10-Q/A: Horizon Kinetics Holding Corporation Reports Increased AUM and Revenue in Q3 2024, Despite Material Weaknesses in Internal Controls

Horizon Kinetics Holding Corporation's Q3 2024 results show increased AUM and revenue, driven by strong performance in key holdings, but are tempered by the restatement of prior period financials and identified material weaknesses in internal controls.

Summary

• Horizon Kinetics Holding Corporation filed an amended 10-Q report for the period ended September 30, 2024, to consolidate certain proprietary funds.
• The restatement increased total assets to $1,624.2 million and liabilities and noncontrolling interests to $1,258.8 million.
• For the three months ended September 30, 2024, management and advisory fees increased by 11% to $13.0 million compared to the prior year.
• Net loss attributable to Horizon Kinetics Holding Corporation was $(38.2) million, or $(2.07) per share, compared to net income of $25.5 million, or $1.42 per share, in the prior year.
• For the nine months ended September 30, 2024, management and advisory fees increased to $37.3 million.
• Net income attributable to Horizon Kinetics Holding Corporation was $16.7 million, or $0.92 per share, compared to a net loss of $(6.9) million, or $(0.38) per share, in the prior year.
• AUM increased by approximately $0.9 billion, or 12%, to $8.3 billion due primarily to market value changes of key holdings.
• The company identified material weaknesses in internal control over financial reporting related to the review and consolidation of certain proprietary funds and other areas.
• On August 1, 2024, the company completed its merger with Horizon Kinetics, LLC, accounted for as a reverse acquisition.
• The company converted from an LLC to a C-Corp on July 1, 2024, resulting in a deferred income tax expense of $59.7 million.

Sentiment

Score: 5

Explanation: The report presents a mixed picture. While AUM and revenue increased, the net loss, material weaknesses in internal controls, and significant tax expense are concerning. The sentiment is neutral, reflecting both positive and negative aspects.

Positives

• AUM increased by $0.9 billion, or 12%, to $8.3 billion, driven by market value changes.
• Management and advisory fees increased by 11% to $13.0 million for the three months ended September 30, 2024.
• The company completed its merger with Horizon Kinetics, LLC, which is expected to provide long-term strategic benefits.
• The company's consolidated investment products experienced favorable performance thus far in 2024, with the Polestar Funds, Horizon Kinetics Equity Opportunities Fund and Horizon Multi-Strategy Fund being the largest contributors.

Negatives

• The company reported a net loss attributable to Horizon Kinetics Holding Corporation of $(38.2) million, or $(2.07) per share, for the three months ended September 30, 2024.
• The company identified material weaknesses in internal control over financial reporting.
• The company incurred a significant deferred income tax expense of $59.7 million due to the conversion from an LLC to a C-Corp.
• The company restated prior period financial statements to consolidate certain proprietary funds.

Risks

• Material weaknesses in internal control over financial reporting could lead to material misstatements in the company's financial statements.
• The company's investments are subject to market risk, and unfavorable market conditions could adversely affect its business.
• The company's success depends on its senior executives, and the loss of their services would have a material adverse effect on its business.
• Poor performance of the company's funds would cause a decline in its revenue, income, and cash flow.
• The asset management business is intensely competitive.

Future Outlook

The company expects its investment securities to impact future results of operations, often significantly so, and intends to continue its quarterly dividend policy based on the company's quarterly performance.

Management Comments

• HKHC's total revenues continued to grow this quarter as a result of increasing AUM at our proprietary funds, separately managed accounts and mutual funds due to their favorable 2024 performance.
• Total revenues were also positively impacted by two months of product sales following the acquisition of Scotts Liquid Gold.

Industry Context

The asset management industry is highly competitive, and Horizon Kinetics faces competition from other asset managers, including large, well-established firms. The company's performance is also affected by broader market conditions and economic uncertainty.

Comparison to Industry Standards

• It's difficult to directly compare Horizon Kinetics' results to industry standards without more specific information on their investment strategies and client base.
• However, the increase in AUM suggests that the company is attracting and retaining clients, which is a positive sign.
• The material weaknesses in internal control over financial reporting are a concern and need to be addressed to ensure the accuracy and reliability of the company's financial statements.
• The conversion from an LLC to a C-Corp is a significant event that will have tax implications for the company.

Related Party Transactions

• FRMO has a right to a 4.2 % share of the Company's gross revenue (prior to any commission sharing agreements) and a 4.95 % ownership interest.
• The Company has waived, or provides discounted management and advisory fees, for assets under management in proprietary funds or separately managed accounts for Shareholders and their direct families, FRMO, Horizon Common Inc., Kinetics Holding Corporation and employees of the Company.
• The Company owns an equity interest and has advanced funds in exchange for notes receivable to HM Tech, a service provider for digital asset mining operations.
• The Company has also recently agreed to guarantee a $ 0.3 million Promissory Note receivable from HM Tech LLC issued to Consensus Mining & Seigniorage Corporation in the event of default.

Stakeholder Impact

• Shareholders: The net loss and material weaknesses in internal controls are negative for shareholders.
• Employees: The company's performance affects employee compensation and job security.
• Clients: The company's investment performance affects client returns.
• Suppliers: The company's financial condition affects its ability to pay suppliers.

Next Steps

• The company needs to remediate the material weaknesses in internal control over financial reporting.
• The company needs to manage its investments effectively to generate positive returns.
• The company needs to continue to attract and retain clients to grow AUM.
• The company needs to monitor and manage its expenses to improve profitability.

Key Dates

Keywords

Horizon Kinetics, AUM, Asset Management, Financial Results, Merger, Internal Controls, Proprietary Funds, Consolidation, Restatement, Investment Management