whg-20230630000116500212/3110-Q2023Q2FALSEfalse7,1446,4620.010.0125,000,00025,000,00010,314,30510,182,5838,906,1528,904,9021,408,1521,277,6810.150.15http://fasb.org/us-gaap/2023#FairValueInputsLevel3Memberhttp://fasb.org/us-gaap/2023#FairValueInputsLevel12And3Memberhttp://fasb.org/us-gaap/2023#FairValueInputsLevel3Memberhttp://fasb.org/us-gaap/2023#FairValueInputsLevel12And3Member350,0005,398,100642,000The following table presents the total stock-based compensation expense recorded for stock-based compensation arrangements for the periods indicated (in thousands): | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2023 | | 2022 | | | | |
| Service condition stock-based compensation expense | | | $ | 1,283 | | | | | |
| Performance condition stock-based compensation expense | | | 97 | | | | | |
| Stock-based compensation expense under the Plan | — | | | 1,380 | | | | | |
| Canadian Plan stock-based compensation expense | — | | | — | | | | | |
| Total stock-based compensation expense | $ | — | | | $ | 1,380 | | | | | |
1,28397—1,380———1,38013.22.5Restricted Stock Subject Only to a Service Condition
We calculate compensation cost for restricted stock grants by 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, with adjustments for forfeitures recorded as they occur.
The following table details the status and changes in our restricted stock grants subject only to a service condition for the six months ended June 30, 2023: | | | | | | | | | | | | | | |
| | 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 | | (26,372) | | | $ | 39.72 | |
Non-vested, June 30, 2023 | | 491,625 | | | $ | 36.25 | |
396,59848.31262,37327.39140,97453.0626,37239.72491,62536.25Restricted 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 six months ended June 30, 2023: | | | | | | | | | | | | | | |
| | Shares | | Weighted Average
Grant Date Fair Value |
| Non-vested, January 1, 2020 | | 80,975 | | | $ | 49.73 | |
| | | | |
| Vested | | (35,275) | | | $ | 55.11 | |
Non-vested, June 30, 2023 | | 45,700 | | | $ | 45.58 | |
80,97549.7335,27555.1145,70045.5827,4740.756,6251.3three 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____________________________________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________________________ | | | | | |
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2023
OR | | | | | |
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
Commission file number 1-31234
____________________________________________________________________________________________________
WESTWOOD HOLDINGS GROUP, INC.
(Exact name of registrant as specified in its charter)
____________________________________________________________________________________________________ | | | | | | | | | | | |
| Delaware | | 75-2969997 |
| (State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
| | | |
| 200 CRESCENT COURT, SUITE 1200 | | |
| DALLAS, | Texas | | 75201 |
| (Address of principal executive office) | | (Zip Code) |
(214) 756-6900
(Registrant’s telephone number, including area code)
____________________________________________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
| Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
| Common stock, par value $0.01 per share | WHG | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
| | | |
| Non-accelerated filer | | ☒ | | Smaller reporting company | | ☒ |
| | | | | | |
| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Shares of common stock, par value $0.01 per share, outstanding as of July 26, 2023: 9,182,716.
____________________________________________________________________________________________________
WESTWOOD HOLDINGS GROUP, INC.
INDEX
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PART I | | FINANCIAL INFORMATION | PAGE |
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Item 1. | | Financial Statements | |
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Item 2. | | | |
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Item 3. | | | |
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Item 4. | | | |
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PART II | | | |
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Item 1. | | | |
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Item 1A. | | | |
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Item 2. | | | |
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| Item 6. | | | |
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WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share amounts)
(Unaudited) | | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 15,229 | | | $ | 23,859 | |
| Accounts receivable | 13,609 | | | 13,900 | |
| Investments, at fair value | 22,894 | | | 15,342 | |
| Prepaid income taxes | — | | | 446 | |
| Other current assets | 4,154 | | | 4,645 | |
| Total current assets | 55,886 | | | 58,192 | |
| Investments | 7,247 | | | 4,455 | |
| Equity method investments | 4,180 | | | 6,574 | |
| Noncurrent investments at fair value | 259 | | | 3,027 | |
| Goodwill | 39,501 | | | 35,732 | |
| Deferred income taxes | 1,535 | | | 1,762 | |
| Operating lease right-of-use assets | 3,972 | | | 4,976 | |
| Intangible assets, net | 26,889 | | | 28,952 | |
| Property and equipment, net of accumulated depreciation of $9,755 and $9,277 | 1,718 | | | 1,828 | |
| Other long-term assets | 918 | | | 929 | |
| Total long-term assets | 86,219 | | | 88,235 | |
| Total assets | $ | 142,105 | | | $ | 146,427 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable and accrued liabilities | $ | 5,780 | | | $ | 5,678 | |
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| Dividends payable | 1,408 | | | 1,745 | |
| Compensation and benefits payable | 5,344 | | | 8,689 | |
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| Operating lease liabilities | 1,276 | | | 1,502 | |
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| Income taxes payable | 1,044 | | | — | |
| Total current liabilities | 14,852 | | | 17,614 | |
| Accrued dividends | 657 | | | 701 | |
| Contingent consideration | 7,763 | | | 12,901 | |
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| Noncurrent operating lease liabilities | 3,734 | | | 4,563 | |
| Total long-term liabilities | 12,154 | | | 18,165 | |
| Total liabilities | 27,006 | | | 35,779 | |
| Commitments and contingencies (Note 11) | | | |
| Stockholders' Equity: | | | |
Common stock, $0.01 par value, authorized 25,000,000 shares, issued 11,896,226 and outstanding 9,182,770 shares at June 30, 2023; issued 11,527,544 and outstanding 8,881,831 shares at December 31, 2022 | 119 | | | 115 | |
| Additional paid-in capital | 200,885 | | | 199,914 | |
Treasury stock, at cost - 2,713,456 shares at June 30, 2023; 2,645,713 shares at December 31, 2022 | (85,965) | | | (85,128) | |
| | | |
| Retained earnings (accumulated deficit) | (959) | | | (4,253) | |
| Total Westwood Holdings Group, Inc. stockholders’ equity | 114,080 | | | 110,648 | |
| Noncontrolling interest in consolidated subsidiary | 1,019 | | | — | |
| Total equity | 115,099 | | | 110,648 | |
| Total liabilities and stockholders' equity | $ | 142,105 | | | $ | 146,427 | |
See Notes to Condensed Consolidated Financial Statements.
1
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands, except per share data and share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| REVENUES: | | | | | | | |
| Advisory fees: | | | | | | | |
| Asset-based | $ | 16,799 | | | $ | 10,980 | | | $ | 33,832 | | | $ | 22,770 | |
| Performance-based | — | | | — | | | 555 | | | — | |
| Trust fees | 5,024 | | | 5,365 | | | 10,055 | | | 11,080 | |
| | | | | | | |
| Other, net | 122 | | | (742) | | | 230 | | | (1,031) | |
| Total revenues | 21,945 | | | 15,603 | | | 44,672 | | | 32,819 | |
| EXPENSES: | | | | | | | |
| Employee compensation and benefits | 13,688 | | | 9,133 | | | 27,890 | | | 19,467 | |
| Sales and marketing | 764 | | | 509 | | | 1,504 | | | 991 | |
| Westwood mutual funds | 746 | | | 445 | | | 1,478 | | | 1,041 | |
| Information technology | 2,566 | | | 1,847 | | | 4,949 | | | 3,676 | |
| Professional services | 1,355 | | | 832 | | | 2,884 | | | 2,352 | |
| General and administrative | 3,235 | | | 2,348 | | | 6,281 | | | 4,388 | |
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| (Gain) loss from change in fair value of contingent consideration | (4,078) | | | — | | | (5,138) | | | — | |
| Acquisition expenses | — | | | 887 | | | 209 | | | 887 | |
| Total expenses | 18,276 | | | 16,001 | | | 40,057 | | | 32,802 | |
| Net operating income (loss) | 3,669 | | | (398) | | | 4,615 | | | 17 | |
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| Net change in unrealized appreciation (depreciation) on private investments | 24 | | | (299) | | | 24 | | | (262) | |
| Net investment income (loss) | 211 | | | 5 | | | 383 | | | (11) | |
| Other income | 239 | | | 234 | | | 611 | | | 392 | |
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| Income (loss) before income taxes | 4,143 | | | (458) | | | 5,633 | | | 136 | |
| Income tax provision | 1,244 | | | (80) | | | 2,020 | | | 464 | |
| Net income (loss) | $ | 2,899 | | | $ | (378) | | | $ | 3,613 | | | $ | (328) | |
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| Total comprehensive income (loss) | $ | 2,899 | | | $ | (378) | | | $ | 3,613 | | | $ | (328) | |
| Less: Comprehensive income (loss) attributable to noncontrolling interest | 4 | | | — | | | 25 | | | — | |
| Comprehensive income (loss) attributable to Westwood Holdings Group, Inc. | $ | 2,895 | | | $ | (378) | | | $ | 3,588 | | | $ | (328) | |
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | 0.36 | | | $ | (0.05) | | | $ | 0.45 | | | $ | (0.04) | |
| Diluted | $ | 0.36 | | | $ | (0.05) | | | $ | 0.45 | | | $ | (0.04) | |
| Weighted average shares outstanding: | | | | | | | |
| Basic | 7,991,228 | | | 7,944,212 | | | 7,922,954 | | | 7,904,911 | |
| Diluted | 8,131,333 | | | 7,944,212 | | | 8,050,298 | | | 7,904,911 | |
See Notes to Condensed Consolidated Financial Statements.
2
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Three Months Ended June 30, 2023 and 2022
(In thousands, except share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock, Par | | Additional Paid-In Capital | | Treasury Stock | | | | Retained Earnings (Accumulated Deficit) | | Noncontrolling Interest | | Total |
| Shares | | Amount | | | | | | |
| Balance, March 31, 2023 | 9,212,390 | | | $ | 119 | | | $ | 200,453 | | | $ | (85,965) | | | | | $ | (3,752) | | | $ | 1,015 | | | $ | 111,870 | |
Net income | — | | | — | | | — | | | — | | | | | 2,895 | | | 4 | | | 2,899 | |
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Issuance of restricted stock, net of forfeitures | (29,620) | | | — | | | — | | | — | | | | | — | | | — | | | — | |
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| Dividends declared ($0.15 per share) | — | | | — | | | (1,192) | | | — | | | | | (102) | | | — | | | (1,294) | |
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Stock-based compensation expense | — | | | — | | | 1,624 | | | — | | | | | — | | | — | | | 1,624 | |
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| Balance, June 30, 2023 | 9,182,770 | | | $ | 119 | | | $ | 200,885 | | | $ | (85,965) | | | | | $ | (959) | | | $ | 1,019 | | | $ | 115,099 | |
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| Common Stock, Par | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings (Accumulated Deficit) | | Noncontrolling Interest | | Total |
| Shares | | Amount | | | | | |
| Balance, March 31, 2022 | 8,575,451 | | | $ | 110 | | | $ | 196,564 | | | $ | (82,576) | | | $ | 3,162 | | | $ | — | | | $ | 117,260 | |
Net loss | — | | | — | | | — | | | — | | | (378) | | | — | | | (378) | |
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Issuance of restricted stock, net of forfeitures | 29,438 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
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| Dividends declared ($0.15 per share) | — | | | — | | | — | | | — | | | (1,291) | | | — | | | (1,291) | |
Stock-based compensation expense | — | | | — | | | 1,521 | | | — | | | — | | | — | | | 1,521 | |
| | | | | | | | | | | | | |
Purchases of treasury stock | (93,875) | | | — | | | — | | | (1,394) | | | — | | | — | | | (1,394) | |
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| Balance, June 30, 2022 | 8,511,014 | | | $ | 111 | | | $ | 198,084 | | | $ | (83,970) | | | $ | 1,493 | | | $ | — | | | $ | 115,718 | |
See Notes to Condensed Consolidated Financial Statements.
3
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2023 and 2022
(In thousands, except share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock, Par | | Additional Paid-In Capital | | Treasury Stock | | | | Retained Earnings (Accumulated Deficit) | | Noncontrolling Interest | | Total |
| Shares | | Amount | | | | | | |
| Balance, December 31, 2022 | 8,881,831 | | | $ | 115 | | | $ | 199,914 | | | $ | (85,128) | | | | | $ | (4,253) | | | $ | — | | | $ | 110,648 | |
Net income | — | | | — | | | — | | | — | | | | | 3,588 | | | 25 | | | 3,613 | |
Acquisition | — | | | — | | | — | | | — | | | | | — | | | 994 | | | 994 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Issuance of restricted stock, net of forfeitures | 368,682 | | | 4 | | | (4) | | | — | | | | | — | | | — | | | — | |
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Dividends declared ($0.30 per share) | — | | | — | | | (2,397) | | | — | | | | | (294) | | | — | | | (2,691) | |
Stock-based compensation expense | — | | | — | | | 3,372 | | | — | | | | | — | | | — | | | 3,372 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Restricted stock returned for payment of taxes | (67,743) | | | — | | | — | | | (837) | | | | | — | | | — | | | (837) | |
| Balance, June 30, 2023 | 9,182,770 | | | $ | 119 | | | $ | 200,885 | | | $ | (85,965) | | | | | $ | (959) | | | $ | 1,019 | | | $ | 115,099 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock, Par | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings (Accumulated Deficit) | | Noncontrolling Interest | | Total |
| Shares | | Amount | | | | | |
| Balance, December 31, 2021 | 8,253,491 | | | $ | 107 | | | $ | 195,187 | | | $ | (81,750) | | | $ | 4,362 | | | $ | — | | | $ | 117,906 | |
| | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | (328) | | | — | | | (328) | |
Issuance of restricted stock, net of forfeitures | 401,203 | | | 4 | | | (4) | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
Dividends declared ($0.30 per share) | — | | | — | | | — | | | — | | | (2,541) | | | — | | | (2,541) | |
Stock-based compensation expense | — | | | — | | | 2,901 | | | — | | | — | | | — | | | 2,901 | |
| | | | | | | | | | | | | |
Purchases of treasury stock | (106,077) | | | — | | | — | | | (1,594) | | | — | | | — | | | (1,594) | |
Restricted stock returned for payment of taxes | (37,603) | | | — | | | — | | | (626) | | | — | | | — | | | (626) | |
| Balance, June 30, 2022 | 8,511,014 | | | $ | 111 | | | $ | 198,084 | | | $ | (83,970) | | | $ | 1,493 | | | $ | — | | | $ | 115,718 | |
See Notes to Condensed Consolidated Financial Statements.
4
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited) | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2023 | | 2022 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
| Net income (loss) | $ | 3,613 | | | $ | (328) | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
| Depreciation | 346 | | | 352 | |
| Amortization of intangible assets | 2,063 | | | 811 | |
| Net change in unrealized (appreciation) depreciation on investments | (499) | | | 1,312 | |
| | | |
| Stock-based compensation expense | 3,372 | | | 2,901 | |
| Deferred income taxes | 228 | | | (502) | |
| Non-cash lease expense | 630 | | | 490 | |
| Loss on asset disposition | 69 | | | — | |
| Gain on remeasurement of lease liabilities | (119) | | | — | |
| | | |
| | | |
| Fair value change of contingent consideration | (5,138) | | | — | |
| | | |
| Change in operating assets and liabilities: | | | |
| Net sales of trading securities | (7,083) | | | 12,370 | |
| Accounts receivable | 919 | | | 1,862 | |
| Other current assets | 1,141 | | | 192 | |
| Accounts payable and accrued liabilities | (796) | | | (314) | |
| Compensation and benefits payable | (3,345) | | | (5,597) | |
| Income taxes payable | 1,490 | | | (823) | |
| Other liabilities | (793) | | | (585) | |
| Net cash provided by (used in) operating activities | (3,902) | | | 12,141 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
| Acquisition, net of cash acquired | (741) | | | — | |
| | | |
| | | |
| Purchase of property and equipment | (97) | | | (82) | |
| | | |
| | | |
| Net cash used in investing activities | (838) | | | (82) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
| Purchases of treasury stock | — | | | (1,404) | |
| | | |
| Restricted stock returned for payment of taxes | (837) | | | (626) | |
| | | |
| Cash dividends paid | (3,053) | | | (3,264) | |
| Net cash used in financing activities | (3,890) | | | (5,294) | |
| Effect of currency rate changes on cash | — | | | 4 | |
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (8,630) | | | 6,769 | |
| Cash and cash equivalents, beginning of period | 23,859 | | | 15,206 | |
| Cash and cash equivalents, end of period | $ | 15,229 | | | $ | 21,975 | |
| | | |
| SUPPLEMENTAL CASH FLOW INFORMATION: | | | |
| Cash paid during the period for income taxes | $ | 300 | | | $ | 1,791 | |
| Accrued dividends | $ | 2,065 | | | $ | 2,214 | |
| Accrued purchases of treasury stock | $ | — | | | $ | 190 | |
| | | |
| | | |
See Notes to Condensed Consolidated Financial Statements.
5
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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., Westwood Advisors, L.L.C. Salient Advisors, LP ("Salient") and its majority-owned subsidiary Broadmark Asset Management LLC ("Broadmark"), (referred to hereinafter together as “Westwood Management”), and Westwood Trust.
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. 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") and assets under advisement ("AUA"), and fluctuations in financial markets and in the composition of AUM and AUA impact our revenues and results of operations.
Westwood Management is registered with the Securities and Exchange Commission ("SEC") as an investment adviser ("RIA") under the Investment Advisers Act of 1940. Westwood Trust is chartered and regulated by the Texas Department of Banking.
Acquisition of Broadmark Asset Management LLC
In January 2023 we acquired an additional 32% interest in Broadmark for $1.2 million (net of cash acquired), increasing our ownership of Broadmark to approximately 80%, which represents a controlling interest for financial statement consolidation purposes (the "Broadmark Acquisition"). Broadmark is a San Francisco-based RIA managing and/or sub-advising mutual funds, retail and institutional separately managed accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements are unaudited and are presented in accordance with the requirements for quarterly reports on Form 10-Q and consequently do not include all of the information and footnote disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The Company’s Condensed Consolidated Financial Statements reflect all adjustments (consisting only of normal recurring adjustments) necessary in the opinion of management to present fairly our interim financial position and results of operations and cash flows for the periods presented. The accompanying Condensed Consolidated Financial Statements are presented in accordance with GAAP and the rules and regulations of the SEC.
The accompanying unaudited Condensed Consolidated Financial Statements should be read in conjunction with our Consolidated Financial Statements, and notes thereto, included in our Annual Report on Form 10-K for the year ended December 31, 2022. Operating results for the periods in these Condensed Consolidated Financial Statements are not necessarily indicative of results for any future period. The accompanying Condensed Consolidated Financial Statements include the accounts of Westwood and its subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation.
3. BUSINESS COMBINATIONS
Broadmark
Westwood completed the Broadmark Acquisition in January 2023, giving Westwood a controlling interest and requiring an allocation of the Broadmark Acquisition purchase price. The total consideration recorded for accounting purposes consisted of $1.2 million in cash (net of cash acquired).
Prior to the Broadmark Acquisition, Westwood had a $2.4 million equity method investment in Broadmark, the fair value of which was estimated using recent market transactions. Westwood's equity method investment was derecognized without gain or loss following the Broadmark Acquisition, however there was a corresponding increase to goodwill.
The Broadmark Acquisition was accounted for using the acquisition method of accounting. Accordingly, the purchase price was allocated to tangible assets acquired and liabilities assumed based on their estimated fair values as of the
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
acquisition date. The total consideration of $1.6 million has been allocated based on valuations of acquired assets and assumed liabilities in connection with the acquisition.
The allocation of the Broadmark Acquisition purchase price was as follows (in thousands):
| | | | | |
| (in thousands) |
| Cash consideration | $ | 1,570 | |
| Cash acquired | (402) | |
| Total consideration, net of cash acquired | $ | 1,168 | |
| |
| Fair value of Westwood's investment in Broadmark before the business combination | 2,417 | |
| Fair value of noncontrolling interest in Broadmark | 994 | |
| |
| Assets | |
| Accounts receivable | $ | 629 | |
| Other current assets | 150 | |
| Property and equipment | 11 | |
| Other long-term assets | 511 | |
| Liabilities | |
| Accounts payable and accrued liabilities | 919 | |
| Total Identifiable Net Assets | $ | 382 | |
| |
| Goodwill | $ | 4,197 | |
Westwood owns approximately 80% of Broadmark's equity and accordingly we recognized $1.0 million of a noncontrolling interest in a consolidated subsidiary. Fair value of this interest was estimated using recent market transactions.
At the time of the Broadmark Acquisition, the Company believed that its expanded operational opportunities, enhanced range of investment strategies and expected realization of synergies were the primary factors that contributed to a total purchase price that resulted in the recognition of goodwill. Goodwill arising from the Broadmark acquisition is not expected to be deductible for tax purposes.
For the three months ended June 30, 2023, the Company has included $1.1 million of revenue and $0.1 million of net income related to Broadmark in its Condensed Consolidated Statements of Comprehensive Income (Loss). For the six months ended June 30, 2023, the Company has included $2.3 million of revenue and $0.1 million of net income related to Broadmark in its Condensed Consolidated Statements of Comprehensive Income (Loss).
Pro Forma Financial Information
The following unaudited pro forma results of operations for the three and six months ended June 30, 2023 and 2022 assume the Broadmark Acquisition had occurred as of January 1, 2022. This unaudited pro forma information should not be relied upon as being necessarily indicative of the historical results that would have been obtained if the Broadmark Acquisition had actually occurred on that date, nor of results that may be obtained in the future.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (in thousands) | 2023 | | 2022 | | 2023 | | 2022 |
| Total revenues | $ | 21,945 | | | $ | 16,725 | | | $ | 44,672 | | | $ | 35,121 | |
| Net income (loss) | $ | 2,899 | | | $ | (344) | | | $ | 3,613 | | | $ | (608) | |
4. REVENUE
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. We derive our revenues from investment advisory fees, trust fees and other sources of revenues such as gains and losses from our seed
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
money investments into new investment strategies. The "Other, net” revenues on our Condensed Consolidated Statements of Comprehensive Income (Loss) are the unrealized gains and losses on our seed money investments, and our seed money investments are included in "Investments, at fair value" on our Condensed Consolidated Balance Sheets. Advisory and trust fees are calculated based on a percentage of AUM or AUA, as applicable, and the performance obligation is realized over the current calendar quarter. Once clients receive our investment advisory services, we have an enforceable right to payment.
Advisory Fee Revenues
Our advisory fees are generated by Westwood Management which manages client accounts under investment advisory and sub-advisory agreements. Advisory fees are typically calculated based on a percentage of AUM and AUA 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 Condensed 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) sub-advisory relationships where Westwood provides investment management services for funds offered by other financial institutions; (iii) pooled investment vehicles, including collective investment trusts; and (iv) managed account relationships with brokerage firms and other RIAs that offer Westwood products to their customers.
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 suite of 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 many 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 Condensed Consolidated Financial Statements contain no deferred fee revenues.
Revenue Disaggregated
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Sales taxes are excluded from revenues. The following table presents our revenue disaggregated by account type (in thousands). | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Advisory Fees: | | | | | | | |
| Institutional | $ | 9,443 | | | $ | 6,632 | | | $ | 19,046 | | | $ | 13,681 | |
| Mutual Funds | 7,093 | | | 4,140 | | | 14,279 | | | 8,689 | |
| Wealth Management | 263 | | | 208 | | | 507 | | | 400 | |
| Performance-based | — | | | — | | | 555 | | | — | |
| Trust Fees | 5,024 | | | 5,365 | | | 10,055 | | | 11,080 | |
| | | | | | | |
| Other, net | 122 | | | (742) | | | 230 | | | (1,031) | |
| Total revenues | $ | 21,945 | | | $ | 15,603 | | | $ | 44,672 | | | $ | 32,819 | |
We serve clients primarily in the United States, as well as in certain international locations. The following table presents our revenue disaggregated by our clients' geographical locations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2023 | Advisory | | Trust | | | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
| Canada | $ | 276 | | | $ | — | | | | | $ | — | | | $ | 276 | |
| | | | | | | | | |
| United States | 16,523 | | | 5,024 | | | | | 122 | | | 21,669 | |
| Total | $ | 16,799 | | | $ | 5,024 | | | | | $ | 122 | | | $ | 21,945 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | Advisory | | Trust | | | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
| Canada | $ | 303 | | | $ | — | | | | | $ | — | | | $ | 303 | |
| | | | | | | | | |
| United States | 10,677 | | | 5,365 | | | | | (742) | | | 15,300 | |
| Total | $ | 10,980 | | | $ | 5,365 | | | | | $ | (742) | | | $ | 15,603 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2023 | Advisory | | Trust | | | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
| Canada | $ | 568 | | | $ | — | | | | | $ | — | | | $ | 568 | |
| | | | | | | | | |
| United States | 33,819 | | | 10,055 | | | | | 230 | | | 44,104 | |
| Total | $ | 34,387 | | | $ | 10,055 | | | | | $ | 230 | | | $ | 44,672 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | Advisory | | Trust | | | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
| Canada | $ | 594 | | | $ | — | | | | | $ | — | | | $ | 594 | |
| | | | | | | | | |
| United States | 22,176 | | | 11,080 | | | | | (1,031) | | | 32,225 | |
| Total | $ | 22,770 | | | $ | 11,080 | | | | | $ | (1,031) | | | $ | 32,819 | |
5. 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 reviews 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, a non-GAAP measurement. We define Economic Earnings as net income (loss) plus non-cash equity-based compensation expense, amortization of intangible assets and deferred taxes related to goodwill. Although depreciation on fixed assets is a non-cash expense, we do not add it back when calculating Economic Earnings because depreciation charges represent an allocation of the decline in the value of the related
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
assets that will ultimately require replacement. In addition, we do not adjust Economic Earnings for tax deductions related to restricted stock expense or amortization of intangible assets.
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 collective investment trusts. Westwood Management, Salient and Broadmark provide investment advisory services to similar clients and are included in our Advisory segment.
Trust
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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Advisory | | Trust | | Westwood
Holdings | | Eliminations | | Consolidated |
| Three Months Ended June 30, 2023 | | | | | | | | | | |
| Net fee revenues from external sources | | $ | 16,799 | | | $ | 5,024 | | | $ | — | | | $ | — | | | $ | 21,823 | |
| Net intersegment revenues | | 1,587 | | | 77 | | | — | | | (1,664) | | | — | |
| | | | | | | | | | |
| Other, net | | 122 | | | — | | | — | | | — | | | 122 | |
| Total revenues | | $ | 18,508 | | | $ | 5,101 | | | $ | — | | | $ | (1,664) | | | $ | 21,945 | |
| | | | | | | | | | |
| June 30, 2023 segment assets | | $ | 268,184 | | | $ | 44,412 | | | $ | 14,831 | | | $ | (185,322) | | | $ | 142,105 | |
| June 30, 2023 segment goodwill | | $ | 23,100 | | | $ | 16,401 | | | $ | — | | | $ | — | | | $ | 39,501 | |
| | | | | | | | | | |
| Three Months Ended June 30, 2022 | | | | | | | | | | |
| Net fee revenues from external sources | | $ | 10,980 | | | $ | 5,365 | | | $ | — | | | $ | — | | | $ | 16,345 | |
| Net intersegment revenues | | 536 | | | 88 | | | — | | | (624) | | | — | |
| | | | | | | | | | |
| Other, net | | (742) | | | — | | | — | | | — | | | (742) | |
| Total revenues | | $ | 10,774 | | | $ | 5,453 | | | $ | — | | | $ | (624) | | | $ | 15,603 | |
| | | | | | | | | | |
| June 30, 2022 segment assets | | $ | 223,773 | | | $ | 52,105 | | | $ | 28,586 | | | $ | (174,539) | | | $ | 129,925 | |
| June 30, 2022 segment goodwill | | $ | — | | | $ | 16,401 | | | $ | — | | | $ | — | | | $ | 16,401 | |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Advisory | | Trust | | Westwood Holdings | | Eliminations | | Consolidated |
| Six Months Ended June 30, 2023 | | | | | | | | | | |
| Net fee revenues from external sources | | $ | 34,387 | | | $ | 10,055 | | | $ | — | | | $ | — | | | $ | 44,442 | |
| Net intersegment revenues | | 3,249 | | | 154 | | | — | | | (3,403) | | | — | |
| | | | | | | | | | |
| Other, net | | 230 | | | — | | | — | | | — | | | 230 | |
| Total revenues | | $ | 37,866 | | | $ | 10,209 | | | $ | — | | | $ | (3,403) | | | $ | 44,672 | |
| | | | | | | | | | |
| Six Months Ended June 30, 2022 | | | | | | | | | | |
| Net fee revenues from external sources | | $ | 22,770 | | | $ | 11,080 | | | $ | — | | | $ | — | | | $ | 33,850 | |
| Net intersegment revenues | | 1,113 | | | 178 | | | — | | | (1,291) | | | — | |
| | | | | | | | | | |
| Other, net | | (1,031) | | | — | | | — | | | — | | | (1,031) | |
| Total revenues | | $ | 22,852 | | | $ | 11,258 | | | $ | — | | | $ | (1,291) | | | $ | 32,819 | |
6. INVESTMENTS
The Company has made strategic investments to enhance the services we provide to our customers. Each of these investments is discussed below.
InvestCloud. During 2018, we made a strategic investment in InvestCloud, which is included in “Investments” on our Condensed 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 InvestCloud's recapitalization in the first quarter of 2021, we re-invested $4.4 million of our proceeds into newly-issued shares of InvestCloud.
Charis. Our investment in Charis was included in “Noncurrent investments at fair value” on our December 31, 2022 Condensed Consolidated Balance Sheets and was measured at fair value on a recurring basis. On April 3, 2023, Charis was acquired by Vista Bank ("Vista") in a transaction in which the Company traded its shares in Charis for shares in Vista.
Vista. Our investment in Vista is included in “Investments” on our Condensed 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.
Private Equity Funding. In 2019, we made a $0.3 million investment in Westwood Hospitality. Our investment is included in “Noncurrent investments at fair value” on our Condensed Consolidated Balance Sheets, and it is measured at fair value on a recurring basis using net asset value ("NAV") as a practical expedient.
Zarvona Energy Fund GP, L.P. and Zarvona Energy Fund II-A, L.P. These investments represent ownership interests in non-controlled partnerships. These investments are included in “Equity method investments” on our Condensed Consolidated Balance Sheets and are measured based on our share of the net earnings or losses of the investees.
Broadmark Asset Management LLC. This investment represented a 47.5% ownership interest in a non-controlled corporation prior to the Broadmark Acquisition in 2023. This investment is included in “Equity method investments” on our Condensed Consolidated Balance Sheets at December 31, 2022. In January 2023, as a result of the Broadmark Acquisition, we acquired additional equity interests in Broadmark and accounted for that investment as a consolidated subsidiary.
All other investments are carried at fair value on a recurring basis and are accounted for as trading securities.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
Investments carried at fair value are presented in the table below (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair
Value |
| June 30, 2023: | | | | | | | | |
| U.S. Government and Government agency obligations | | $ | 14,776 | | | $ | — | | | $ | (256) | | | $ | 14,520 | |
| Money market funds | | 4,194 | | | 111 | | | — | | | 4,305 | |
| Equity funds | | 3,639 | | | 81 | | | (274) | | | 3,446 | |
| Equities | | 490 | | | — | | | (13) | | | 477 | |
| Exchange-traded bond funds | | 160 | | | — | | | (14) | | | 146 | |
| Total trading securities | | 23,259 | | | 192 | | | (557) | | | 22,894 | |
| Private investment fund | | 265 | | | 7 | | | (13) | | | 259 | |
| | | | | | | | |
| Total investments carried at fair value | | $ | 23,524 | | | $ | 199 | | | $ | (570) | | | $ | 23,153 | |
| | | | | | | | |
| December 31, 2022: | | | | | | | | |
| U.S. Government and Government agency obligations | | $ | 5,728 | | | $ | — | | | $ | (389) | | | $ | 5,339 | |
| Money market funds | | 4,093 | | | 111 | | | — | | | 4,204 | |
| Equity funds | | 4,863 | | | 32 | | | (446) | | | 4,449 | |
| Equities | | 1,278 | | | — | | | (65) | | | 1,213 | |
| Exchange-traded bond funds | | 159 | | | — | | | (22) | | | 137 | |
| Total trading securities | | 16,121 | | | 143 | | | (922) | | | 15,342 | |
| Private investment fund | | 265 | | | — | | | (30) | | | 235 | |
| Private equity | | 3,475 | | | — | | | (683) | | | 2,792 | |
| Total investments carried at fair value | | $ | 19,861 | | | $ | 143 | | | $ | (1,635) | | | $ | 18,369 | |
The investments shown below are included in our Condensed Consolidated Balance Sheets as Equity method investments, as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
| Carrying value | Ownership | | Carrying value | Ownership |
| Zarvona Energy Fund GP, L.P. | $ | 3,461 | | 50.0 | % | | $ | 3,438 | | 50.0 | % |
| Zarvona Energy Fund II-A, L.P. | 700 | | 0.5 | % | | 700 | | 0.5 | % |
| Broadmark Asset Management LLC | — | | — | % | | 2,417 | | 47.5 | % |
| Salient MLP Total Return Fund, L.P. | 11 | | — | % | | 11 | | — | % |
| Salient MLP Total Return TE Fund, L.P. | 8 | | 0.2 | % | | 8 | | 0.2 | % |
| Total | $ | 4,180 | | | | $ | 6,574 | | |
7. FAIR VALUE MEASUREMENTS
ASC 820, Fair Value Measurements, defines fair value, establishes a framework for measuring fair value and requires 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
•Level 2 – inputs other than quoted prices that are directly or indirectly observable
•Level 3 – significant unobservable inputs where there is little or no market activity
Our strategic investments in InvestCloud and Vista, discussed in Note 6 “Investments,” are excluded from the recurring fair value table shown below because we have elected to apply the measurement alternative for those investments=.
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The following table summarizes the values of our investments measured at fair value on a recurring basis within the fair value hierarchy as of the dates indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Level 1 | | Level 2 | | Level 3 | | Investments Measured at NAV (1) | | Total |
| As of June 30, 2023: | | | | | | | | | |
| Investments in trading securities | $ | 22,894 | | | $ | — | | | $ | — | | | $ | — | | | $ | 22,894 | |
| Private investment fund | — | | | — | | | — | | | 259 | | | 259 | |
| | | | | | | | | |
| Total assets measured at fair value | $ | 22,894 | | | $ | — | | | $ | — | | | $ | 259 | | | $ | 23,153 | |
| Salient Acquisition contingent consideration | $ | — | | | $ | — | | | $ | 7,763 | | | $ | — | | | $ | 7,763 | |
| Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 7,763 | | | $ | — | | | $ | 7,763 | |
| | | | | | | | | |
| As of December 31, 2022: | | | | | | | | | |
| Investments in trading securities | $ | 15,342 | | | $ | — | | | $ | — | | | $ | — | | | $ | 15,342 | |
| Private investment fund | — | | | — | | | — | | | 235 | | | 235 | |
| Private equity | — | | | — | | | 2,792 | | | — | | | 2,792 | |
| Total assets measured at fair value | $ | 15,342 | | | $ | — | | | $ | 2,792 | | | $ | 235 | | | $ | 18,369 | |
| Salient Acquisition contingent consideration | $ | — | | | $ | — | | | $ | 12,901 | | | $ | — | | | $ | 12,901 | |
| Total liabilities measured at fair value | $ | — | | | $ | — | | | $ | 12,901 | | | $ | — | | | $ | 12,901 | |
| (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 Condensed Consolidated Balance Sheets. |
Prior to our exchange of shares in Charis for shares in Vista, our investment in Charis was included within Level 3 of the fair value hierarchy as we valued it utilizing inputs not observable in the market. Historically, our investment was measured at fair value on a recurring basis using a market approach based on either a price to tangible book value multiple range determined to be reasonable in the current environment, or on market transactions. On April 3, 2023, Charis was acquired by Vista in a transaction in which the Company exchanged its shares in Charis for shares in Vista.
The following table summarizes the changes in Level 3 investments measured at fair value on a recurring basis for the periods presented (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value using Significant Unobservable Inputs (Level 3) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Beginning balance | $ | 2,792 | | | $ | 4,326 | | | $ | 2,792 | | | $ | 4,369 | |
| | | | | | | |
| Exchange of shares | (2,792) | | | — | | | (2,792) | | | — | |
| | | | | | | |
| | | | | | | |
| Unrealized gains (losses) on private investments | — | | | (302) | | | — | | | (345) | |
| Ending balance | $ | — | | | $ | 4,024 | | | $ | — | | | $ | 4,024 | |
The following table summarizes the changes in Level 3 liabilities measured at fair value on a recurring basis for the periods presented (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value using Significant Unobservable Inputs (Level 3) |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Beginning balance | $ | 11,841 | | | $ | — | | | $ | 12,901 | | | $ | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total (gains) losses included in earnings | (4,078) | | | — | | | (5,138) | | | — | |
| Ending balance | $ | 7,763 | | | $ | — | | | $ | 7,763 | | | $ | — | |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
The June 30, 2023 contingent consideration fair value of $7.8 million was valued based upon updated revenue growth projections following AUM outflows in 2023 and current volatility inputs. The fair value of contingent consideration related to both the revenue retention earn-out and the growth earn-out is measured using the Monte Carlo simulation model, which considered assumptions including revenue growth projections, revenue volatility, risk free rates and discount rates. The projected contingent payment is discounted back to the current period using a discounted cash flow model. Increases or decreases in projected revenues, probabilities of payment, discount rates, projected payment dates and other inputs may result in significantly higher or lower fair value measurements.
The following table represents the range of the unobservable inputs utilized in the fair value measurement of the contingent consideration classified as level 3:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Range | | |
| Earn-out | | Unobservable Input | | Low | | High | | Weighted Average Rate |
| Revenue Retention earn-out | | Discount rate | | 13.0% | | 13.5% | | 13.25% |
| | Volatility | | 15.0% | | 25.0% | | 20.00% |
| | | | | | | | |
| Growth earn-out | | Discount rate | | 13.0% | | 13.5% | | 13.25% |
| | Volatility | | 15.0% | | 25.0% | | 20.00% |
8. INCOME TAXES
Our effective income tax rate differed from the 21% statutory rate for the three and six months ended 2023 and 2022 due to permanent differences between book and tax restricted stock expense based on a decrease in our stock price between the restricted stock grant and vesting dates.
9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is computed by dividing comprehensive income (loss) attributable to Westwood Holdings Group, Inc. by the weighted average number of shares outstanding for the applicable period. Diluted earnings (loss) per share is computed based on the weighted average number of shares outstanding plus the effect of any dilutive shares of restricted stock granted to employees and non-employee directors.
There were approximately 106,000 and 89,000 anti-dilutive restricted shares outstanding for the three months ended June 30, 2023 and June 30, 2022, respectively. There were approximately 108,000 and 87,000 anti-dilutive restricted shares outstanding for the six months ended June 30, 2023 and June 30, 2022, respectively.
The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, except per share and share amounts): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| Comprehensive income (loss) attributable to Westwood Holdings Group, Inc. | $ | 2,895 | | | $ | (378) | | | $ | 3,588 | | | $ | (328) | |
| Weighted average shares outstanding - basic | 7,991,228 | | | 7,944,212 | | | 7,922,954 | | | 7,904,911 | |
| Dilutive potential shares from unvested restricted shares | 140,105 | | | — | | | 127,344 | | | — | |
| | | | | | | |
| Weighted average shares outstanding - diluted | 8,131,333 | | | 7,944,212 | | | 8,050,298 | | | 7,904,911 | |
| Earnings (loss) per share: | | | | | | | |
| Basic | $ | 0.36 | | | $ | (0.05) | | | $ | 0.45 | | | $ | (0.04) | |
| Diluted | $ | 0.36 | | | $ | (0.05) | | | $ | 0.45 | | | $ | (0.04) | |
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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. Goodwill is not amortized but is reviewed for impairment annually, or between annual assessments if a triggering event occurs or circumstances change that would more likely than not result in the fair value of a reporting unit below its carrying amount. We completed our most recent annual goodwill impairment assessment during the third quarter of 2022 and determined that no goodwill impairment related to the Trust segment was required. There was no goodwill impairment during the three and six months ended June 30, 2023 or June 30, 2022.
Changes in goodwill were as follows (in thousands): | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| June 30, 2023 |
| Beginning balance | $ | 39,929 | | | $ | 35,732 | |
Broadmark Acquisition1 | — | | | 4,197 | |
Salient Acquisition Adjustment2 | (428) | | | (428) | |
| Ending balance | $ | 39,501 | | | $ | 39,501 | |
1 The $4.2 million of acquired goodwill is attributable to the Advisory segment.
2 Represents subsequent purchase price adjustments for the 2022 Salient Acquisition.
Other Intangible Assets
Our intangible assets represent the acquisition date fair value of acquired client relationships, trade names, non-compete agreements and internally developed software and are reflected net of amortization. In valuing these assets, we made significant estimates regarding their useful lives, growth rates and potential attrition. We periodically review intangible assets for events or circumstances that would indicate impairment. No intangible asset impairments were recorded during the three and six months ended June 30, 2023 or June 30, 2022.
11. LEASES
As of June 30, 2023 there have been no material changes outside the ordinary course of business to our leases since December 31, 2022. For information regarding our leases, refer to Note 12 “Leases” in Part IV, Item 15. “Exhibits, Financial Statement Schedules” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
12. STOCKHOLDERS' EQUITY
Share Repurchase Program
As of June 30, 2023, there are $1.9 million of shares that may yet be repurchased under our plan.
During the three and six months ended June 30, 2023, the Company did not repurchase any shares of our common stock. During the three months ended June 30, 2022, the Company repurchased 57,984 shares of our common stock at an average price of $14.29 per share, including commissions, for an aggregate purchase price of $0.8 million under our share repurchase plan. During the six months ended June 30, 2022, the Company repurchased 70,186 shares of our common stock at an average price of $14.65 per share, including commissions, for an aggregate purchase price of $1.0 million under our share repurchase plan.
13. VARIABLE INTEREST ENTITIES
We evaluated (i) our relationship as sponsor of the Common Trust Funds (“CTFs”) and managing member of the private equity funds Westwood Hospitality 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, Vista, Zarvona Energy Fund GP and Zarvona Energy Fund II-A as discussed in Note 6 “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, Private Funds and Zarvona Energy Fund II-A were VIEs, as the at-risk equity holders do not have the ability to direct the activities that most significantly impact the entities' economic
WESTWOOD HOLDINGS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)
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. As we do not qualify as primary beneficiaries for those entities, we have not consolidated our investments in those entities for the periods ending June 30, 2023 and December 31, 2022.
Based on our analyses, we determined the Westwood Funds®, InvestCloud, Vista and Zarvona Energy Fund GP (i) have sufficie