a significantly higher (lower) fair value measurement.
7. EMPLOYEE BENEFITS:
Restricted Stock Awards
We have issued restricted shares to certain employees and non-employee directors. The Plan reserves shares of Westwood common stock for issuance to eligible employees, directors and consultants of Westwood or its subsidiaries in the form of restricted stock and stock options. In April 2020, stockholders approved an additional 350,000 shares to be authorized under the Plan, increasing the total number of shares issuable under the Plan (including predecessor plans to the Plan) to
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5,398,100 shares. In the event of a change in control of Westwood, the Plan contains provisions providing for the acceleration of the vesting of restricted stock. At December 31, 2020, approximately 684,000 shares remain available for issuance under the Plan.
The following table presents the total stock-based compensation expense recorded and the total income tax benefit recognized for stock-based compensation arrangements for the years indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Service condition restricted stock expense
|
|
$
|
6,348
|
|
|
$
|
7,240
|
|
|
$
|
9,941
|
|
Performance-based restricted stock expense
|
|
1,280
|
|
|
2,388
|
|
|
4,760
|
|
Restricted stock expense under the Plan
|
|
7,628
|
|
|
9,628
|
|
|
14,701
|
|
Canadian Plan restricted stock expense
|
|
(927)
|
|
|
677
|
|
|
582
|
|
Total stock-based compensation expense
|
|
$
|
6,701
|
|
|
$
|
10,305
|
|
|
$
|
15,283
|
|
Total income tax benefit recognized related to stock-based compensation
|
|
$
|
953
|
|
|
$
|
1,932
|
|
|
$
|
3,592
|
|
Restricted Stock
Under the Plan, we have granted to certain employees and non-employee directors restricted stock subject to service conditions and to certain key employees restricted stock subject to both service and performance conditions. We accrue dividends on unvested restricted stock, which are due and payable upon vesting of restricted stock. Accrued dividends coming due within the next twelve months are included in “Dividends payable” on the Consolidated Balance Sheets, with the remaining noncurrent portion of accrued dividends included in “Accrued dividends” on the Consolidated Balance Sheets. At December 31, 2020, we had $0.8 million and $0.5 million in Dividends payable and Accrued dividends, respectively, and the Dividends payable were related to unvested restricted stock. At December 31, 2019, we had $7.4 million and $1.3 million in Dividends payable and Accrued dividends, respectively.
As of December 31, 2020, there was approximately $10.3 million of unrecognized compensation cost for restricted stock grants under the Plan, which we expect to recognize over a weighted-average period of 2.2 years. In order to satisfy tax liabilities that employees will owe on their shares that vest, we may withhold a sufficient number of vested shares from employees on the date vesting occurs to cover minimum tax withholding requirements. We withheld 43,045 shares in 2020 for this purpose. Our two types of restricted stock grants under the Plan are discussed below.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted Stock Subject Only to a Service Condition
For the years ended December 31, 2020, 2019 and 2018, we granted restricted stock to certain employees and non-employee directors. Employee shares generally vest over four years and Director shares vest over one year. We calculate compensation cost for restricted stock grants using the fair market value of our common stock at the date of grant, the number of shares issued and an adjustment for restrictions on dividends. This compensation cost is amortized on a straight-line basis over the applicable vesting period.
The following table details the status and changes in our restricted stock grants that are subject only to a service condition for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair
Value
|
Non-vested, January 1, 2020
|
|
396,598
|
|
|
$
|
48.31
|
|
Granted
|
|
262,373
|
|
|
27.39
|
|
Vested
|
|
(140,974)
|
|
|
53.06
|
|
Forfeited
|
|
(68,394)
|
|
|
38.21
|
|
Non-vested, December 31, 2020
|
|
449,603
|
|
|
$
|
36.15
|
|
The following table shows the weighted-average grant date fair value for shares granted and the total fair value of shares vested during the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Weighted-average grant date fair value
|
|
$
|
27.39
|
|
|
$
|
38.64
|
|
|
$
|
55.92
|
|
Fair value of shares vested (in thousands)
|
|
$
|
7,480
|
|
|
$
|
9,273
|
|
|
$
|
11,189
|
|
Restricted Stock Subject to Service and Performance Conditions
Under the Plan, certain key employees were provided agreements for grants of restricted shares that vest over multiple year periods subject to achieving annual performance goals established by the Compensation Committee of Westwood’s Board of Directors. Each year the Compensation Committee establishes specific goals for that year’s vesting of the restricted shares. The date that the Compensation Committee establishes annual goals is considered to be the grant date and the fair value measurement date to determine expense on the shares that are likely to vest. The vesting period ends when the Compensation Committee formally approves the performance-based restricted stock vesting based on the specific performance goals from the Company’s audited consolidated financial statements. If a portion of the performance-based restricted shares does not vest, no compensation expense is recognized for that portion and any previously recognized compensation expense related to shares that do not vest is reversed.
The following table details the status and changes in our restricted stock grants subject to service and performance conditions for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted Average
Grant Date Fair
Value
|
Non-vested, January 1, 2020
|
|
80,975
|
|
|
$
|
49.73
|
|
|
|
|
|
|
Vested
|
|
(35,275)
|
|
|
55.11
|
|
|
|
|
|
|
Non-vested, December 31, 2020
|
|
45,700
|
|
|
$
|
45.58
|
|
The following table shows the weighted-average grant date fair value for shares granted and the total fair value of shares vested during the years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Weighted-average grant date fair value
|
|
$
|
—
|
|
|
$
|
37.90
|
|
|
$
|
51.85
|
|
Fair value of shares vested (in thousands)
|
|
$
|
1,944
|
|
|
$
|
4,515
|
|
|
$
|
5,485
|
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Canadian Plan
As discussed in Note 2, the Canadian Plan provided compensation in the form of common stock for services performed by employees of Westwood International Advisors. On July 27, 2020, Westwood’s Board of Directors approved the closure of Westwood International Advisors, effective September 30, 2020.
During the year ended December 31, 2020, the trust formed pursuant to the Canadian Plan purchased 27,474 Westwood common shares in the open market for approximately $0.7 million. The subsequent closure of the Westwood International Advisors office resulted in forfeitures of 56,625 shares, which reduced the Company's expenses by $1.3 million in the year ended December 31, 2020. As of December 31, 2020, there is no unrecognized compensation cost related to restricted stock grants under the Canadian Plan.
Mutual Fund Share Incentive Awards
We may grant mutual fund incentive awards, which are annual bonus awards based on our mutual funds achieving specific performance goals, to specific employees. Awards granted are notionally credited to a participant account maintained by us that contains a number of mutual fund shares equal to the award amount divided by the net closing value of a fund share on the date the amount is credited to the account. We maintain the award in a corporate investment account until vesting. The investment may increase or decrease based on changes in the value of the mutual fund shares awarded, including reinvested income from the mutual funds during the vesting period. Unvested mutual fund awards are included under "Investments, at fair value" on our Consolidated Balance Sheets.
Awards vest after approximately two years of service following the year in which the participant earned the award. We begin accruing a liability for mutual fund incentive awards when we believe it is probable that the award will be earned and record expense for these awards over the service period of the award, which is three years. During the year in which the amount of the award is determined, we record expense based on the expected value of the award. After the award is earned, we record expense based on the value of the shares awarded and the percentage of the vesting period that has elapsed. Our liability under these awards may increase or decrease based on changes in the value of the mutual fund shares awarded, including reinvested income from the mutual funds during the vesting period. Upon vesting, participants receive the value of the mutual fund share awards adjusted for earnings or losses attributable to the underlying mutual funds. For the years ended December 31, 2020, and 2019, mutual fund share incentive award activity was insignificant. For the year ended December 31, 2018, we recorded expense of $0.3 million related to mutual fund share incentive awards. As of both December 31, 2020 and 2019, we had an accrued liability of $0.1 million related to mutual fund incentive awards.
Deferred Share Units
We had a deferred share unit (“DSU”) plan for employees of Westwood International Advisors. A DSU is an award linked to the value of Westwood’s common stock and is represented by a notional credit to a participant account. The value of a DSU is initially equal to the value of a share of our common stock. DSUs vested 50%, 25% and 25% after two, three and four years of service, respectively, and became fully vested after four years of service. The liability for these units is settled in cash upon termination of the participant’s service. We record expense for DSUs based on the number of units vested on a straight line basis, which may increase or decrease based on changes in the price of our common shares, and will increase for additional units received from dividends declared on our shares. As of December 31, 2020, we had an accrued liability of $0.3 million for 18,261 deferred share units related to the 2012 to 2018 awards issued from 2013 to 2019, which is based on the $14.50 per share closing price of our common stock on the last trading day of the year ended December 31, 2020. As of December 31, 2019, we had an accrued liability of $0.5 million for 17,401 deferred share units related to the 2012 to 2018 awards issued from 2013 to 2019, which was based on the $29.62 per share closing price of our common stock on the last trading day of the year ended December 31, 2019.
Benefit Plans
Westwood has a defined contribution and profit-sharing plan that was adopted in July 2002 and covers substantially all of our employees. Discretionary employer profit-sharing contributions become fully vested after four years of service by the participant. For U.S. employees, Westwood provides a 401(k) match of up to 6% of eligible compensation. For Westwood International Advisors employees, Westwood provided a Registered Retirement Savings Plan match of up to 6% of eligible compensation. Westwood International Advisors was closed effective September 30, 2020. Both retirement plan matching contributions vest immediately.
The following table displays our profit-sharing and retirement plan contributions for the periods presented (in thousands):
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Profit-sharing contributions, net
|
|
$
|
(233)
|
|
|
$
|
31
|
|
|
$
|
926
|
|
Retirement plan matching contributions
|
|
1,410
|
|
|
1,597
|
|
|
1,604
|
|
8. INCOME TAXES:
Income Tax Provision
Income (loss) before income taxes by jurisdiction was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
U.S.
|
$
|
(5,861)
|
|
|
$
|
10,237
|
|
|
$
|
21,250
|
|
Canada
|
(1,727)
|
|
|
(835)
|
|
|
15,212
|
|
Total
|
$
|
(7,588)
|
|
|
$
|
9,402
|
|
|
$
|
36,462
|
|
Income tax expense differs from the amount that would otherwise have been calculated by applying the U.S. Federal corporate tax rate of 21% to income before income taxes. The difference between the Federal corporate tax rate and the effective tax rate is comprised of the following (in thousands). In 2020, we recast certain 2019 and 2018 income tax expense components.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Income tax provision computed at US federal statutory rate
|
$
|
(1,593)
|
|
|
21.0
|
%
|
|
$
|
1,974
|
|
|
21.0
|
%
|
|
$
|
7,657
|
|
|
21.0
|
%
|
Canadian rate differential
|
(61)
|
|
|
0.8
|
|
|
(26)
|
|
|
(0.3)
|
|
|
895
|
|
|
2.4
|
|
State and local income taxes, net of federal income taxes
|
91
|
|
|
(1.2)
|
|
|
512
|
|
|
5.4
|
|
|
916
|
|
|
2.5
|
|
Amended state returns
|
(555)
|
|
|
7.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Global Intangible Low Taxed Income, net deductions
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,573
|
|
|
4.3
|
|
U.S. Tax Credits
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,528)
|
|
|
(4.2)
|
|
Stock-based compensation
|
683
|
|
|
(9.0)
|
|
|
594
|
|
|
6.3
|
|
|
(450)
|
|
|
(1.2)
|
|
Rate changes
|
(66)
|
|
|
0.9
|
|
|
30
|
|
|
0.3
|
|
|
(10)
|
|
|
—
|
|
Tax on repatriation
|
1,378
|
|
|
(18.1)
|
|
|
—
|
|
|
—
|
|
|
118
|
|
|
0.3
|
|
Nondeductible currency losses
|
910
|
|
|
(12.0)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Impairment expense
|
398
|
|
|
(5.2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Compensation subject to Section 162(m)
|
42
|
|
|
(0.6)
|
|
|
140
|
|
|
1.5
|
|
|
276
|
|
|
0.8
|
|
Other, net
|
132
|
|
|
(1.8)
|
|
|
267
|
|
|
2.9
|
|
|
264
|
|
|
0.7
|
|
Total income tax expense
|
$
|
1,359
|
|
|
(17.9)
|
%
|
|
$
|
3,491
|
|
|
37.1
|
%
|
|
$
|
9,711
|
|
|
26.6
|
%
|
Effective income tax rate
|
(17.9)
|
%
|
|
|
|
37.1
|
%
|
|
|
|
26.6
|
%
|
|
|
We include penalties and interest on income-based taxes in the “General and administrative” line on our Consolidated Statements of Comprehensive Income (Loss). Penalties and interest were insignificant for both of the years ended December 31, 2020 and 2019, and we recorded $0.1 million of penalties and interest in 2018.
Income tax expense as set forth in the Consolidated Statements of Comprehensive Income (Loss) consisted of the following components (in thousands):
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Current taxes:
|
|
|
|
|
|
U.S. Federal
|
$
|
1,350
|
|
|
$
|
424
|
|
|
$
|
5,949
|
|
State and local
|
(534)
|
|
|
350
|
|
|
1,477
|
|
Foreign
|
(211)
|
|
|
(189)
|
|
|
4,034
|
|
Total current taxes
|
605
|
|
|
585
|
|
|
11,460
|
|
Deferred taxes:
|
|
|
|
|
|
U.S. Federal
|
500
|
|
|
2,619
|
|
|
(1,853)
|
|
State and local
|
44
|
|
|
222
|
|
|
(169)
|
|
Foreign
|
210
|
|
|
65
|
|
|
273
|
|
Total deferred taxes
|
754
|
|
|
2,906
|
|
|
(1,749)
|
|
Total income tax expense
|
$
|
1,359
|
|
|
$
|
3,491
|
|
|
$
|
9,711
|
|
Deferred Income Taxes
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented below (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
1,685
|
|
|
$
|
2,222
|
|
Deferred rent
|
|
1,734
|
|
|
2,172
|
|
Compensation and benefits payable
|
|
1,617
|
|
|
1,938
|
|
Federal unrecognized tax benefit
|
|
38
|
|
|
38
|
|
Other
|
|
—
|
|
|
(23)
|
|
Total deferred tax assets
|
|
5,074
|
|
|
6,347
|
|
Deferred tax liabilities:
|
|
|
|
|
Property and equipment
|
|
(429)
|
|
|
(359)
|
|
Intangibles
|
|
(907)
|
|
|
(911)
|
|
Unrealized gains on investments
|
|
(585)
|
|
|
(833)
|
|
Leases
|
|
(1,548)
|
|
|
(2,028)
|
|
Other
|
|
(137)
|
|
|
—
|
|
Total deferred tax liabilities
|
|
(3,606)
|
|
|
(4,131)
|
|
Net deferred tax assets
|
|
$
|
1,468
|
|
|
$
|
2,216
|
|
The Company is subject to taxation in the U. S. and various state and foreign jurisdictions. As of December 31, 2020, the Company’s 2017, 2018 and 2019 tax years are open for examination by the Internal Revenue Service, and various state and foreign jurisdiction tax years remain open to examination. In 2020, we received a refund of approximately $0.6 million from the state of Texas for the reporting years 2014 to 2019.
Following the closure of our foreign subsidiary, Westwood International Advisors, in the year ended December 31, 2020, we repatriated previously undistributed income to the United States from Canada and incurred $1.1 million of Canadian withholding taxes (net of U.S. federal tax deduction). The withholding taxes were recognized in "Income tax expense" on the Consolidated Statements of Comprehensive Income (Loss).
At December 31, 2020 and 2019, the Company's gross liability related to uncertain tax positions was $0.2 million. A number of years may elapse before an uncertain tax position is finally resolved. To the extent that the Company has favorable tax settlements, or determines that accrued amounts are no longer needed due to a lapse in the applicable statute of limitations
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
or other changes in circumstances, such liabilities, as well as the related interest and penalties, would be reversed as a reduction of income tax expense, net of federal tax effects, in the period such determination is made. A reconciliation of the change in recorded uncertain tax positions during the years ended December 31, 2020 and 2019 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2018
|
$
|
184
|
|
Additions for tax positions related to the current year
|
2
|
|
|
|
Reductions for tax positions related to prior years
|
(2)
|
|
Balance at December 31, 2019
|
184
|
|
Additions for tax positions related to the current year
|
1
|
|
Reductions for tax positions related to prior years
|
(1)
|
|
Settlements
|
(5)
|
|
Balance at December 31, 2020
|
$
|
179
|
|
It is reasonably possible that the liability for uncertain tax positions could decrease by as much as $0.2 million within the next twelve months as a result of settlements with certain taxing authorities that, if recognized, would decrease our provision for income taxes by $0.2 million.
9. EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per common share (“EPS”) is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares outstanding. Diluted EPS is computed based on the weighted average shares of common stock outstanding plus the effect of any dilutive shares of restricted stock granted to employees and non-employee directors. There were approximately 381,000, 76,000 and 7,300 anti-dilutive restricted shares as of December 31, 2020, 2019 and 2018, respectively.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share and share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Net income (loss)
|
|
$
|
(8,947)
|
|
|
$
|
5,911
|
|
|
$
|
26,751
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – basic
|
|
7,987,554
|
|
|
8,408,017
|
|
|
8,365,360
|
|
Dilutive potential shares from unvested restricted shares
|
|
—
|
|
|
55,222
|
|
|
182,010
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding – diluted
|
|
7,987,554
|
|
|
8,463,239
|
|
|
8,547,370
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
Basic
|
|
$
|
(1.12)
|
|
|
$
|
0.70
|
|
|
$
|
3.20
|
|
Diluted
|
|
$
|
(1.12)
|
|
|
$
|
0.70
|
|
|
$
|
3.13
|
|
10. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill
Goodwill represents the excess of the cost of acquired assets over the fair value of the underlying identifiable assets at the date of acquisition. Changes in goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
Beginning balance
|
|
$
|
19,804
|
|
|
$
|
19,804
|
|
Impairment expense
|
|
(3,403)
|
|
|
—
|
|
Ending balance
|
|
$
|
16,401
|
|
|
$
|
19,804
|
|
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following a sustained decline in the Company's market capitalization, we determined that the entire goodwill related to our Advisory segment was impaired, and we recorded impairment charges of $3.4 million in the year ended December 31, 2020 to "Impairment expense" on the Consolidated Statements of Comprehensive Income (Loss).
We determined the fair value of each of our reporting units using a weighted average approach of the market and income approaches. As part of this current assessment, we determined that an increase in the discount rate (from the prior assessment) applied in the valuation was required to align with market-based assumptions. The higher discount rate, in conjunction with revised long-term projections resulted in a lower fair value of the Advisory segment.
Other Intangible Assets
Our intangible assets represent the acquisition date fair value of acquired client relationships, internally-developed software and trade names, and are reflected net of amortization. In valuing these assets, we made significant estimates regarding their useful lives, growth rates and potential attrition.
The following is a summary of intangible assets at December 31, 2020 and 2019 (in thousands, except years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
Amortization
Period (years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
2020
|
|
|
|
|
|
|
|
|
Client relationships
|
|
14.8
|
|
$
|
21,431
|
|
|
$
|
(8,850)
|
|
|
$
|
12,581
|
|
Internally developed software
|
|
5.8
|
|
1,439
|
|
|
(485)
|
|
|
954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,870
|
|
|
$
|
(9,335)
|
|
|
$
|
13,535
|
|
2019
|
|
|
|
|
|
|
|
|
Client relationships
|
|
14.8
|
|
$
|
21,431
|
|
|
$
|
(7,416)
|
|
|
$
|
14,015
|
|
Internally developed software
|
|
5.8
|
|
1,439
|
|
|
(233)
|
|
|
1,206
|
|
Trade names
|
|
4.9
|
|
708
|
|
|
(673)
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,578
|
|
|
$
|
(8,322)
|
|
|
$
|
15,256
|
|
Amortization expense, which is included in “General and administrative” expense on our Consolidated Statements of Comprehensive Income (Loss), was $1.7 million for each of the years ended December 31, 2020, 2019 and 2018.
Estimated amortization expense for intangible assets over the next five years is as follows (in thousands):
|
|
|
|
|
|
|
|
|
For the year ending December 31,
|
|
Estimated
Amortization Expense
|
2021
|
|
$
|
1,623
|
|
2022
|
|
$
|
1,623
|
|
2023
|
|
$
|
1,604
|
|
2024
|
|
$
|
1,529
|
|
2025
|
|
$
|
1,372
|
|
11. LEASES:
We have operating leases for corporate offices and certain office equipment. The lease terms of our corporate offices vary and have remaining lease terms ranging from one to six years. The corporate office lease payments are fixed and are based upon contractual monthly rates. The majority of our corporate office leases do not include options to extend or terminate the leases. We lease office equipment for a period of two years. We analyzed our weighted average discount rate during the calculation of our lease liability and reviewed the corporate debt environment in 2019 to determine a collateralized discount rate of 5%. We have not entered into any significant new operating leases since the determination to use a 5% discount rate. In June 2019, we entered into an agreement to sublease a portion of our corporate office. The sublease agreement has a term of seven years, and the sublease income is included in "Other income" on our Consolidated Statements of Comprehensive Income (Loss).
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the components of lease costs related to our leases (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Operating lease costs
|
$
|
2,033
|
|
|
$
|
1,796
|
|
|
$
|
1,706
|
|
Sublease income
|
135
|
|
|
144
|
|
|
—
|
|
The following table presents supplemental cash flow information related to our leases (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
Operating cash flows from operating leases
|
$
|
2,091
|
|
|
$
|
2,095
|
|
|
$
|
1,909
|
|
Right-of-use assets obtained in exchange for lease obligations
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
1,010
|
|
Operating lease costs are included in "General and administrative" expense on our Consolidated Statements of Comprehensive Income (Loss). We lease our offices under non-cancelable operating lease agreements with expiration dates that run through 2026.
The following table presents information regarding our operating leases (in thousands, except years and rates):
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2020
|
|
2019
|
Operating lease right-of-use assets
|
$
|
6,103
|
|
|
$
|
7,562
|
|
|
|
|
|
Operating lease liabilities
|
$
|
1,718
|
|
|
$
|
1,584
|
|
Non-current lease liabilities
|
6,121
|
|
|
7,762
|
|
Total lease liabilities
|
$
|
7,839
|
|
|
$
|
9,346
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
4.9
|
|
5.7
|
Weighted-average discount rate
|
5.0
|
%
|
|
5.0
|
%
|
The maturities of lease liabilities are as follows (in thousands):
|
|
|
|
|
|
Year ending December 31,
|
Operating Leases
|
2021
|
$
|
2,127
|
|
2022
|
1,730
|
|
2023
|
1,733
|
|
2024
|
1,563
|
|
2025
|
1,528
|
|
Thereafter
|
331
|
|
Total undiscounted lease payments
|
$
|
9,012
|
|
Less: discount
|
(1,173)
|
|
Total lease liabilities
|
$
|
7,839
|
|
12. BALANCE SHEET COMPONENTS:
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property and Equipment
The following table reflects information about our property and equipment as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
Leasehold improvements
|
|
$
|
5,385
|
|
|
$
|
5,517
|
|
Furniture and fixtures
|
|
2,728
|
|
|
2,906
|
|
Computer hardware and office equipment
|
|
3,129
|
|
|
3,118
|
|
Construction in progress
|
|
—
|
|
|
6
|
|
Accumulated depreciation
|
|
(8,056)
|
|
|
(7,395)
|
|
Property and equipment, net
|
|
$
|
3,186
|
|
|
$
|
4,152
|
|
We record a contract asset when we have a right to payment from a customer that is conditioned on events other than the passage of time. Contract assets are included in Other current assets in the accompanying Consolidated Balance Sheets, and the following table reflects our contract asset balances as of December 31, 2020 and 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
2020
|
|
2019
|
Contract assets
|
|
$
|
429
|
|
|
$
|
—
|
|
Refer to Note 3, “Revenue” for our revenues from contract assets.
13. COMMITMENTS AND CONTINGENCIES:
The following table summarizes our contractual obligations as of December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due in:
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
4-5 years
|
|
Thereafter
|
Purchase obligations
|
$
|
12,629
|
|
|
$
|
4,858
|
|
|
$
|
5,825
|
|
|
$
|
1,946
|
|
|
$
|
—
|
|
Litigation
On August 3, 2012, AGF Management Limited and AGF Investments Inc. (together “AGF”) filed a lawsuit in the Ontario Superior Court of Justice against Westwood, certain Westwood employees and the executive recruiting firm of Warren International, LLC (“Warren”). The action related to the hiring of certain members of Westwood’s Emerging Markets investment team previously employed by AGF. On November 5, 2012, Westwood responded to AGF’s lawsuit with a counterclaim against AGF, and on November 6, 2012, AGF filed a second lawsuit against Westwood, Westwood Management and an employee of a Westwood subsidiary.
On October 13, 2017, we reached a settlement with AGF that provided for the dismissal of all claims, with prejudice and without any admission of liability. We agreed to pay AGF a one-time payment of $10 million CDN, half of which was covered by our insurance. We recorded a net $4.0 million ($5 million CDN) charge related to the settlement and associated insurance coverage, with a $4.0 million ($5 million CDN) receivable from our insurance provider included in “Other current assets” on our Consolidated Balance Sheets at December 31, 2017. We received the insurance proceeds of $4.0 million during 2018 and had no receivable related to the settlement on our Consolidated Balance Sheets as of December 31, 2020 and 2019.
Our policy is to not accrue legal fees and directly related costs as part of potential loss contingencies. Our Directors & Officers insurance provider covered 50% of the defense costs related to both AGF claims, excluding Westwood’s counterclaim against AGF. We expense legal fees and directly-related costs as incurred. We received insurance proceeds of $0.2 million during 2018.
14. REGULATORY CAPITAL REQUIREMENTS:
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Westwood Trust must maintain cash and investments in an amount equal to the required minimum restricted capital of $4.0 million as required by the Texas Finance Code. Restricted capital is included in Investments in the accompanying Consolidated Balance Sheets. At December 31, 2020, Westwood Trust had approximately $13.9 million in excess of its minimum capital requirement.
Westwood Trust is limited under applicable Texas law in the payment of dividends of undivided profits, which is that part of equity capital equal to the balance of net profits, income, gains and losses since formation minus subsequent distributions to stockholders and transfers to surplus or capital under share dividends or appropriate Board resolutions. At the discretion of its Board of Directors, Westwood Trust may make quarterly and special dividend payments, or other distributions, to us out of its undivided profits. No dividend payments were made to us in 2020, 2019 or 2018.
15. VARIABLE INTEREST ENTITIES:
As discussed in Note 2 “Summary of Significant Accounting Policies,” the CTFs and Private Funds (together the “Westwood VIEs”) are considered VIEs, and the Westwood Funds® and Private Equity are considered VOEs (together the “Westwood VOEs”). We receive fees for managing assets in these entities commensurate with market rates. As of December 31, 2020 and 2019, we evaluated all of the Westwood VIEs and Westwood VOEs to determine whether or not we should consolidate the entities into our Consolidated Financial Statements. For the Westwood VIEs, we evaluated whether or not we qualify as the primary beneficiary based on whether we have the obligation to absorb significant losses, the right to receive residual returns and the right to direct the activities of the entity that most significantly impact the entity’s economic performance. For the Westwood VOEs, we evaluated whether or not we own a controlling financial interest in the entities. Based on our analyses, we have not consolidated the Westwood VIEs or Westwood VOEs into our Consolidated Financial Statements for the years ended December 31, 2020 or 2019.
We had no seed investments in the Westwood Funds® as of December 31, 2020, and we had $6.4 million at December 31, 2019. The seed investments were provided for the sole purpose of showing economic substance needed to establish the funds or sub-funds. The Company's seed investments in these funds are included in “Investments, at fair value” on our Consolidated Balance Sheets.
We have not otherwise provided any financial support that we were not previously contractually obligated to provide and there are no arrangements that would require us to provide additional financial support to any of these entities. Our seed investments in the Westwood Funds® are accounted for as investments in accordance with our other investments described in Note 5 “Investments.”
We recognized fee revenue from the Westwood VIEs and Westwood VOEs of approximately $19.3 million, $31.0 million and $46.1 million for the twelve months ended December 31, 2020, 2019 and 2018, respectively.
The following table displays the AUM, the amount of our seed investments that are included in “Investments” and “Investments, at fair value” on the Consolidated Balance Sheets, and the financial risk of loss in each vehicle (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
Assets
Under
Management
|
|
Corporate
Investment
|
|
Amount at Risk
|
VIEs/VOEs:
|
|
|
|
|
|
|
Westwood Funds®
|
|
$
|
2,143
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Common Trust Funds
|
|
996
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
Private Funds
|
|
9
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Private Equity
|
|
—
|
|
|
$
|
11.6
|
|
|
$
|
11.6
|
|
|
|
|
|
|
|
|
All other assets:
|
|
|
|
|
|
|
Wealth Management
|
|
3,330
|
|
|
|
|
|
Institutional
|
|
6,567
|
|
|
|
|
|
Total AUM
|
|
$
|
13,045
|
|
|
|
|
|
16. RELATED PARTY TRANSACTIONS:
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Some of our directors, executive officers and their affiliates invest personal funds directly in trust accounts that we manage. At both December 31, 2020 and at December 31, 2019, there was approximately $0.1 million in fees due from these accounts. For each of the years ended December 31, 2020, 2019 and 2018, we recorded trust fees from these accounts of $0.4 million.
The Company engages in transactions with its affiliates as part of its operations. Westwood International Advisors (prior to its closure, effective September 30, 2020) and Westwood Management provide investment advisory services to the UCITS Fund (prior to its liquidation in June 2020) and the Westwood Funds®. Certain members of our management served on the board of directors of the UCITS Fund before its liquidation. Under the terms of the investment advisory agreements, the Company earns quarterly fees paid by clients of the fund or by the funds directly. The fees are based on negotiated fee schedules applied to AUM. For the years ended December 31, 2020, 2019 and 2018, we recorded fees from the affiliated Funds of $0.9 million, $2.8 million and $4.2 million, respectively, which are included in “Asset-based advisory fees” on our Consolidated Statement of Comprehensive Income (Loss). As of December 31, 2020, all of these fees had been collected. As of December 31, 2019, $0.2 million of these fees were unpaid and included in “Accounts receivable” on our Consolidated Balance Sheets.
17. CONCENTRATION:
For the year ended December 31, 2020, our ten largest clients accounted for approximately 24% of our fee revenue. For each of the years ended December 31, 2019 and 2018, our ten largest clients accounted for approximately 20% of our fee revenue. No single customer accounted for 10% or more of our fee revenues in any of these years. The following table presents advisory fee revenue received from our single largest client in each year (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
Advisory fees from our largest client:
|
|
|
|
|
|
|
Asset-based fees
|
|
$
|
1,940
|
|
|
$
|
1,863
|
|
|
$
|
1,868
|
|
Performance-based fees
|
|
1,607
|
|
|
764
|
|
|
2,984
|
|
Percent of fee revenue
|
|
5.5
|
%
|
|
3.2
|
%
|
|
4.0
|
%
|
18. SUBSEQUENT EVENTS:
Dividends Declared
On February 10, 2021, the Board of Directors declared a quarterly cash dividend of $0.10 per share of common stock payable on April 1, 2021 to stockholders of record on March 2, 2021.
Restricted Stock Grants
On March 2, 2021 we issued approximately $2.5 million of restricted stock to employees, or approximately 148,066 shares based on the closing price of our stock on February 23, 2021. The shares are subject to vesting conditions described in Note 7 “Employee Benefits” of our Consolidated Financial Statements in this Report.
Investment remeasurement
In January 2021, our investment in InvestCloud was remeasured, resulting in a pre-tax gain of approximately $5.6 million.
Office sublease
In February 2021, we entered into a sublease agreement with a third party for approximately 10,000 square feet of our Dallas, Texas office space. The agreement begins in the first quarter of 2021 and expires in the fourth quarter of 2025.
.
19. QUARTERLY FINANCIAL DATA (Unaudited):
The following is a summary of unaudited quarterly results of operations for the years ended December 31, 2020 and 2019 (in thousands, except per share amounts):
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
2020
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
16,669
|
|
|
$
|
15,875
|
|
|
$
|
15,454
|
|
|
$
|
17,113
|
|
Income (loss) before income taxes
|
|
(1)
|
|
|
(1,817)
|
|
|
(8,318)
|
|
|
2,548
|
|
Net income (loss)
|
|
1,102
|
|
|
(2,575)
|
|
|
(10,289)
|
|
|
2,815
|
|
Basic earnings (loss) per common share
|
|
0.13
|
|
|
(0.33)
|
|
|
(1.31)
|
|
|
0.36
|
|
Diluted earnings (loss) per common share
|
|
0.13
|
|
|
(0.33)
|
|
|
(1.31)
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
23,862
|
|
|
$
|
21,709
|
|
|
$
|
19,892
|
|
|
$
|
18,616
|
|
Income before income taxes
|
|
1,496
|
|
|
2,656
|
|
|
1,559
|
|
|
3,691
|
|
Net income
|
|
392
|
|
|
1,861
|
|
|
1,117
|
|
|
2,541
|
|
Basic earnings per common share
|
|
0.05
|
|
|
0.22
|
|
|
0.13
|
|
|
0.30
|
|
Diluted earnings per common share
|
|
0.05
|
|
|
0.22
|
|
|
0.13
|
|
|
0.30
|
|